Is Uganda’s rising public debt worth it?
Monday July 08 2019
Uganda’s public debt is projected to reach $18 billion —or more than 50 per cent of the country’s GDP — by the end of financial year 2022/23, according to economists, with critics questioning the returns on investment in large infrastructure projects and spikes in domestic government borrowing.
The total debt portfolio of Uganda by end of June 2017 amounted to some $9.4 billion or 37 per cent of GDP, and increased further to $10.74 billion by the close of June 2018, equivalent to 41.5 per cent of GDP. External debt was estimated at $7.29 billion while domestic debt accounted for $3.45 billion, according to data compiled by Ministry of Finance, Planning and Economic Development. Total public debt rose to $11.7 billion in December 2018, equivalent to 41.8 per cent of GDP. It grew further to $12.2 billion by end of June this year, standing at 42 per cent of GDP.
This is a sharp rise from 2006, when Uganda’s total public debt stood at $1.6 billion. The country enjoyed generous debt relief offered by the Heavily Indebted Poor Country initiative and the Multilateral Debt Relief Initiative between 1998 and 2006 for extremely poor countries across the globe.
The sharp growth in public debt is mainly attributed to heavy borrowing to fund large infrastructure projects in the transport and energy sectors, occasional surges in military spending and humanitarian needs, observers say.
But experts ask, where are the returns on investment in big infrastructure projects to justify the surging national debt? These returns would help determine a country’s ability to repay loans obtained from foreign lenders, potential impact on economic growth and lead to increased revenue collection, employment and local savings.
“Return on investment is not pegged to a specific project but to the entire economy. Failure to stimulate strong economic growth could translate into an inability to repay non-concessional loans acquired for financing large infrastructure projects,” said Fred Muhumuza, an economist.
Dr Muhumuza illustrates this view with the Kampala-Entebbe Express Way. The debt repayment schedule for the road was tied to road toll fees, which proved insufficient, forcing the government to turn to the general works and transport budget.
To avoid a repeat of such a scenario, he argues that new projects planned in the transport and energy sector should be linked to other areas like agricultural processing, manufacturing, tourism promotion, mining and rural electrification.
“Through the synergy based approach, many infrastructure projects backed by non-concessional borrowing would be eliminated. Unlike concessional borrowing that allows for renegotiation of repayment terms, non-concessional loans such as the $200 million borrowed by government from Standard Chartered Bank Uganda for installation of security cameras across the country are usually difficult to renegotiate with foreign private lenders,” Dr Muhumuza added.
According to Dr Isaac Nkote, Dean of the Faculty of Commerce at Makerere University, what matters when it comes to infrastructure projects is the quality and efficiency of execution since the benefits are not immediate.
“Some projects carry social rather than economic benefits and these must be equally considered for national good. For example, the construction of the Kampala-Jinja Express Way would cut the burden of spending three hours travelling from the City to Jinja for business,” said Dr Nkote.
In addition, spikes occasionally witnessed in government’s domestic borrowing operations have aggravated “crowding out” of private sector from the credit market.
During the financial year 2018/19, the government’s domestic borrowing programme exceeded target by Ush320 billion ($85.4 million), hitting Ush2 trillion ($533.6 million), and triggered a two per cent rise in interest rates earned on Treasury bonds as investors rushed to exploit government’s desperate need for cash to finance budget commitments amid low revenue collections.
An increase in interest rates earned on Treasury bills and bonds directly leads to higher borrowing rates charged on borrowers because several commercial banks rely on movements in the former to determine their lending rates.
The domestic borrowing target for 2019/20 stands at Ush2.8 trillion ($746.9 million). In 2016/17, the government borrowed more than Ush1 trillion ($266.8 million) from the local market, exceeding its target by more than Ush200 billion ($53 million). This raised interest rates earned on Treasury bills and bonds by around three per cent, according to financial market data.
Further pressures exerted on interest rates earned on government securities prompted fears about escalated interest payment costs which in turn, caused suspension of Treasury bills and bonds auctions for the final month of 2016/17, according to government sources.
“On the ‘crowding out’ of the private sector, we are cautious about this matter. Weighted interest rates on Treasury bonds fell from 15.6 per cent to 14 per cent, while indicative rates for short term securities dropped to around 8.8 per cent in the previous financial year. But these are not the interest rates that the private sector pays for its borrowing needs,” said Godfrey Arnold Dhatemwa, Commissioner in the Debt Policy and Issuance Department at the Ministry of Finance, Planning and Economic Development.
Whereas Ush10.6 trillion ($2.8 billion) was budgeted for debt repayments in the 2019/20 financial year, Uganda’s interest payment costs rose from Ush9.9 trillion ($2.6 billion) in 2016/17 to Ush12.3 trillion ($3.3 billion) by end of 2018/19.