In Summary

Manageable. Although some experts have warned against rising domestic debt, government and other statistical data maintain it is manageable and efforts are being made to keep it below 50 per cent, writes Martin Luther Oketch.

Public debt has been rising and the same applies to money allocated for refinancing.
This has been the phenomena since 2013 and many low income developing countries have fallen victim to a rapid spike that experts have warned “might be a walk in the a wrong direction.”
The debt levels, which have been rising for about five years now, have subsequently amplified debt vulnerabilities across Africa, Uganda inclusive.
However, Uganda could still be in a safe zone. But for how long?
Uganda is classified as a low risk debt country, according to International Monetary Fund (IMF) but remains vulnerable to external shocks.
The level has been kept under check because of a well-laid out repayment plan managed under the Medium Term Debt Management Strategy (MTDS).
Through the strategy, actual composition of the debt, key among cost and risk exposure, is determined. Cost and risk exposure are some of the key salient facets in managing debt.
It is formulated around World Bank and IMF analytical tools that take into account linkages between debt and macroeconomic fundamentals.
Patrick Ocailap, the Treasury deputy secretary, just like many other government officials and statistical data, argues Uganda is still at low risk of debt distress with a manageable repayment volume.
In the 2019/20 budget Shs3.145 trillion, which represents 9.6 per cent of the total budget, will go towards interest payments.
The money, which will be mobilised from domestic revenue, is an increment from the Shs2.514 trillion, which was allocated to interest repayments for the 2018/19 financial year.
Away from interest repayment, government will be required to allocate money for domestic debt financing.
In the 2019/20 financial year, according to Ocailap, Shs6.452 trillion has been allocated to domestic debt repayment.
The money, he says, will be mobilised through issuance of new government securities including T. Bills and Bonds.
In the 2018/19 financial year, Shs5.271 trillion was allocated for domestic refinancing but will have to increase because of anticipated increased expenditure on defence and recapitalisation of the Bank of Uganda, among others.
In April, the Ministry of Finance told MPs on the Finance Committee that money was urgently needed to cover for deficits and losses accumulated since 2013.
The IMF last month indicated that Uganda’s public debt currently stands at 41.3 per cent of GDP with two-thirds, which translates into $7.9b, held by external creditors.
Domestic debt, which is largely composed of T. Bills and Bonds on short term basis, currently stands at $3.5b, according to the IMF.
Uganda, according to IMF, has since the 2015/16 financial year turned to the Far East, especially China, to draw semi-concessional loans. However, much of the country’s loans are advanced on concessional terms.
Concessional loans are considered more generous than market loans. In other wards, they offer favourable terms compared to non-concessional ones.
According to available data, Uganda’s concessional loans are drawn from the International Development Association arm of the World Bank and the African Development Fund (ADF).
Loans from the two lenders account for 58.8 per cent of Uganda’s external debt portfolio.
Other concessional creditors include International Fund for Agricultural Development, Arab Bank for Economic Development in Africa, Organisation of the Petroleum Exporting Countries, among others.
The IMF said recently that even though there has been a spike in the debt burden, Uganda remains at low risk of debt distress because of four key parameters, key among them, infrastructure investments yielding envisaged growth returns, improvement in revenue collection by half a percentage of GDP every year in the next five years, commencement of oil exports by 2023 and a cutback on infrastructure investment once the current projects are completed.
In its forecast last month, the IMF said Uganda’s external liabilities consisted mostly of public sector loans and public portfolio debt liabilities, which are mostly concessional from multilateral and bilateral creditors.
External debt (amortisation) which is paid using domestic revenues, according to Ocailap, in the 2019/20 financial year, has been allocated Shs723.3b, a reduction from what was allocated in the 2018/19 financial year (Shs894b).
In its forecast published last month, IMF said that whereas Uganda’s debt levels remain sustainable, caution must be taken due to exponential and external shocks that might impact the economy.
The current weakening of the dollar and the trade war between China and US, IMF said, remain a threat.
Uganda’s debt is projected to rise to 50.7 per cent by 2021/22, according to IMF, due to increased borrowing for infrastructure.
However, Ocailap says, efforts have been made to see that the debt levels are kept below 50 per cent, a threshold beyond which, he says: “We will become a debt distress country.”
In its analysis of Uganda’s economy, the IMF said, fiscal deficit widened to 5 per cent of GDP in the 2017/18 financial year, driven by public investments, especially infrastructure.
This subsequently pushed infrastructure investments up by 1 per cent of GDP, despite the chronic under execution of externally-financed projects.
“External financing came mostly from concessional and non-concessional sources for public investment projects. Public debt increased by 4 percentage points to 41 per cent of GDP,” the IMF observed.
Therefore, the IMF recommended that Uganda finds an effective monetary policy that will keep debt below the 50 per cent of GDP as well as adopting a budgeting process that has a clear top-down approach.
According to IMF, the clear top-down approach must seek to create jobs with the threshold being at least 60,000 jobs per annum.
This will help to mop up the extremes in youth unemployment as well cut back on dependence.

Highlights

Low risk: Uganda, according to the IMF and government, remains at low risk of external debt distress. This is buttressed by the fact that much of the country’s loan portfolio is drawn from concessional and bilateral creditors.
Single account: A new Public Finance Management Act was adopted in 2015. It requires a Treasury Single Account with the view of bring all government accounts such as local government and donor projects under one account.
Refocusing budget documents: The budget must ensure that it publishes a clear annual fiscal anchor that states how government plans to keep the debt under 50 per cent.

Non-concessional loans

China factor. Uganda has also contracted non-concessional debts, which have mainly been used to finance the building of the Karuma and Isimba dams as well as the Kampala–Entebbe Expressway. These were mainly drawn from the Export-Import Bank of China (Exim). According to IMF, loans drawn from Exim Bank account for about 23.4 per cent of Uganda’s external debt portfolio. Also, a semi-concessional loans has been contracted from European Investment Bank to build the East Africa Transport Corridor.

Analysis

“Uganda remains at low risk of external debt distress. External liabilities consisted mostly of public sector loans and public portfolio debt liabilities, which are mostly concessional loans.”
imf analysis

Fiscal anchor

Refocusing budget documents: The budget must ensure that it publishes a clear annual fiscal anchor that states how government plans to keep the debt under 50 per cent.