By Jackline Nabirye
Communications Officer-ICPAU
Hon. Ibrahim Ssemujju Nganda, Member of Parliament of Uganda for Kira Municipality, presented a critical analysis of Uganda's public debt, highlighting concerns raised by the International Monetary Fund (IMF), which has advised developing countries against excessive borrowing during his presentation at the 12th CPA Economic Forum at the Imperial Resort Beach Hotel, Entebbe. He noted that despite this warning, Uganda's debt levels have surpassed the IMF's recommended 50% GDP threshold, reaching 53% of GDP in the 2022/2023 fiscal year, with external debt amounting to 52.6 trillion shillings.
Hon. Ssemujju emphasised that China alone collects 1.1 billion shillings daily from Uganda in debt repayment, with 380 million shillings paid in daily interest. He criticised the inefficiency of borrowing practices, noting that Uganda pays 443 billion shillings in commitment fees for money borrowed but not utilised. The Ministry of Finance however always defends its actions, stating that funds are borrowed for projects still in the design phase.
He also highlighted that Uganda faces a dual challenge: a substantial portion of its budget (47%) is allocated to debt financing, and tax collections are insufficient to cover debt repayments. This situation forces the country to dip into its foreign reserves. Although there are 34 banks in Uganda, only four are locally owned, meaning most domestic debt is effectively foreign debt as profits are repatriated abroad, he added.
This reliance on foreign-owned banks exacerbates the economic strain, as the repatriation of profits further depletes the country's financial resources. The heavy burden of debt servicing not only limits the government's ability to invest in critical sectors like health, education, and infrastructure but also undermines long-term economic growth. To address these issues, Hon. Ssemujju called for a comprehensive review of borrowing practices and emphasised the need to strengthen domestic financial institutions to retain more capital within the country.
Mr. Corti Eliab Paul Lakuma a Senior Research Fellow at the Economic Policy Research Centre, however, emphasised the importance of debt in government financing but noted the need for better management to avoid crowding out expenditure on critical sectors during his presentation at the forum. He pointed out that Uganda’s debt has significantly increased over the last decade, necessitating a review of policies for improved outcomes.
Government measures in infrastructure development, such as road and energy projects, and responses to COVID-19 have contributed to the debt increase, Mr Lakuma noted. Key projects include the Bujagali, Karuma, and Isimba dams, the Entebbe Expressway, and oil and gas infrastructure. Despite these efforts, Moody’s downgraded Uganda’s credit rating to B3 from B2 on 22 May 22 2024, due to decreased debt affordability and financing options.
Mr Lakuma also cited the IMF’s Article IV Mission on 6 March 2024, which warned that tightening external financial conditions could restrict access to syndicated loans and hinder fiscal financing and recovery. He highlighted that the Anti-Homosexuality Bill, 2023, could also negatively impact foreign investment, loans, grants, and tourism. The bill has already sparked international controversy, potentially deterring foreign investors who view it as a violation of human rights.
“Many Western countries, which are key sources of loans and grants for Uganda, have expressed strong opposition to the bill, threatening to withdraw financial support and impose sanctions. This potential loss of foreign investment and aid could exacerbate Uganda's financial challenges” he noted.
The IMF stressed the need for fiscal consolidation to reduce financing risks while maintaining social and development expenditure. Fiscal consolidation involves policies aimed at reducing government deficits and debt accumulation, which is crucial for maintaining economic stability. The IMF urged the Ugandan government to implement measures that would enhance revenue collection and manage public spending more effectively. This approach would help to ensure that critical sectors such as health, education, and infrastructure development receive adequate funding, even as the country works to improve its debt situation.
In the context of these challenges, Uganda must navigate a complex economic landscape, Mr Lakuma noted.
“The combination of high public debt, the impact of the Anti-Homosexuality Bill, and the need for fiscal consolidation requires strategic and well-coordinated policy responses. Strengthening domestic revenue mobilisation, improving the efficiency of public spending, and fostering a more favourable investment climate will be key to sustaining economic growth and stability” he said.
Uganda’s Debt Sustainability Analysis (DSA) projects a 1% GDP increase in revenues due to the Domestic Revenue Mobilisation Strategy (DRMS) and oil and gas projects. Public expenditure is expected to rise significantly from 20.1% of GDP in FY2023/24, driven by an expanding fiscal deficit. External resources will continue to play a crucial role in deficit financing, with a preference for concessional loans. However, the limited availability of concessional financing will necessitate a mix that includes commercial lending. Mr Lakuma noted that the government plans to expand domestic borrowing, focusing on long-term instruments, despite the higher risks and costs.
In his conclusion, Mr Lakuma said that while Uganda's public debt remains high, it is still sustainable and below the 50% threshold. However, he highlighted that the majority of debt is external, posing exchange rate vulnerabilities, though robust reserves and rising exports provide some stability. Concessional loans dominate external borrowing, but commercial lending is on the rise. Interest rate risk on external debt has increased, but most domestic debt has fixed rates, offering security. The significant share of domestic debt maturing within a year remains a concern.
The CPA Economic Forum is an annual event organized by the Institute of Certified Public Accountants of Uganda. It provides a platform for professionals to discuss national economic policies. The event will be held from 3-5 July 2024, at the Imperial Resort Beach Hotel in Entebbe and online. It has attracted development enthusiasts, tax consultants, economists, policymakers, entrepreneurs, investment experts, accountants, government officials, and other professionals. The forum's discussions contribute to economic policy recommendations forwarded to the government for the national budgeting process.
- END -
