Uganda: Secretary to the Treasury Warns Government On Debt
Uganda’s national debt has hit a staggering Shs42 trillion, just 8 per cent away from hitting the International Monetary Fund’s redline where the country’s indebtedness will be declared unmanageable and Secretary to the Treasury Keith Muhakanizi has warned government to slow down on further borrowing.
He said unless further borrowing is checked, the country’s debt will become unsustainable.
In an interview with Daily Monitor, Mr Muhakanizi said the current debt at Shs42 trillion is still sustainable but added that the Ministry of Finance is cautioning government to restrain itself on further borrowing.
“It is still sustainable but there are signals we are flagging to government that if we don’t water down, we may end up in unsustainable debt. We are strongly signaling to government to that effect,” he said.
Mr Muhakanizi, who also is Permanent Secretary of Ministry of Finance, said countries cannot develop without borrowing money to build infrastructural projects like roads and electricity generation to spur industrialisation.
“Debt is good. That’s why there is a financial sector in the world. The financial sector was put there to mediate savers and the borrowers. Therefore, you cannot develop without a debt,” he said.
However, he observed that the debt becomes dangerous when it becomes unmanageable. “But debt is also dangerous if it turns out to be unsustainable. That’s when it becomes dangerous. The ignorance of many people is that they think government shouldn’t borrow or households shouldn’t borrow. But how will you develop?” he wondered.
By December 31, 2018, Uganda’s debt stock stood at $11.5b (about Shs42 trillion) which is 41.8 per cent of the Gross National Product (GDP), just 8 per cent below the IMF risky threshold of 50 per cent.
Last week, the Parliament’s National Economy Committee warned in a report that the increasing trend of borrowing is taking the public debt to the edge of unsustainability.
The legislators also told government to stop borrowing to fund consumptive items such as paying salaries, consultancies and buying vehicles.
Mr Julius Kapwepwe, the Director of Programmes at Uganda Debt Network cited Local Governments where 13 per cent of their budget goes to recurrent expenditure such as salaries with only 4 per cent spent on capital development.
“This grossly undermines service delivery because out of every five shillings that is collected domestically, two go to debt servicing and one is lost through corruption,” he said.
Mr Muhakanizi insisted government borrows for development purposes only: “Fortunately, we don’t borrow to pay the recurrent cost. We borrow purely for development. That you can take it from me.”
Debt increases by 12 per cent
According to Parliament’s Committee on National Economy report, Uganda’s public debt increased by 22 per cent from Shs34.423 trillion in 2016/17 financial year to Shs42 trillion in 2017/18.
The Ministry of Finance’s report on Uganda’s public debt released in March this year states: “The total public debt stock increased by 12.5 per cent to $11.52 billion as at end of December 2018 from $10.24 billion as at the end of December 2017.”
The MPs said spending borrowed money on consumptive items undermines Uganda’s capacity to repay the debt stock that is increasing every financial year.
The MPs also asked government to expedite implementation of the projects that would increase production in the economy. “Government should expedite the implementation of all projects financed by debt to increase the country’s productive capacity in order to repay debt,” the MPs say in their report which was tabled before parliament two weeks ago.
The MPs also advised government to prioritise concessional borrowing for social projects and non-concessional borrowing for highly viable commercial projects.
“In the medium term, government continues to prioritise concessional financing as the preferred means of meeting financing requirements especially aimed at social projects,” the report reads.
The executive director of Civil Society Budget Advocacy Group, Mr Julius Mukunda, said even projects like the Northern Bypass that are under non-concessional funding end up becoming more expensive because of the delayed start or completion. “Sometimes the costs double because of the delay to complete the projects,” he said.
Delaying to start the projects when government has already borrowed money which accrues interest, is another big challenge on the debt burden. By the end of last year, the total amount of undisbursed debt was $4.05b (about Shs14.7 trillion) which is lying idle yet government continues to pay interest on it. This shows the government’s poor absorption capacity for loans.
The Commissioner of Debt Policy and Issuance Department Ministry of Finance, Mr Godfrey Arnold Dhatemwa, says when the public debt ratio to the GDP reaches 50 per cent, it means that accessing loans become more expensive because the lenders raise the interest rate because they doubting the country’s ability to service its debt. ” Your credit rating goes down and when you are borrowing, the interest rate is higher than the one whose debt stock is lower,” he said.
