Prepared for Global strategy meeting, Nairobi, July 2016, by Julius Kapwepwe.

Preamble and synopsis of Debt context in Uganda:

Uganda Debt Network (UDN) is an advocacy civil society organization (CSO) formed in 1996 as a result of concerns about the unsustainable level of Uganda's debt, under the global Jubilee campaign movement then. The Mission of UDN is to promote and advocate for poor and marginalized people to participate in influencing poverty focused policies, demand for their rights, and monitor service delivery to ensure prudent, accountable and transparent resource generation and utilization.

Uganda’s Debt situation is older than its independence from the colonial Britain in 1962 e.g. a) $24 million WB loan in 1955 under the broader regional railways & harbors connection in Uganda, Kenya & then Tanganyika b) $8.4 million WB loan for purposes of Owen Falls Dam electricity, eventually commissioned in 1954 (see WB reports). Under HIPC & MDRI initiatives; Uganda has previously defaulted on debt repayment in 1980s. Coming to the 1990s, Uganda was the 1st country in the world that qualified to benefit from the HIPC initiative- with forgiven debt cycles initially in 1998, then 2000 and 2004; and later the MDRI (G8- Gleneagles) window in 2005— leaving the country with a paltry public debt of about $900 million by March 2007. Before HIPC and MDRI initiatives, Uganda’s Debt: GDP stood at over 70%. Whereas Uganda has in place a Legal, Policy and Institutional framework for prudent Debt Management and the Debt Sustainability Indicators (DSAs) seem okay compared to the1990s and early 2000s situation, Civil Society remains concerned, given some of the following issues;

1)    Uganda’s level of Indebtedness- is a moving target; With varying figures depending on which source/ method for calculation (e.g. contracted versus disbursed; debt stock plus interest- real versus nominal; only current debt stock; with/ without a factor of inflation), Uganda’s gross public debt was approximately $8.81 billion by end of FY 2015/16 (i.e. June 2016) with a) External debt ($5.48b) and b) Domestic debt ($3.32b)- as per the Budget Speech for FY 2016/17 fiscal period. With official Debt: GDP estimated at 34% (GOU) and 38% (IMF) by May 2016, Debt still appears sustainable.

2)    Any economic rebasing linked to appetite for Debt? We are yet to ascertain if the appetite in some EAC States to opt to front load esp. infrastructural projects, has any link with recent GDP expansion due to rebasing. Even when we are resizing (real or perceived) our economies/ GDP- e.g. rebasing by Kenya (2014) & Uganda (2015); UDN analysis; UDN analysis gives higher % figures of Debt: GDP and indebtedness to about $13.7b (not $8.81b), whether 34% (GOU) and/ or 38% (IMF)- thus moving target. Yet the above levels exclude new lined up borrowing e.g. a) $14.2b Standard Gauge Railway b) refined products pipeline c) $400m 8th municipal Infrastructure dev’t (USMID project) d) $500m for Kampala Light Rail construction e) Fertilizer plant f) Ebb airport expansion g) $4.27b Oil refinery and h) phase three of National Transmission Backbone (ICT) Project.
3)    Low External loan absorption/performance; Due to  long procurement process and lack of transparency, co-funding/ counter-part funds by Government, Delays in approval by Parliament, given inadequate guidelines for approval.  How then do we smoothen investment expenditures over time, in broader view of limited absorptive capacity of Uganda’s economy- estimated at $25 billion in 2015?

4)    Rapidly growing Domestic Debt; This includes total domestic debt of UGX 1.632Bn (Treasury instruments) & (Domestic arrears) in 2003, to UGX 4.5359 trillion in June 2012, to even higher figures by Dec. 2015. With a rise of 178% (i.e. average annual growth rate of 16.6%) between June 2003 & 2011, the growth rate is simply too big and raises concerns to the Ugandan economy. Yet this excludes debt due to oil recoverable costs for private companies; Public acquired Private debt (under PP Partnerships); cost of debt servicing.

5)    Domestic debt was bigger than total domestic revenue; In FY 2015/16, total domestic debt was bigger than total domestic revenue, so for 2nd year running Uganda has had to roll-over a portion of her maturing domestic debt of about UGX 5 trillion each year, leading to UGX 7.3 trillion (or $2.1 billion) budget allocation in FY 2016/17 for both external and domestic debt i.e. 25% of the total national budget. More than 80% of annual interest payment over the last two years is to domestic markets. In some cases where we are borrowing for feasibility studies, we risk pre-determined biased positive feasibility reports.
6)    Poor adherence to existing debt management control systems; Orchestrated by Accounting officers (AOs). So far with no evidence of punitive sanctions to AOs who disregard policy provisions.  This is coupled with Fiscal indiscipline – reflected in escalated domestic arrears debt; also due to under -budgeting for fixed expenses (like utilities).

