What gov’t is doing to tame rising public debt

Kampala, Uganda | THE INDEPENDENT | Uganda has outlined plans aimed at reducing its national debt starting in 2027 the year it is forecast to touch 53 percent of the value of the economy (GDP).

The country’s national debt stands at 25.6 billion (93 trillion shillings) as of the end of June 2024, or about 46.9 percent of the value of the economy (GDP).

The International Monetary Fund (IMF) puts it at 51.38 percent.

While the World Bank and the IMF Fund have cautioned Uganda against high appetite for credit, they say the risk posed to the economy is ‘moderate’ or quite below distress levels.

According to the IMF, debt distress is when a country is unable to meet its debt obligations due to its debt levels and other factors.

Some signs of debt distress include: Being unable to get low interest rates from lenders, insolvency, illiquidity, unwillingness to pay, and spending more on interest repayments than on education or health.

African countries facing debt distress include Ghana, Zambia, Kenya, South Africa, Egypt: A middle-income country at high risk of debt distress, with debt-to-GDP ratios of 65 or more.

The government says it will cut external borrowing by 98 percent to 29.9 billion Shillings in the financial year 2025/2026 to reduce its increasing public debt.

The Ministry of Finance, Planning and Economic Development is now formulating and implementing measures to put a stop to the upward trend.

Joy Gessa, Principal Economist at the Ministry says borrowing is inevitable whenever there is a deficit in the government budget, and that most countries globally operate deficit budgets (where the planned expenses are higher than the planned revenues).

Uganda’s debt and other East African Countries, started rising sharply five years ago, especially when the Covid 19 broke out leading to a slowdown in economic activities.

The economic slowdown was made worse by the need for more financial resources to deal with the increased health services demands.

This necessitated more borrowing at a time when lenders were either withholding, restructuring or sparing their financial resources, meaning that Uganda and her peers had to diversify their sources of aid, and this meant taking more commercial or non-concessional debt.

But apart from commercial debt being expensive, rating agencies are making it worse by “underrating” Uganda, with the big three; Standard and Poor’s, Fitch and Moody’s giving the country a “B”.

Gessa says the government is working to ensure Uganda is rated fairly because a low rating either sends away cheap lenders or leads to increased interest rates.

Recently the Uganda Revenue Authority started implementing Domestic Revenue Mobilisation strategies that involved expanding the taxpayer register but also plug revenue leaks.

One of those was mobilizing the goods and services consumers to always ask for a receipt and the introduction of the electronic fiscal receipting and invoicing system (EFRIS) aimed at catching tax evaders.

But also, the physical consolidation measures that are aimed at not only increasing revenue but also reducing expenditure. The flagship action here is the rationalisation of government ministries, departments and agencies.

The government also got an idea from the mobilization of resources from willing Ugandans exhibited during the height of the COVID-19 pandemic.

Gessa says the ministry thinks it worked well, only that there was no proper means for the public to track what was being collected and therefore, there was no proper accountability of resources.

While the president started by regularly reading out the contributions that had been made by individuals and organisations, it soon became clear that some, especially small amounts could not be mentioned.

However, Gessa says a policy is being developed which will also provide for accountability of the resources raised through crowdfunding.

Other options like foreign direct investments and diaspora remittances are some of the resources that have not been used towards financing government projects.

Under this, the government is drawing a policy to introduce products in which people can invest their money, like a diaspora bond, an alternative financing option that has already taken root in some other countries.

Such products will not necessarily be an investment but also a safe way for the diaspora to save their earnings while enabling the government to access cheap capital.

The government has also been challenged with loan requests made without feasibility studies and these lead to accumulation of debt along the way due to “unforeseen circumstances”.

Now, Gessa says, no project will be approved for a loan without a feasibility study.

The government is also implementing the recommendations of multilateral lenders like the World Bank.

These require that it makes its performance policy actions. Here a country decided on some measures that are agreeable to the lender.

These are aimed at ensuring the borrower maintains favourable conditions.

Gessa says that this has helped the government debt stay within limits.

Another system the government has adopted is hedging or ceasing the interest rates especially when the loan facility carries a variable interest component.

Under this, as it was for the Karuma Dam loan, the borrower can agree with the lender that should the interest start rising, it would not go beyond a certain level.

Gessa says that that was how they have ensured the rate for the Karuma Dam loan has remained within the 2.5 percent limit.

The IMF, the World Bank, the African Development Bank and other multilateral lenders are the biggest traditional lenders to Uganda, accounting for more than 74 percent of the portfolio as of 2020, while China is the biggest bilateral lender.

Some lenders approach the government through the president, who then forwards them to the Ministry for consideration.

However, Gessa says that currently, President Yoweri Museveni gives the ministry the leeway to discuss the terms of the loan offers and when they are considered too expensive, he listens to the government official.

She says that these are some of the ways the government is managing to keep the debt levels low, adding that they are confident the World Bank’s relationship with the government of Uganda over the anti-homosexuality law passed earlier this year, has been handled.

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