Uganda will spend a bulk of its domestic revenue on debt servicing in the next financial year as the country works to resuscitate its Covid-19 battered economy.
According to the National Budget Framework Paper 2021/2022 recently approved by parliament, the country’s budget is projected at Ush45.65 trillion ($12.38 billion), of which Ush20.9 trillion ($5.66 billion) will go to debt servicing, against total domestic revenue that is projected at only Ush21.69 trillion ($5.88 billion).
This means that 96.7 percent of Uganda’s total domestic revenue — whose tax revenue is projected to be Ush20.13 trillion ($5.46 billion) — will be spent on debt servicing.
Despite signs of economic recovery in the technology and construction sectors, tax experts are worried about the cumulative impact of widespread economic downturn on tax revenue growth.
Reduced tax revenues directly translate into increased government borrowing and risks of debt distress — a situation in which a country finds itself struggling to repay its loans on time.
“We have noticed impressive business activity in the technology sector, which has led to strong returns in value added tax and income tax filed by companies in that sector recently. The proposed allocation of Ush400 billion ($108 million) for domestic arrears seems inadequate and may be reviewed before we submit the final budget proposals to parliament before April 1,” said Moses Kaggwa, director for Economic Affairs at Uganda’s Finance Ministry.
More than half of the budget is to be funded through borrowing, both from external sources and the domestic market, an unsustainable trend and an indictment on local revenue mobilisation, according to Julius Mukunda, co-ordinator of Civil Society Budget Advocacy Group.
A total of Ush10.3 trillion ($2.79 billion) is projected as external financing in the next financial year, of which Ush6.7 trillion ($1.81 billion) is in the form of project loans, while Ush3.58 trillion ($971 million) is expected as budget support loans.
The government will gradually borrow Ush2.48 trillion ($672.6 million) from the domestic market, for fiscal purposes, which translates into 1.5 percent of gross domestic product, according to the National Budget Framework Paper.
However, the Framework adds that borrowing from domestic sources will decline to an average 1.1 percent per annum over the medium-term, to maintain debt sustainability and promote increased private sector lending. However, economists disagree with this.
“My conclusion from the portion of revenue used to service debt is that we have entered the debt stress category through the World Bank and the International Monetary Fund (IMF) using the wrong parameter of debt to GDP,” said Fred Muhumuza, an economist and lecturer at Makerere University.
The IMF, for example, says Uganda’s public debt increased to 43.6 percent of GDP in 2019; then 47 percent in 2020 and will peak at 48.7 percent in 2021 — which is still below the 50 percent threshold for debt stress.
In December 2020, Finance Minister Matia Kasaija presented the budget framework for the Financial Year 2021/22 to parliament for approval and to inform on next year’s spending priorities.
Debt servicing includes debt repayment and interest payments, with the latter projected to amount to Ush4.96 trillion ($1.3 billion) in the next financial year, of which Ush3.85 trillion ($1.04 billion) is expected to cover domestic interest payments of which Ush1.11 trillion ($301 million) will cater for foreign interest payments and commitment fees according to the budget framework.
“The ratio of interest payments to GDP is projected to peak at 3.0 per cent in financial year 2021/2022, and will decline thereafter, to an average of 2.6 percent per annum over the medium term,” it adds.
The debt servicing burden continues to rise on the back of Uganda’s appetite for loans, which have seen the stock of total public debt rise to $15.27 billion at end of June 2020, up from $ 12.55 billion at the end of June 2019. Of this, $10.45 billion was external debt, while domestic debt was $4.82 billion.
Government officials said the extra borrowing was necessitated by the need to cover for both the revenue shortfalls and the Covid-19-related expenditure needs, as the main driver of the significant increase in debt financial year 2019/2020.
“The budget for financial year 2021/2022 aims at sustaining economic recovery from the impact of Covid-19 while maintaining impetus on driving progress towards achieving Vision 2040,” said Gabriel Ajedra, junior minister for finance.
Mr Ajedra said this will be achieved through the budget strategy of expanding economic base through productivity enhancement in agriculture and minerals, prudent macroeconomic management and enhancing local enterprise competitiveness through public investment in production, trade and social infrastructure.
This, the government hopes will recover the 2.9 percent growth in 2019/2020 and three per cent in 2020/2021 to five per cent in 2021/2022.
Domestic revenues are projected to amount to Ush21.69 trillion ($5.88 billion) in 2021/2022 and will grow at an average of 0.5 percent of GDP per annum over the medium term.
The domestic revenue resources which will cover 47.5 percent of the next financial year’s budget will be raised from tax sources of Ush20.13 trillion ($5.46 billion) and non-tax revenue sources, accounting for Ush1.56 trillion ($423 million).
Additional reporting by Bernard Busuulwa