7)    Oil-related rapidly growing trends of borrowing (Domestic & External)- i) Just one case, between FY2013/14 and 2014/15, new external borrowing increased by 82% ii) With Debt: GDP growth from 24.2% in 2012 to 38%- IMF/ or 34% (GOU) by May 2016, is Uganda mortgaging her oil with increased borrowing (esp. for infrastructural projects, appetite to opt to front load projects)- even when oil real production is estimated for around 2022? What are the risks with spending in advance on account of future oil revenues? While Government may not borrowing on account of oil, the lenders seem to do so, esp. China through the EXIM Bank.

8)    Debt still sustainable? Whether Debt: GDP was at about 34% (GOU) or 38% (IMF) or UDN higher % figures by May 2016, that UGX 2.1 trillion out of UGX 13 trillion projected domestic revenue in FY 2016/17 has been allocated to interest payment alone, or 25% (UGX 7.3 trillion or $2.1 billion) of the budget due to debt repayment (interest & principal) , does that point to sustainable public debt?

9)    Increasing debt-related risks?-  Is Uganda increasing risks of debt restructuring (e.g. shifting the repayment burden to future generations, with bigger debt obligations? Will Uganda borrow for bail-out or ask for new debt relief- even amidst non-concessional and commercial creditors, or there will be defaulting on repayment? What is the implication on the economy, households, poverty reduction & dev’t?  Have we learnt any lessons from the Ghana-rapid borrowing since 2012 and implication on the currency or economy in general, e.g. with $1b IMF bail-out already? Broadly, East Africa’s growing debt levels to finance infrastructural projects could push regional economies into financial distress in the wake of volatile local currencies and falling export earnings.
Specific Recommendations

  •      A guide/tool to MPs; UDN so far has a draft tool, “Guidelines for Loan Scrutiny and Approval Process in Uganda to influence the loan contraction process” to support Members of Parliament (MPs) in assessment criteria for approval of loans.
  • Advocacy Campaigns; For responsible borrowing, including reduced Domestic debt; and broader citizens’ participation - especially the intended beneficiaries for they understand better the local context where implementation is to take place- beyond MPs.
  • Campaign against short-term borrowing for long-term investment; Else, how will Uganda pay back if the assumption is that investment will spur economic activities that generate returns (e.g. taxes, self-financing after commissioning) to sufficiently meet debt payback obligations? The burden also weighs heavily on Uganda’s dev’t Budget component (with debt servicing making up to nearly 25% of FY 2016/17, thus being the largest “sector”.
  •      Resist Eurobonds where possible; Even with the apparent rising debt, Uganda has not been to financial markets/ global market/ e.g. floating a Eurobond. Given the experiences & challenges through this debt instrument, Uganda should continue resist the modality- instead look at reduced opulence & huge consumptive spending- largely recurrent.
  •      Phased borrowing & investment; Through sequencing of planned projects, rather than Debt/ projects frontloading, given absorption challenges of a small economy.

Finally; Enhance broader North- South; and South-South linkages and corroborative advocacy actions at national, regional (e.g. EAC/COMESA, AU- UNECA) & global levels

By Juliet Akello

Published: 30th June 2016

The national budget as a policy instrument helps the Government to run the state of affairs (political, social and economic) smoothly to achieve set priorities for a given financial year.Uganda’s development agenda is guided by Vision 2040 and the NDP II (2015/16 – 2019/20); therefore planning, budgeting and policy formulation processes at all have to be aligned to transform Uganda’s economy to modern and prosperous country. Of the total, national budget FY 2016/17 (sh26,361b),  sh6,524.5b equivalent to 24.8% will be sourced externally. External borrowing will total sh5,034.5b which is 19% of the budget; that is; sh2,520.8b in concessional loans and sh2,513.7b in non-concessional loans; while sh1,490b in grants and domestic debt refinancing (sh4,977.7b) equivalent to 18.8%.

However, sh2,022.9b (7.7%) is expected to settle interest payments. This is more than the 3.1% share of the budget for the agriculture sector considered the back-borne of the economy. National budget deficits increase when debt service is characterised by high interest payments because part of the available resources is diverted from public service provision translating into a cost.

Notice that public debt-to-GDP was 26% by February 2015 which rose to 32.7% by June in the same year (MoFPED Report). The Budget speech FY 2016/17 indicates that this has further risen to 34% representing an increase of 31% in just one year and three months. Can Uganda’s economy growth faster than this debt growth rate to ensure debt sustainability in the future? Moreover, all this is within the context of; i) slow economic growth rate averaging less than 6% in four years, ii) stagnated revenue-to-GDP ratio at 13% for about three years now, iii) Negative Balance of Payments in recent years of less than 50% of the import bill within 12 months to March 2016 arising from a large international trade imbalance; and iv) costly infrastructural development (World Bank, 2016). These prevailing conditions are not favourable for debt sustainability.

