So, how much does Uganda owe? Is it too much?

Construction of the downstream channel at the Karuma dam project in Uganda. The Economic Update released by the World Bank shows Uganda is not benefiting from investment in infrastructure, due to endemic delays in implementation, cost overruns and corruption. PHOTO | MORGAN MBABAZI 

By DICTA ASIIMWE

In Summary

• Is Uganda’s public debt inching back to the unsustainable levels of yesteryear? It depends on whom you ask — or the method used to calculate the country’s capacity to pay back.
• Experts say it’s $13.7 billion but government officials insist it’s $8.8 billion; blame methods used.
• There are fears that given its ambitious infrastructure expansion programme, it is borrowing heavily in anticipation of oil revenues.

Is Uganda’s public debt inching back to the unsustainable levels of yesteryear? It depends on whom you ask — or the method used to calculate the country’s capacity to pay back.

Uganda, which has over the past 10 years increased investment in infrastructure, had by March contracted $13.7 billion in public debt.

Uganda was a beneficiary of debt relief by the Paris Club of multilateral lenders in 1998. Under the Highly Indebted Poor Countries (HIPC) initiative, Uganda was forgiven its debt in cycles — 1998, 2000, and 2004 — with its public debt falling to a paltry $900 million.

But Kampala has since piled the debt back up. According to some critics, the debt is not sustainable. At $13.7 billion, Uganda’s debt to GDP ratio stands at 53.1 per cent. This is above the 50 per cent sub-Saharan Africa standard of sustainable debt.

But government officials including Patrick Ocailap, the Deputy Secretary to the Treasury and Lawrence Kizza, the Director for Economic Affairs, say Uganda has borrowed Ush30 trillion ($8.8 billion) or 34 per cent of its GDP.

At a World Bank event in Kampala, Ocailap dismissed those saying the debt was too high.

Explaining the discrepancy in calculating Uganda’s debt, Jim Mugunga, the Ministry of Finance, Planning and Economic Development spokesperson, said the government doesn’t consider all the debt that has been contracted, but focuses on the disbursed amounts reflected in the national budget.

“Calculating as debt money we have not yet received would limit the reach of our revenues, when this is not money we have to pay back soon,” he said.

He added that Uganda doesn’t need to calculate the undisbursed debt because the country is not incurring any interest or repayment costs on it.
In the national budget, the government committed over 25 per cent of the total budget to servicing debt.

“I still need to be convinced that when a country allocates Ush2 trillion out of Ush13 trillion expected revenue to paying interest on its debt, that that is evidence of a sustainable public debt,” said Dr Fred Muhumuza of the Economic Policy Research Centre (EPRC) at Makerere University.

Most of the Ush7.3 trillion ($2.1 billion) used for debt repayment goes to domestic markets. This has led to higher interest rates, with the average prime lending rate now standing at 24.3 per cent.

The Bank of Uganda has for the third consecutive quarter lowered the Central Bank Rate in a bid to lower commercial lending rates, though the banks don’t seem to be following suit or at least are not moving at the same pace. 

READ: Bank of Uganda cuts Central Bank Rate again

This high interest rate, according to the Uganda Manufacturers Associations executive director Sssebagala Kigozi, increases the cost of capital, making the goods produced in the country uncompetitive.

Yet the government says public debt is meant to improve the competitiveness of sectors like manufacturing, which have the potential to employ many people and to pay more taxes. These taxes would then be used to pay back the loans

Is the government frontloading debt in anticipation of oil revenues?

There are fears that given its ambitious infrastructure expansion programme, it is borrowing heavily in anticipation of oil revenues.

Officially, government sources deny using expected oil revenues as collateral but Steven Mukitale Biraahwa a former chairperson of the Parliamentary National Economy Committee, which approves government loans, says Uganda is no longer looking at revenue from sectors like industry and agriculture to pay back the accumulated debt.

READ: Uganda sees oil as answer to growing public debt

He says the government is already frontloading and expects to pay back the huge public debt using oil revenues.  This is supported by the director of research at the Bank of Uganda, Dr Adam Mugume. Dr Mugume said that Uganda’s debt is unsustainable and that payment is only possible if oil production starts.

“I don’t see how else we shall generate enough money to pay back our debt in foreign currency,” he said.

Dr Mugume added that the other alternative for Uganda is debt relief or defaulting, which, he argued, wouldn’t be such a bad thing considering that Argentina, which defaulted in 2001, is already back in the international borrowing markets. 

External borrowing accounts for 75 per cent of Ugandan government borrowing, and this money is invested in infrastructure projects.

According to the Ministry of Finance, of the $10.4 billion in external debt that has been contracted, only $5.4 billion has been received. 

The ministry blames the low absorption of borrowed money on inadequate preparedness by implementing government agencies, low procurement capacity, and lack of project management.

The Economic Update released by the World Bank shows Uganda is not benefiting from investment in infrastructure, due to endemic delays in implementation, cost overruns and corruption.

“Over the past decade, for every shilling invested in the development of Uganda’s infrastructure, seven-tenths of a shilling of economic activity has been generated,” says Christina Malmberg Calvo, the Uganda World Bank Country manager.

Joseph Muvawala adds that investment in infrastructure has failed to work as a stimulus for economic activity because Uganda has been signing contracts that grant all the resources being generated to foreign companies.

Several government departments are now investing in increasing local content for infrastructure. The Uganda National Roads Authority announced recently that all companies working on road projects should make sure all foreign employees have work permits.

Increasing local content is expected to boost economic activity and taxes for Uganda, all of which would improve debt sustainability.