Uganda’s debt stock has steadily increased in the past four financial years, and so has the burden on the tax payers, a review of data from the finance ministry, the central bank and the 2015-16 auditor general’s report has revealed.
As of June 2016, Bank of Uganda (BOU) state of the economy reports estimated Uganda’s debt at Shs 46.1tn, a figure confirmed by the auditor general’s 2015-16 report released last December.
This puts debt per capita (the debt burden per citizen) at Shs 1.3 m for each of the 34.6 million citizens that make up the east African land locked nation according to 2014 population census figures.
Total debt has increased by Shs 13tn (about 39 per cent) from Shs 33tn in FY 2014-15 to Shs 46tn in 2015-16. This figure includes both the disbursed and undisbursed loans – the latter accumulating interest, the former commitment fees.
The current debt stock has outstripped both the current budget – and will even surpass the proposed 2017-18 national budget. The current budget is Shs 26tn while in the next financial year, Uganda’s budget is expected to rise to about Shs 29tn. In other words, to clear the debt, the country would forfeit two national budgets (each worth Shs 23tn).
According to the auditor general, “the accelerated increment in the absolute value of foreign debt was caused by both increase in the nominal amounts borrowed and also the increase in the translation rate arising from the depreciation of the Uganda shilling against major currencies especially the US dollar”.
However, there is contention on Uganda’s right debt stock figure mainly arising from whether one looks at it from the nominal value or in net value terms – the former looks at the total contracted debt while the latter only considers the loans disbursed and included in the national budget; the former incurs commitment fees, the latter interest rates.
But it also depends on who one asks. The BOU nominal figure (as of April 2016) is Shs 46.1tn which translates into over a half (52 per cent) of the total value of Uganda’s goods and services in a year (Gross Domestic Product – GDP) while the disbursed (or net value) figure stands at Shs 28.1tn (about 31 per cent of GDP).
During the 2016-17 budget speech, finance minister Matia Kasaija put the nominal figure at about Shs 30tn by end of June 2016. He put nominal external debt at Shs 18.7tn and domestic debt at Shs 11.3tn. For Kasaija’s figure, the debt stock is about 34 per cent of GDP while the net value is about 30.5 per cent of the same.
EXTERNAL AND DOMESTIC DEBT
For four fiscal years, external debt has steadily risen – only slightly falling short of foreign debt-to-total debt cap. According to the 2013 public debt management framework, government should ensure that the proportion of the foreign currency debt to the total debt does not rise over the maximum of 80 per cent.
Just 77 per cent (Shs 35.4tn) of the current debt stock (Shs 46tn) is external debt – this alone is above the current national budget as well as the budget estimates for the next financial year.
If the current trend persists, the auditor general warns, government is likely to exceed the 80 per cent cap in the near future, which may negatively impact on the risk perception of the lenders to government; translating into higher interest rates on foreign denominated loans.
The disparity in the debt stock figures springs from the foreign debt sum: there is no contention on the domestic debt figures. Although the ratio of domestic debt to total debt stock has reduced by 10 per cent – from 33 per cent in FY2012-13 to 23 per cent in FY 2015-16, the amount of debt has increased from Shs 7tn to Shs 11tn in the same period.
COST OF DEBT
The impact of the servicing of this debt on the economy is rather direct, taking a huge chunk of government revenue. For example, while tax body Uganda Revenue Authority (URA) collected Shs 11tn in the FY2015-16, about 16 per cent (Shs 1.75tn) of this collection was used to pay interest on debt.
The ratio of expenditure on interest payments to government revenue is just one percentage point above the 15 per cent cap as provided for in Public Debt Management Framework of 2013. Standing at Shs 1.75tn, the expenditure on interest payments in the FY2015-16 is slightly lower than that of the current health budget (FY 2016-17) at Shs 1.8tn.
The expenditure on interest payments is already swallowing up huge chunks of Uganda’s national budget. For example, in the current financial year, about Shs 2tn (9.9 per cent) of the Shs 20tn budget (this excludes external debt repayments and arrears) will be spent on interest payments that are due. This allocation is nearly equivalent to a combination of the security (Shs 1.578tn) and parliament (Shs 470bn) budgetary allocations.
