Uganda’s loan uptake sparks pay back fears

Monday November 11 2019

Iinfrastructure projects

The bulk of Kampala’s loans are expected to finance big infrastructure projects in transport and energy. FILE PHOTO | NMG 

BERNARD BUSUULWA
By BERNARD BUSUULWA
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Uganda's public debt had risen to $12.2 billion as at June this year from about $9.4 billion in 2017, Ministry of Finance data shows.

The rapid accumulation of debt has raised repayment concerns, even as government economists tread between defiance and caution while analysts cite serious financial risks tied to new borrowing.

The national debt, equivalent to 37 per cent of GDPin 2017, has now risen to 42 per cent of annual economic output. The bulk of the loans are intended to finance big infrastructure projects in the transport and energy sectors.

Total interest payment on debt has risen from Ush9.9 trillion ($2.6 billion) in 2016/17 to Ush12.3 trillion ($3.3 billion) by end of 2018/19.

The increased payments have been made worse by diminished tax revenue growth and limited economic benefits linked to some infrastructure projects.

Despite a revenue surplus of Ush258.89 billion ($69.3 million) recorded in 2018/19, the taxman posted revenue collection deficits for three preceding years in a sign of harsh economic conditions experienced by many businesses and low consumer spending.

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The Uganda Revenue Authority registered a deficit of roughly Ush606 billion ($162.3 million) in 2017/18 compared with a revenue shortfall of Ush404 billion ($108.2 million) posted in 2016/17, according to government statistics.
Government economists insist that bigger investments in infrastructure remain a prudent economic choice, but also concede to hidden risks connected to surging public debt levels.

“Our debt-to-GDP ratio remains below the 50 per cent ceiling after the latest economic rebasing. The debt to GDP ratio dropped from 41 per cent to 39 per cent after the rebasing exercise but the International Monetary Fund and World Bank concerns are pegged to the speed at which we are acquiring new debt, particularly domestic debt.

“However, we are borrowing for new infrastructure projects which will eventually translate into higher economic growth except in cases where projects are poorly executed,” said Albert Musisi, Commissioner for Macroeconomic Policy at the Ministry of Finance, Planning and Economic Development.

Vincent Phiri, an economist at NKC African Economics Ltd, a research company based in South Africa said that despite the notable increase in Uganda’s public debt over the past decade, it is still sustainable as it is expected to remain below the 50 per cent debt-to-GDP threshold.

"However, public debt sustainability faces significant downside risks from the government’s ambitious push for infrastructure development, exchange rate volatility, and rising refinancing risks. Poor execution of these projects will hurt economic growth and the country's fiscal position,” said Mr Phiri.

About 50 per cent of Uganda’s debt portfolio remains unabsorbed which is a painful cost to taxpayers who are obliged to repay loans even when the funds disbursed are yet to be utilised, said Julius Mukunda, co-ordinator of the Civil Society Budget Advocacy Group.

“Delays in execution of major infrastructure projects result in cost overruns that are passed on to taxpayers,”said Mr Mukunda. “Parliament needs to rein in rapid borrowing but political will in this matter remains elusive across the political spectrum.”

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