Uganda’s debt gymnastics

I was asked in a questionnaire for a course on economics; “What do you think is next big topic in Uganda?” My answer: “Debt”. And indeed it has turned to be true. Uganda’s debt is a hot topic. Matia Kasaija, the finance minister in the 2017/18 Budget Speech noted that; “Uganda’s public debt, therefore, is sustainable over the medium to long term.”

Some didn’t believe him. Several stories have been written since. People are up in arms describing this as unsustainable.

The International Monetary Fund and World Bank have stated that Uganda’s debt is low – yeah right! what do they know? they messed us up in the 1990’s. Right?. Well, you have to listen to them.

The measure of how sustainable debt is what is considered debt-to-GDP ratio. The size of Uganda’s economy (measured as Gross Domestic Product) is about $26bn. Uganda’s debt is $8bn. That means that going by the current GDP level, $8bn is about 32% of the size of Uganda’s economy. That – if going by the people that give us marks, IMF and World Bank – is sustainable because it is below 50%.

And here is the argument for sustainability. As long as the economy continues to grow, then debt can grow too – but not at a faster rate. Uganda’s economy grew by 3.9% in 2016/17. Debt grew by 2.3% between June 2016 and December 2016. The idea here is that the government is borrowing for infrastructure that will turn around the economy. The new power dams will bring down the cost power and the country will industrialize. All well-thought ideas. If these projects translate into better economic prospects, then the economy will grow and those loans will be cleared. That should not be a problem. Debt is not necessarily bad. At the moment, the country doesn’t have the resources to build all the roads it wants – just like you borrow to complete a house, buy a car or invest in a business.

What is that money doing? Is it being spent? On what? Are we getting value for money? Are we raising enough domestic revenue to cater for other services like education and health?

Ms. Christine Lagarde, the managing director IMF visited Uganda. Here is what she said;

“Continued progress on domestic revenue mobilization will help keep government debt on a sustainable path. Uganda’s inflation targeting framework is serving the country well.” 

Uganda plans to borrow for two ambitious projects. The Standard Gauge Railway (Phase 1) estimated at $2.3bn. Another underestimated amount totaling $400m for the revival of the national airline. The oil refinery.

The SGR debt level if approved in the next financial year will Uganda’s debt jump to a 40% – 43% range of GDP. The SGR is also of concern because the debt is non-concessional – the terms are like at commercial rates. The concessional lending like the World Bank where there is no interest on the debt. The terms allow a level of flexibility to the government. That perhaps also explains why financial closure with the Chinese is delaying the delivery of the SGR.

The challenge, for the government, is not the lack of a vision. It is the implementation of that vision.

Borrowed money is under-utilized.

“In its own assessment (Uganda government) of performance on external financing, the government has performed dismally with 72% of projects being unsatisfactory between 2007 and June 2016. Only 15% of projects are considered satisfactory.”

Uganda is also getting a negative turn on investment for the infrastructure projects.

“Over the past decade, for every Shilling invested in the development of Uganda’s infrastructure, less than a shilling (only seven-tenths of a shilling) of economic activity has been generated. That is not good, and it will not translate into a transformed middle-income country anytime soon,” Christina Malmberg Calvo, World Bank Uganda (June 8th 2016).

This is on borrowed funds. Cost overruns, delays, and inflated prices are not new to Uganda. They are the cause of this negative Return on Investment (ROI).

Also hard to comprehend why the government would borrow money meant for municipal markets not peg debt repayments to the proceeds from the project.

Also, what is hard to comprehend why the government would borrow money meant for municipal markets not peg debt repayments to the proceeds from the project. If the markets were driving real value, why wouldn’t the loan be pegged to the project performance (some sort of Special Purpose Vehicle) instead of all taxpayers being burdened?

The government is also trying out new ways like toll roads on the some of the new road project like the Kampala-Jinja Expressway – it could cost $1bn – 80% funded by the private sector. The road users will service the loan by paying a fee to use the road. The trouble with this; has enough research been done to ensure the road doesn’t become a white elephant project and for a period of 30 years, the loan will be cleared.

The same applies to the new dams being constructed. Uganda needs to industrialize, once 780MW of power come on board. Already, we are underutilizing the existing power. If the demand doesn’t grow, the power tariff will remain high for the country to meet debt obligations on the money borrowed at the construction phase.

Also, the government has the exchange rate to worry about in debt accumulation. Uganda’s income is earned in Uganda Shillings but external debt repayments are in foreign currency.

The government, even if it doesn’t want to admit, has pegged the future on oil. Oil related investments – even before oil – are estimated at $10bn. This will drive up foreign investment, leading to job creation and the economy will recover to grow by about 6% – 7%. Good enough. Also, once the oil starts flowing, the proceeds can be spent on catering for debt repayments. All this is premised on oil coming out of the ground and effective utilization of the revenues.

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