According to the budget framework paper for FY 2017-18, the cost of interest payments will increase to Shs about Shs 2.3tn (10.3 per cent) of the proposed FY2017-18 budget estimated at Shs 22.7tn (this excludes external debt repayments and arrears). This amount is slightly (0.1 per cent) lower than the proposed education budget. Of the total expenditure on interest payments, Shs 1.6tn is for domestic debt and the rest – Shs 700bn is for external loan interest payments.
Meanwhile, government is already entangled in a web of domestic borrowing – borrowing from commercial banks to repay loans from the same banks. In the current financial year, government has borrowed Shs 5.3tn and used Shs 4.98tn to clear loans from the same lenders while in the next financial year, government will borrow Shs 7.2tn and use Shs 6.3tn to pay domestic creditors.
LOAN RATES; POOR LOAN PERFORMANCE
The auditor general is also concerned about the high interest rates for domestic loans. The rates for treasury bills have increased by six percentage points from 13 per cent in 2013 to 19 per cent in 2016. Although higher than treasury bill rates, commercial loan interests increased by only 1.6 per cent from 23.3 per cent to 24.9 per cent in the same period.
He has also expressed worry about the interest rates for the non-concessional bilateral and multilateral loans some of which stand between 3.4 per cent and 4.5 per cent. Creditors include China’s Exim Bank which extended Shs 2.3tn for the Karuma Hydropower Dam at 3.94 per cent for 15 years. This means that Uganda will pay about Shs 1.4tn as interest over the loan period.
But even with the high rates, the utilisation of loans remains wanting.
“My review of the loan disbursements revealed that several loans appeared to be performing poorly, with some nearing expiry; while others reached the closing date without fully disbursing,” the auditor general writes in his report.
According to the report, committed but undisbursed debt stood at Shs 18.1tn as of end of June 2016. Of this, Shs 8.6tn was multilateral while Shs 9.5tn was bilateral. For this, tax payers will part with Shs 20.9bn in commitment fees.
EXTERNAL DEBT PAYMENTS AND ARREARS
While the total budget for the current financial year 2016-17 stands at Shs 26tn, external debt payments and arrears are worth Shs 6tn (about 23 per cent). This money is an equivalent of the total budgetary allocations for both energy and mineral development, and works and transport, the most prioritised sectors.
The figure is expected to rise to about Shs 8tn (about 26.7 per cent) of the projected budget of Shs 30tn for the FY2017-18. The money set aside for external debt payments and arrears in the next financial year is equivalent to the projected budget allotted to both the works and transport sector and the energy sector in the next financial year.
Economic experts measure debt sustainability by considering the ratio of the debt to the GDP with 50 per cent being the limit for sustainable debt. BoU figures indicate that the debt-to-GDP ratio has increased from 27 per cent in 2010 to 34.4 per cent in 2015.
But speaking during the launch of the eighth edition of Uganda’s Economic Update by the World Bank at the Kampala Serena Hotel recently, Moses Bekabye, the macroeconomic advisor in the ministry of Finance, suggested that Uganda’s debt was not yet out of hand.
“Our [Uganda’s] debt ratio to the GDP is 27 per cent in terms of Net Present Value (PV) [and] is below the 50 per cent which is the limit for sustainable debt. Public debt in nominal terms is at 34 per cent of the GDP,” he said.
The IMF is of a similar view, albeit with some caution. According to the seventh review of the Ugandan economy under the Policy Support Instrument of the IMF released last month, “the debt sustainability analysis continues to show a low risk of debt distress, but also indicates that vulnerabilities have increased”.
In November 2016, Moody’s downgraded Uganda’s debt sustainability profile from “stable” to “negative”. Moody’s then warned: “Debt affordability has been a persistent vulnerability for Uganda, and the higher debt burden combined with the shift in financing sources will lead to further deterioration”.
With such caution, Uganda’s debt could get out of hand and only debt relief – like the one extended to the country in 2000 – could save the economy from sinking.