Due to the civil servant strikes of 2017, the Government of Uganda intends to borrow UGX 700 billion to meet demands by civil servants. If the borrowing is realised, Uganda's public debt will increase further. Public Debt has always been very sensitive, owing to the complexities surrounding debt as a form of financing.
Partly, the decision to take public debt is made by a few people, yet its payment falls on all citizens. Uganda's public debt has been steadily on the rise at an average of 2% of GDP per annum since 2010 when it was within 22% of Uganda's gross domestic product (GDP). It is currently estimated at 37% of GDP implying a 2.4% percentage increment from 34.6% in financial year 2015/16.
Of the 37%, domestic debt comprises 12.7% while external debt takes up 24.3%. According to the International Monetary Fund, Uganda's debt to GDP ratio is expected to climb up to 47.8% of GDP in financial year 2020/21, slightly below the danger level of 50% of GDP, this will mostly be dominated by external borrowing for infrastructure projects. The point here is that with debt at 37% of GDP, we shouldn't ideally be so worried yet, if only we were investing it efficiently and productively
Debt is not necessarily a bad thing for functioning economy, but it can be a challenge if not carefully planned and managed. Whether debt is a good thing depends on how it is used, which ultimately has a bearing on one's ability to pay it back in time.
If Uganda for example, borrowed 2.9 billion dollars to fund a standard gauge railway connecting Kampala to Mombasa, the future inherits a debt of 2.9 billion dollars plus interest, they would rather not pay the debt, but they also probably would not want to give back all that the debt purchased, in other words, the future generation would have made the same choice If it were up to them.
However, the future would most likely have a different stand if the USD 2.9 billion was used to pay salaries or diverted in to non-productive activities which they think could have been funded by non-debt sources. A standard gauge railway constructed efficiently and effectively would more likely pay back debt sustainably than salaries. The argument here is not that expenditure in less productive areas are not important, but that we can pay for them through other means but debt.
At approximately 240%, 133%, and 108% of the GDP of Japan, Italy and the United states respectively, developed economies have some of the highest public debts, but they also have better repayment terms and relatively much stronger economies, enough to sustainably service their obligations. Therefore, while the size of debt can be salient, the ability to service it sustainably is more pertinent.
Perhaps, right now as a country, we need to refocus our attention to debt terms and the consumption and expenditure decisions of our government. Most of Uganda's debt is invested in infrastructure projects but we lose up to one half of public resources invested in infrastructure projects to inefficient planning, delays in mobilizing project financing and disbursements, procurement delays, low absorption, inflated unit
costs and poor project selection and execution.
Further, a considerable portion of our domestic debt have short maturity timeline and higher interest compared to external debt, which affects our ability to meet other obligations. In 2015, the Auditor General's value for money audit alluded to Uganda's Country Policy and Institution Assessment (CPIA) frame work ratings being hampered by the fair rating of Public Sector Management and Institutions.
The rise of Uganda's corruption perception ranking to an all-time high of 151 summarizes the grim nature of the environment within which our resources flow. All these factors clearly manifest that Uganda's underlying debt institutional weaknesses require more urgent attention than our current size of debt if we are to get the full value of borrowed money and avoid distress.
There is need therefore, to improve public investment efficiency to realise value for money. Government needs to be more keen in borrowing and less feckless in spending. We should show more shrewdness in managing public finances to control leakages. Government borrowing decisions need to carefully match investment plans, this requires that loan disbursement timeline match investment timeline and maturity spread match investment returns.
External debt should be invested in initiatives that raise foreign exchange to avoid currency mismatches and mitigate exchange rate losses that increase default risk. More could still be done to improve our domestic resource mobilization to close our budgetary deficit which is currently at about 6.6% of the GDP, through strengthening tax administration and innovating incentives towards taxing the informal sector which still constitutes over 40% of Uganda's GDP.This may help to increase our tax to GDP ratio and could then reduce government pressure to borrow domestically, hence crowding in private sector lending. Lastly, we should re-think the way we negotiate financing terms with our lenders, for instance we should be able to convince our lenders to commit to share more risk with us through for example linking interest payments to growth or to commodity prices instead of expected commodity revenue. First published by New Vision https://www.newvision.co.ug/new_vision/news/1476472/uganda-debt-sustainable
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