Uganda reduces debt costs as cheap loan sources disappear

Kampala, Uganda | THE INDEPENDENT | Uganda has managed to reduce the level of spending on loans in terms of the percentage of the Gross Domestic Product (GDP) through restructuring debt and the growth of the economy. Total interest payments as a share of GDP decreased to 3.5 percent at the end of June 2024 from 3.8 percent a year before, signaling government efforts to strengthen the sustainability of the national debt.

The Ministry of Finance, Planning, and Economic Development says this decrease was driven by a decrease in the variable interest rates on external debt coupled with the GDP growth.  “A significant challenge in debt management remains the high debt service burden, due to high external and domestic interest rates,” said Ramathan Ggoobi, the Permanent Secretary at the Ministry of Finance.

Domestic interest payments maintained the bulk share of interest payments due to the higher interest rates on locally issued debt relative to those on external financing that continues to be predominantly concessional. The Financial Year 2023/24 Debt Sustainability Analysis report finds that while Uganda’s public debt is sustainable in the medium to long term, it faces a moderate risk of debt distress.

This outlook is contingent on the implementation of sound fiscal policies, the commencement of oil production in the medium term, and the effective management of oil revenues to reduce borrowing needs, according to the Ministry. As Uganda joins the middle-income group of economies, it is bracing for a reduction in sources of concessional loans, which might necessitate going for more bilateral and commercial loans in the mid-term to finance its budget deficit.

The stock of public sector debt increased from 23.66 Billion Dollars (86,779.87 Billion Shillings) in the financial year 2022/23 to 25.59 Billion (94.869 Trillion) at the end of 2023/24. Uganda’s indebtedness is still dominated by external debt, which amounted to 14.63 Billion Dollars in June, up from 14.24 Billion. On the other hand, domestic debt measured in US Dollars increased from 9.43 Billion to 10.96 Billion over the same period.

As a percentage of GDP, public sector debt reduced slightly from 47.4 percent in 2022/23 to 46.8 percent in 2023/24 mainly due to the expansion of the economy. This ratio is projected to rise this financial year and peak in 2025/26 at around 52 percent, but gradually decline thereafter, primarily driven by improved revenue performance. This is expected to be supported by the ongoing implementation of the Domestic Revenue Mobilization Strategy (DRMS) and the realization of oil revenues, according to Ggoobi.

External debt accounted for 26.8 percent of GDP, while domestic debt contributed 20 percent. The financial year 2023/24 saw an increase in the share of external debt owed to multilateral creditors, following the government’s decision to reduce signing up commercial debt which was available at very high costs. Multilateral lenders are financial institutions usually owned by more than one country, that provide loans to countries in need, particularly developing countries.

Loans from these lenders usually carry low interest rates and longer maturity periods.  The share of domestic debt in the total public debt stock amounted to 42.8 percent at the end of June 2024 from 39.8 percent in the previous financial year. Consequently, the share of external debt in total public debt dropped further to 57.2 percent in the financial year 2023/24 from 60.2 percent in the financial year 2022/23.

This in turn led to the share of debt held by external commercial creditors slightly reducing to 11.8 percent from 13.6 percent the previous financial year, contributing to lower servicing costs.

On the other hand, bilateral creditors accounted for 23.5 percent of the total external debt stock last financial year, with 16.5 percent of that owed to China alone down from 18.1.

A bilateral lender is a single lender or financial institution that lends money directly to a single borrower. On domestic debt, commercial banks continued to hold the largest share of the locally acquired public debt by the end of June 2024 at 37.89 percent, while pension and provident funds are owed 29.89 percent.

Other holders of Uganda’s domestic debt are offshore investors with their portfolio growing slightly from 6.3 to 7.07 percent by June 2024, as global financial conditions began to ease.  There was a further reduction in the ratio of debt to GDP by 0.6 percentage points, largely supported by Real GDP growth and the appreciation of the end-period real exchange rate.

These debt mitigating factors outweighed the upward pressures particularly stemming from the average real interest rate (high cost of the debt) and the primary deficit. The contribution from Real GDP growth in mitigating the increase in the debt-to-GDP ratio continued to improve following the sustained rebound of real GDP growth from the low 3.5 percent after the outbreak of COVID-19 to 6.1 percent in 2023/24.

Moving forward, the Government aims to reduce domestic debt to ease the debt service burden on the budget and minimize the crowding out of the private sector from the domestic money market.

“On the external side, the focus will continue to be on concessional loans, which offer lower interest rates and longer repayment periods, thereby alleviating the debt service burden,” says Ggoobi, adding that the Government will persist in its fiscal consolidation efforts to control the budget deficit and reduce borrowing needs.

There was a decrease in the variable rates on external loans as well as in the average interest rates on treasury bonds over the period. These combined resulted in the weighted average interest rates declining from 8.1 to 7.5 percent in June 2024.  On the downside, the average time the country has to clear its loans also declined because more short-term loans were contracted over the period, which increases the risk of default.

The average time to maturity (ATM) of the total public debt portfolio declined slightly from 9.4 years at the end of June 2023 to 8.7 years at the end of June 2024. “This was driven by a decline in external debt ATM, from 10.7 years at the end of June 2023 to 10 years in June 2024 arising from the increase in loans contracted on commercial terms, which typically have shorter maturities relative to the concessional loans,” says the analysis.

On the other hand, the ATM for domestic debt increased from 6.8 years at the end of June 2023 to 7.1 years at the end of June 2024 in line with the Government’s strategy to lengthen the maturity time for locally acquired credit. Debt maturing in one year as a percentage of total debt increased from 10.3 percent in June 2023 to 14.8 percent in June 2024, increasing the pressure on the government to mobilise resources to pay off.

This was due to growth in the volume of domestic and external debt maturing in one year as a percentage of total debt, however, the maturities reduce significantly in the medium term, according to the analysis. In contrast, external debt maturities follow a relatively smoother path which peaks in the medium term, driven by principal repayments of commercial debt contracted in the last few years.

The Ministry says that the government will continue to take up some external borrowing over the medium term to finance the budget deficit. Both the grant element of new external borrowing and grant equivalent financing as a percentage of GDP is projected to fall as oil production commences in the medium term and the country progresses towards middle-income status where it will have less access to concessional loans.

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