COMMENT: Meeting rising debt obligations

Uganda has favorable debt sustainability rating but current pressures could worsen its servicing position

COMMENT | EZRA MUNYABONERA |  During the past 10 years, Uganda has registered a consistent rise in the level of indebtedness. Public debt as a share of GDP has risen from 20 percent in 2006 to 37 percent of GDP in 2017 to amount to USD 8.7 billion. Recent estimates by PricewaterhouseCoopers (PwC) and Bank of Uganda show that the level may hit at target of 45 percent by 2020. This would be close to threshold of 50 percent recommended for countries with in the East African Community (EAC). The rising trend in Uganda’s public debt is similar to other developing countries in sub Saharan Africa who have been heavily investing in infrastructure development. Nonetheless, Uganda’s public debt remains below a number of other African countries such as Ghana, Zambia, and Tanzania with public debt to GDP ratio of 73 percent, 53 percent and 41 percent respectively.

Although Uganda has more favorable debt sustainability ratings than most of the SSA countries, current pressure to realise infrastructure developments that could worsen the debt position. Apart of infrastructural investments, new demands to increase civil service staff salaries and poverty reduction expenditures may necessitate further borrowing. Also, the move by the traditional donors like USA and Japan to increase their domestic lending rates, as they consolidate their economies, may further compound Uganda’s debt position.

Specifically, increasing the interest rate will increase the level of debt payment in terms of dollar equivalents and will have a negative effect on economy performance.

Unless properly managed, the country’s debt burden could reach unsustainable levels. Furthermore, with low levels of tax collections, this may crowd out national development unless the government quickly explores measures to boast domestic revenue mobilisation to finance public expenditures.

The International Monetary Fund (IMF)) projects that the level of public debt servicing could rise from the current level of 12 percent of the national budget to about 16 percent by 2020 at current trends. This may be counterproductive if more resources will be required to meet public debt repayments at the expense of service delivery.

Apart of the level debt, there are persistent challenges that will continue to characterise Uganda’s debt management strategy. These include the low debt absorption being caused by poor project selection, design, and implementation. Delays in project implementation may continue to arise due to limited staffing capacity in project feasibility, appraisal, and execution at the level of government ministries, departments, and agencies (MDAs). Other risks to public debt management include the continued rolling over of maturing debt by government which may expose it to the risk of inability to refinance its maturing domestic debt. With Uganda’s debt position, which is likely to be dominated by external borrowing in the medium term, that may result into a failure to meet external debt obligations arising from exchange rate volatility and slow growth in exports. Slow growth in exports could be a potential risk to Uganda’s ability to repay her external debt. Exchange rate volatility could also remain a potential risk to Uganda’s external debt position in high interest rates payments.

In order to maximise benefits from Uganda’s public debt, greater efforts are needed to reduce transaction costs, improve mechanisms of loan acquisition, and improve utilisation and absorption of the loans across the MDAs. Persistent low public debt absorption; especially of the externally funded projects, has had negative implications on the achievement of the key national development objectives and may affect the government’s ability to transform the economy from a low-income country to a medium income country by 2020. Government should, therefore, aim at strengthening systems for efficient and effective loan contracting and utilisation amongst the institutions. The Ministry of Finance should expedite the preparation of the Medium term debt management strategy and the borrowing plan. This will help explore appropriate strategies to achieve a composition of the debt portfolio which encapsulates the cost/risk trade-offs desired by the government. This should encompass a fuller analysis of the risks and opportunities posed by long-term trends in Uganda’s macroeconomic environment, and spell out linkages between debt management and the fiscal, monetary and financial policies of government. These documents should also be published to enhance transparency and accountability in the management of public debt.

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Ezra Munyabonera (PhD) is Senior Research Fellow and Head of Macro-Economics Department at the Economic Policy Research Centre