According to the 2019 IMF ratings, Compared to its neighbours Uganda’s public debt is lower. Kenya has the highest with 56.96 per cent, Ethiopia [55.70 per cent], Rwanda [43 per cent], Tanzania[40 per cent]
Mr Kapwepwe, however, says when the debt reaches 50 percent of the GDP, the country spends a lot of money to service the debt than financing its needs.
Government absorption capacity
In response, Mr Muhakanizi said the government’s absorption capacity of borrowed money has increased from 20 per cent to 70 per cent in the last three years.
“Three years ago, we were absorbing 20-30 per cent of the borrowed money. But given the reforms we did, we are now between 70 and 80 per cent. That’s progress but much more needs to be done,” he said.
According to 2018/19 Budget Speech by Finance Minister Matia Kasaija, out of Shs42 trillion, $7.7b (about 28.4 trillion) is external debt which accounts for 66.5 per cent while the domestic debt stands at 34.5 percent (about Shs14.3 trillion).
Under the domestic debt government borrowed through treasury bills worth Shs3.5 trillion and treasury bonds totaling Shs10.7 trillion
According to Mr Kasaija, in the current budget the debt repayment was allocated shs2.9 trillion which is the second largest share at 11.4 percent of the entire budget.
Investment in infrastructure projects on energy, minerals, oil and gas took the biggest part of the external borrowing with $3.085b, followed by Works and Transport at $2.55b.
Under Ministry of Energy, government borrowed $1.43b to construct Karuma hydro power dam; $482.6m for Isimba power dam and $318m for construction of the Albertine Airport.
According to the ministry of Finance report, government secured a loan of $1,435m (about Shs5.4 trillion) from Exim Bank of China for Karuma power project and implementation is at 90 percent. Commissioning is planned for December 2019.
Another sector that has taken a big chunk of the money borrowed externally, is transport network which saw $2.55b (about 9.6 trillion) borrowed to construct roads and rehabilitate Entebbe International Airport.
Under this sector, government is planning to construct Kampala-Jinja Expressway, Kampala Southern Bypass, Rwekunye-Apac-Lira-Kitgum-Musingo road and Kampala-Mpigi Expressway.
The need for additional financing for Municipal Infrastructure Development (USMID), a World Bank-funded project, saw government borrow $335m (Shs1.2 trillion) for infrastructure developments.
Government also borrowed $104m for CCTV cameras from Standard Chartered Bank.
Population: Uganda’s population is estimated at 45 million people currently. The Shs42 trillion national debt therefore means each Ugandan, including children, is required to pay Shs933,333.3 (about Shs1m) to repay the country’s loans.
1.Agricultural projects-$412m (about Shs1.6 trillion)
2. Science, Technology and Innovation- $84m (about Shs320b)
3.ICT $90m (about Shs328b)
4.Municipal infrastructure development (USMID]-$335m [Shs1.3 trillion]
5.Water and Environment projects-676.6m [Shs2.5 trillion]
6.Public Sector Management-$177m [Shs648b]
7.Works and transport-$2.555b [Shs9.3 trillion]
8.Energy, minerals, oil and gas-$3.085b [Shs11.3 trillion]
9.Education-$418m [Shs1.52 trillion]
10.Economic management and accountability-$37m[Shs135bn]
1.Treasury Bills-Shs3.59 trillion
2.Treasury Bonds- Shs10.7 trillion
Fixed interest rate
The Ministry of Finance says 92.9 per cent of the total loan portfolio has fixed interest rates and cannot be changed throughout the repayment period. Creditors charge different interest rates depending on whether the loan is based on concessional or non-concessional borrowing.
“Although 92.9 per cent of the public debt portfolio has a fixed interest rate, 18.4 per cent of the outstanding debt will be re-fixed in the Financial Year 2018/2019,” the Finance ministry’s report on Public Debt says.
China is the biggest creditor to Uganda at 39 per cent of the total loans in 2017/2018, surpassing the traditional lenders such as World Bank and African Development Bank, which disbursed 21 per cent and 8 per cent of the total credit respectively during the same period.
The UK government Export Credit Agency and Standard Chartered Bank are among the new lenders to Uganda. Mr Mukunda said the banks’ interest rates are high because individual borrowers compete with government to borrow domestically.