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Uganda is trapped in debt - Economists warn

A screenshot from last week's episode of ACFIM TALKS

Uganda may be entering a debt trap because the country is now in a phase where it borrows to pay back debt according to Mr. Katabaazi Patrick, Executive Director- Centre for Budget & Tax Policy who was hosted on last week’s episode of ACFIM Talks. The show was meant to analyse Uganda’s economy in the aftermath of the 2021 Elections.

According to the Auditor General’s report, Uganda’s borrowing has been growing exponentially at alarming levels. As of October 2020, Uganda’s loan portfolio is at UGX 63.35 trillion ($17.8 billion) from UGX 46 trillion ($12.6 billion) in June 2020. In 2016, Uganda’s debt stock was at UGX 28 trillion ($7.6 billion) which shows the country’s insatiable appetite for borrowing has been growing over the years. 

Katabaazi explained that in the next financial year, the country’s budget is projected at UGX 45 trillion. Government spending alone amounts to UGX 29 trillion and yet revenue projections are at UGX 21 trillion. Over the last four financial years government has borrowed to finance the budget shortfalls because the Uganda Revenue Authority has failed to hit the budget and yet there is need for money to finance major infrastructural development. This means that Uganda shall have to borrow to finance the budget deficiency by over by UGX 8 trillion as well as also borrow money to repay loans.  

He further suggested that consequently, if the country continues with this trend of failure to generate its own resources and relying on debt, it will become extremely difficult for government to efficiently invest in the people through delivery of basic social services like health, education plus other productive sectors such as agriculture. Therefore, the more the country gets indebted, the more it becomes constrained to look after its citizens hence abject poverty.

Ms Christine Byiringiro, Program Manager, Policy Analysis and Governance – Uganda Debt Network (UDN) who was also on the show, emphasized that rising poverty was the number one consideration for debt relief in the year 2000 under the Highly Indebted convention initiative where Uganda achieved 100% debt forgiveness.

This was because lending institutions such as World Bank, IMF understood that poverty would rise. Christine however explained that if Uganda doesn’t tame her debt appetite, we may find ourselves in a similar or worse position we were in 20 years ago. This time around though, the debts will not easily be forgiven because the lenders are private entities.

She went on to disclose that the Ministry of finance acknowledged that Uganda has moved from moderate debt distress to low where we are now failing to pay back our debt. At the international level, some credit rating agencies have given Uganda very bad credit rating (in negatives actually) from positive in June 2020.

This means that it is getting more risky for external lenders to lend to Uganda. Government has run to domestic borrowing and yet even our economy is growing downwards from 6% to 3 % and 2.9% as of December 2020.

On what the increasing debt stock means to the ordinary Ugandan?  They will be taxed more on services and goods such as sugar, fuel. For the business men, chances of accessing credit to grow their businesses will be low because government will not be able to borrow externally and will have to resort to domestic borrowing which in turn crowds out the private sector. The interest rates will as a result go up for the private entities because banks feel it safer to lend to government who will have to agree to high interest rates since they are desperate.

Ms Byiringiro believes that borrowing isn’t the solution and that is where Tanzania may have got it right. Uganda’s debt sustainability strategy emphasizes that we ought to consider borrowing concessional loans. “We have however moved towards non- concessional borrowing which is a trap since it allows you to fund big infrastructure development projects” she said. “However, the interest rates are usually higher, grant element is very minimal with short time frames.” She added that Uganda keeps borrowing yet we are not even strict on the misuse of these funds and this is the reason the country has reached where it is. Government is now even mortgaging its properties as security for the loans.

Mr. Katabazi further explained that supplementary budgets in Uganda are indeed a symptom of poor planning and suggested that one wouldn’t be blamed for thinking that these budgets are directed towards campaign financing after all they are either initiated before, or in the year of elections. “Supplementary budgets are meant to address emergencies that happen at budget execution stage. On the contrary for the case of Uganda, supplementary budgets are instead used to address non priority issues”, he argued.

Katabazi revealed that in 2015, under the public finance management act, a solution had been found to deal with the issue of supplementary budgets. To that effect, for a supplementary budget to be raised it had to be tagged to a contingency fund meaning that the country would put aside some money at the beginning of every financial year and if need for a supplementary budget arose, it would be picked from that. However, in less than 6 months before that law could even be implemented it was scrapped off through an amendment. This was right before the 2016 election year.

Was this a coincidence? Could this probably have been deliberate since the country was heading into an election year? In essence the only safeguard that was put in place was removed.

Ms Byirngiro added that the Auditor general in his report cited under-absorption of loans because many loans expired even before the money had been used. She urged the Ugandan government to first address the poor management of the available resources before running to borrow.

Lastly, she advised that just as Tanzania has been able to attain growth through local financing, Uganda should follow suit as opposed to borrowing to even finance budget shortfalls.

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