Uganda’s debt remains sustainable

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OPINION

By Apollo Munghinda

Three key events which happened successively in the recent days have been very instrumental in shaping the narrative about the state of Uganda’s economy with specific reference to public debt and debt sustainability.

First, was the visit to Uganda by Prof. Jeffrey Sachs, a world-renowned professor of economics and thought leader in Sustainable Development from United States University of Colombia.

The professor minced no words in making it known that Uganda still needs long-term low-interest financing to meet its development needs.

Before Prof. Sachs’s could end his visit, Uganda was removed from the Financial Action Task Force (FATF) grey list in recognition of the satisfactory implementation of all deficiencies in our Anti-Money Laundering/Combatting Financing of Terrorism (AML/CFT) legal, regulatory and operational regime. This was a clear manifestation of the integrity of Uganda’s financial system.

The removal from the grey list did not only reinforce Uganda’s global reputation, but also signalled to the investors that Uganda is indeed a safe place to invest. FATF action was reciprocated by the European Union which also removed Uganda from its Anti-Money Laundering black list.

The third event was the successful completion of the fifth review of the International Monetary Fund (IMF)- Extended Credit Facility (ECF) backed economic programme and the immediate disbursement of about $120m to support the budget and the economy in general. This was a vote of confidence by the IMF in Uganda’s economic trajectory.

These events happened against the backdrop of a ferocious public debate on Uganda’s total debt stock and debt sustainability, following the issuance of the Auditor General’s Report to Parliament, which put the total debt stock at sh96 trillion vis-a-vis the sh86.7 trillion in the Debt Sustainability Analysis Report for FY 2022/23, issued by the finance ministry in December, 2023.

According to the Public Finance Management Act, (2015) interpretation under Section 3, public debt includes the interest on that debt, sinking fund payments in respect of that debt and the costs, charges and expenses incidental to the management of that debt.

Under what circumstances do we borrow?

The Government borrows to finance the budget deficit.

Every financial year, the Government consults key stakeholders on priorities to be budgeted for and prepares estimates of revenue and expenditure.

However, there are instances where the required resources to finance the agreed priorities surpass the projected domestic revenues, resulting in a budget deficit.

The budget deficit is financed through either domestic borrowing, external borrowing or grants from development partners.

The finance minister under Section 36 of the PFMA (2015) has the sole authority to borrow on behalf of the Government.

The observed variance in Uganda’s total debt numbers between the Office of the Auditor General and Ministry of Finance is explained by differences in the scope of variables considered.

Whereas the Auditor General considers arrears in addition to the conventional debt in the computation of the total debt portfolio, the finance ministry limits its scope to section 3 of the PFMA (2015).

Whereas the recent debate focused on the rising debt levels, it is worth noting that Uganda’s fiscal deficit has been reducing from 9.0% of GDP in FY 2020/21 to 5.5% in FY 2022/23 and is projected to reduce further to 3.8% in FY 2023/24 which clearly demonstrates that Uganda’s economy is on a correct growth path.

Debt sustainability

As a share of GDP according to the latest Debt Sustainability Analysis Report (DSA), debt reduced from 48.4% in FY2021/22 to 46.9% in FY2022/23 in line with the Charter for Fiscal Responsibility.

The current DSA finds Uganda’s public debt sustainable over the medium to long-term mainly supported by continuous improvement in GDP growth, strong revenue growth by implementation of the domestic revenue mobilisation strategy; and reduction in borrowing as some major infrastructure projects come to completion in the long-term.

The analysis of debt sustainability is hinged on solvency and liquidity. Solvency measures the sufficiency of future incomes to meet future expenditures and pay off current debt. Liquidity on the other hand measures sufficiency of available liquid assets to meet maturing obligations.

The finance ministry is currently in the mode of deepening fiscal consolidation, partly to ensure that the country does not acquire unnecessary debt, knowing full well that high debt levels typically require increased budgetary allocations to debt service, thereby reducing discretionary resources needed for the provision of services.

The Government is also in the process of implementing the Public Investment Financing Strategy (PIFS) to diversify development financing options, including green finance to reduce the composition of commercial loans.

To improve effectiveness and efficiency of public investments, the Government is implementing the Public Investment Management Strategy (PIMS) framework that requires all projects to be fully studied so that only viable and ready projects are included in the Public Investment Plan (PIP).

Going forward, the Government will continue to maintain macroeconomic stability through proper co-ordination of the monetary and fiscal policies, in addition to promoting import substitution and export promotion through industrialisation in line with the priorities of the budget and the tenfold growth of the economy strategy expected to become effective in FY 2024/25.

How borrowed money has been spent?

The Government has been implementing Vision 2040 through the five-year National Development Plans since 2010.We are now in the fourth year of implementing NDP III.

Under this framework, the Government took a deliberate approach to frontload investments, especially infrastructure projects, in addition to managing the effects of the COVID-19 pandemic.

It is through borrowing, that the country has been able to put up key infrastructure projects including, but not limited to: the upgraded and expanded Entebbe International Airport, the Kampala[1]Entebbe Expressway, Karuma and Isimba hydropower projects, including transmission lines, Kampala flyover project, several industrial parks, the new bridge of River Nile at Jinja, the national backbone infrastructure which has provided stable internet as well as support to Uganda Cancer Institute and the Heart Institute.

Other notable investments include schools and health centres under the Uganda Inter-governmental fiscal transfers (UGIFT), Uganda support to municipal infrastructure development (USMID) and water supply systems in urban centres, among others.

These projects are a source of national pride. If the Government had not taken a deliberate step to borrow, perhaps these investments would not be in place right now.

The Government will continue to borrow, for critical infrastructure projects that directly contribute to the growth of the economy, taking into consideration the debt sustainability measures.

The above investments notwithstanding, it is imperative that Ugandans take advantage of the opportunities associated with these projects for increased household incomes and wealth creation.

It is also our collective responsibility to condemn the rampant practices of infrastructure vandalism especially, road furniture and electricity transmission lines. It is painful to pay debt for investments which are not fully serving the intended purpose.

The writer is the Principal Communications Officer at the Ministry of Finance, Planning and Economic Development