October 17, 2018

Uganda’s Increasing Debt; A Road to Success or The Debt Trap?

According to Uganda’s Indebtedness Status Report 2018, Uganda’s debt has hit UGX 41.3 trillion, public debt has increased from $1.9 billion in FY 2008/09 to $11 billion in 2018 (38.4% of the country’s GDP). On another note, the Director for Debt Management, Stella Wanyera reasons that upon implementation of the Standard Gauge Railway, the country’s debt to GDP ratio is likely to increase to 47% which is close to the red line of 50%, the maximum line recommended for borrowing such that its unstainable to borrow once the debt to GDP ratio is 50%.

When you read the Auditor General’s report as of December 2017 revealing how more than UGX 18 trillion in loans is not being utilized due to delays in implementing planned projects, a great sadness washes over you. Looking at the UGX 32.7 trillion budget for FY 2018/19, of which UGX 10 trillion (32.7%) is allocated for debt payment, one can’t help but wonder why Government keeps borrowing more money yet we already have disbursed loans that are not being utilized.

Although majority of these loans have the potential to address development i.e. infrastructure and others, the effect of servicing some of these debts has the potential to take away the available limited resources that could be used for public spending and improving service delivery. More specifically, resources that are used to service debt or pay back loans may crowd out public investment including private investment in priority sectors i.e. health, education and agriculture among others.

Note that, heavy debt servicing as a result of over borrowing will only put Uganda on a fiscal deficit and lead to numerous problems. Three reasons to support my view, first; servicing debt may demand an increase in tax to raise resources which may discourage investment, second; loan payments are usually made using foreign exchange, given that the Uganda Shilling is currently weak, large sums have to be raised when making loan payments, this can affect overall economic performance, and third; a situation may arise where Uganda is faced with a high debt service payment request, public investment might reduce resulting into the crowding out effect of foreign debt.

Nevertheless, I must say government borrowing is not bad, so long as the borrowed money is effectively managed and utilized to finance developmental projects that will generate in¬come and employment opportunities for Ugandans. This goes together with having effective accountability mechanisms and utilization of loans acquired such that Uganda gets to a point where public investments strengthen the capital base of the economy and also help to increase the production of goods and services. Moreover, the government will equally be able to re¬pay the debt and interest charges in the future without much difficulty.

The onus lies within us to voice our concerns through coordinated efforts to call on Government to check the rate at which its borrowing loans, account for loans acquired, implement developmental projects for which funds have already been disbursed and also have effective sustainability mechanisms for loan payments to ensure that Uganda does not join the list of countries that on the verge of losing their national assets upon failing to pay back loans.

Written by; Mugisha Micheal
Research Fellow-Health Sector- Uganda Debt Network