Meanwhile, the Auditor General since FY 2009/10 to-date highlights challenges related to low absorption capacity of loans by the Government MDAs with Uganda’s debt portfolio underperforming below 50% (2015 report). This is a good sign of ill preparedness for the loans acquired yet it attracts commitment charges/fees which have been steadily increasing. In FY 2012/2013 commitment fees paid on undisbursed loans increased by 40% from sh9.023b in 2011/2012 to sh12.7b in 2012/2013 yet, total commitment fees for FY 2016/17 alone are estimated at sh84b which is highly costly. Uganda’s high appetite to borrow will heavily weigh on economic growth, especially where productivity is low.

Therefore, shall Uganda need a big-bang to shake the economy out of the current state for the national budget to deliver?; is it a case of mismatch between the country’s development needs and available credit?; do we need to borrow every time we need to advance our development? should we lower public debt or build public infrastructure first within the context of current public expenditure Vs investment for the future generation? An analysis of whether “productivity” or “job creation” comes first is another area of interest (Budget theme).

The Government should expedite the process of establishing a fully functional and empowered appraisal, monitoring and evaluation entity to approve project designs to avoid costs and delays caused by changing project designs during implementation. This will enhance the absorption capacity to ensure full utilisation of the funds released. For an economy to gain debt sustainability over time, it should grow at a rate higher than interest rate of the debt. Otherwise, it is worth discerning the “devil out of the details” if the national budget is to deliver on the theme and the NDP II.

By Peninah Mbabazi

Published: 15th June 2016

The theme of Uganda’s FY2016/17 budget that was read by Uganda’s Finance Minister Matia Kasaija on June 8th 2016 is ‘Enhanced Productivity for Job Creation’. Going by absolute figures, three priority sectors for the total budget of UGX 26.36 Trillion (approximately USD 7.86 billion) are infrastructure development (8.7%), Energy and Mineral Development (11.7%) and Education 12%. Government will spend UGX 3.78 Trillion on Works and Transport, UGX 2.423 Trillion on Energy and Mineral Development and UGX 2.2 Trillion on Education respectively. The Budget will be largely financed through tax measures. The Government’s revenue from both taxes and non-tax revenue has been projected to be UGX 11.1 Trillion.

In accordance with East African Community (EAC) protocol, ministers of other EAC Member countries who read theirs on the same date, also read highlight great emphasis on infrastructure development Kenya’s Finance Minister Henry Rotich, presented a Kshs. 2.3trn ($22.8bn) Budget focusing on infrastructure with infrastructural projects aimed at roads and railways as well as agriculture including agro processing to spur the country’s growth. Tanzania’s Finance Minister, Philip Mpango, presented a Tzs 29.54 Trillion ($13.51 Billion) budget which will be focusing on upgrading the central railway to standard gauge and port improvement. Rwanda’s Finance Minister, Claver Gatete, presented a 1.95Trn Francs ($2.6bn) Budget focusing on maintaining growth of 7%. 62% of Rwanda’s budget will be funded locally with the external sources funding at 38% which decreases donor funding by increasing domestic resources.

The FY2016/17National Budget Agricultural sec-tor allocation has increased from UGX 480bn last year to UGX 824bn this Financial Year. This in-crease goes to show that the Government of Uganda has started paying attention to a sector that was lagging behind. It is important to note that the Agricultural sector employs a large number of Ugandans and has the potential to employ more thus catering for the unemployed youth once funded adequately.

In Uganda’s specific projects under the proposed budget include Karuma and Isimba Hydro Power projects, the Standard Guage Railway, Kampala-Jinja Expressway and Entebbe Airport rehabilitation. This is at the backdrop of the recently released a UNRA Commission of Inquiry report that highlighted a loss of UGX 4 Trillion (worth 3647km of new roads) out of the UGX 9 Trillion that was allocated to UNRA since 2008. With Public Debt estimated to be UGX 29.984shs which is 30.5% of GDP is below 50% of the EAC convergence criteria but still Government hopes to fund the budget at 44.5% most of it from taxes with the remaining 55.5% to be attained from external and domestic borrowing. Most of the revenue to fund this budget will be got from increasing taxes on luxuries and essential products such as Cigarettes, ready-to-drink spirits, Petrol (gasoline), cane or beet form, Motor vehicle lubricants and confectionaries. As much as this is in a bid for Government to raise more revenue, there is still need to identify other vital revenue collection areas. This will enable a shift from the few compliant tax payers willing to struggle with the tax burden alone.

In view with the continuous trend of endemic delays in implementation of highly funded projects, cost overruns and corruption as major constraints to having proper transformation of the country socially and economically. At a time when Government is focusing on loans and borrowing, not much consideration is put into the cost of repayment being higher and continued concessional loans from China that are still not sustainable in the long run. Uganda already grapples with non-performing loans, borrowed funds which are idle and low absorption capacity of borrowed resources. It is obvious that we as a nation are yet to learn from our past mistakes. If the theme ‘Enhanced Productivity for Job Creation’ is to be a reality, the proposed budget should be a basis for all citizens to be vigilant and actively involved in monitoring finances allocated to different sectors for prudent accountability of their money.