While Uganda’ capacity to borrow more to finance large infrastructure projects has improved after it rebased its economy, the country’s ability to repay future loans remains a challenge due to a deflated revenue base, economists warn.
Key infrastructure projects include building the country’s portion of the standard gauge railway being undertaken by Uganda, Kenya and Rwanda, whose cost is estimated at $8.5 billion.
Following the rebasing — a process that involves a review of baseline years used for calculating economic growth and inclusion of new data that reflects changing economic patterns — Uganda’s debt to GDP ratio fell from 39.8 per cent to around 29.2 per cent, while tax to GDP ratio declined from 13 per cent to 11.8 per cent at the end of 2013/14. The ratio of public expenditure to GDP fell from 19.7 per cent to 17.5 per cent.
Subsequently, the country’s GDP rose from Ush60 trillion ($21.4 billion) in 2002 to Ush68.4 trillion ($24.2 billion) at the end of the 2013/14 financial year, measured against 2009/10 data, according to latest figures published by the Uganda Bureau of Statistics (UBOS).
Whereas a lower debt to GDP ratio creates more leeway to borrow within the regional convergence ceiling of 50 per cent, the diminished tax-revenue ratio has complicated matters for Uganda’s future borrowing plans because there are now fewer domestic resources available for servicing new loans, economists argue.
Credit risk profiles
Lower tax revenues tend to contribute to higher credit risk profiles, limiting the amount of laon an affected country can access, steep interest rates and shorter repayment periods. This in turn raises overall borrowing costs, economists say.
Whereas a sovereign bond would attract fairly high interests projected at 12 per cent per year, a $2.2 billion cap on concessional borrowing set by the International Monetary Fund this year has constrained further utilisation of this credit window.
“The debt to GDP ratio has fallen, but this gives us little room for additional borrowing. This is because the debt servicing costs are still stable while the tax-revenue ratio has fallen, and this implies fewer resources available for repaying future loans,” said Lawrence Kiiza, director of economic affairs at Uganda’s Ministry of Finance, Planning and Economic Development.
“Besides, absorption levels for committed debt are still lagging behind. Out of the $4.2 billion external portfolio, 48 per cent is yet to be disbursed because of low absorption levels among some government departments.”
Total public debt stood at $7 billion at the end of 2013/14 compared with $6.4 billion recorded by the close of 2012/13. However, details on debt repayments were not available by press time.
Faced with this dilemma, some economists say Uganda’s best option lies in the World Bank’s dedicated lending window for developing countries pursuing huge infrastructure projects.
Through the International Bank for Reconstruction and Development, interested countries are subjected to a borrowing limit of $1 billion for a selected project, with interest rates ranging between two and three per cent per year. However, loans issued under this window are directly matched with tax revenues or cash flows expected from specific projects such as power dams and factories.
“The lower debt to GDP ratio plus a reduced tax revenue ratio implies less disposable resources to service new loans. This leaves Uganda with difficult borrowing choices. In this situation, the IBRD credit window offers better opportunities than a sovereign bond. Current revenue mobilisation measures supported by the national identification card project could raise the tax revenue ratio by four per cent in three years’ time,” said Dr Adam Mugume, executive director of research at the Bank of Uganda.
Tax experts feel rising pressure to expand the revenue base means trouble for large businesses — a traditional soft target for revenue agencies struggling to beat targets.
“The reduced tax to GDP ratio could puts pressure on the tax body to collect more and bridge revenue gaps with peer economies; this will lead to a higher tax burden on large businesses. However, Uganda still suffers from quality variations in collection of vital economic data and better implementation of gathering techniques could remedy this shortcoming,” said Muhammed Sempijja, a tax partner at Ernest and Young Uganda.