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Special Reports

Outrage as Uganda Public Debt Hits Shs 14.5tn

A report from Parliament indicating that government of Uganda’s debt is totalling Sh14.5 trillion, has sparked outrage from especially opposition politicians.

The information emerged from a report by the Parliamentary Committee on National Economy, which compiled data from the Treasury,  Bank of Uganda and the Parliamentary Budget Office.

The committee established that as of June 2013, Uganda‘s total public debt stood at Shs14.578 trillion up from Shs13.7 trillion in the previous Financial Year.

The report also indicated that loans contracted as early as 2011/12, had not realized full disbursement while others had even reached their loan closure date without any disbursement.

Speaking earlier this week in respect to the committees report, Opposition Shadow Minister for Finance Planning and Economic development Hon Godfrey Ekanya said that government by accumulating such volumes of debt was busy mortgaging the future generation.

Ekanya expressed concern that while the 2007 National Debt Strategy was intended to reduce Uganda‘s indebtedness and while the country was lucky to have some of its debts written off in 2005, bringing the debt level to $ 1.1 billion, the figure was now going back to unmanageable levels.

It also emerged in the report that 13 new loans equivalent to Shs1.3 trillion had their loan agreements signed without Parliamentary approval: in disregard to article 159 of the constitution.

Reports from Uganda Debt Network indicate that since 2001, Uganda’s debt has been on a steady increase and that much of the borrowing is driven by the country’s budget deficit.

Unsustainable debt levels hurt the country’s credit rating – a key indicator that investors use to make investment decisions.

High debt levels also mean that a country might not have the money to deliver on crucial social services such as health care, education, infrastructure as the government is consumed by paying off the debt. To control debt, governments usually increase taxes, lay off some workers, among other painful measures – all of which make up for a depressing economy.

According to the report, Mr Ekanya noted, the interest cost on public debt increased by 47.6 percent in the FY 2012/13 to Shs 890.5 billion compared to Shs603.3 billion incurred in the previous year. Interest payment on domestic debt is projected to have the largest growth of 52.8 percent.

The cost from external debt service for the financial year 2012/13 is estimated at US $ 67.4 million, as at 30th April 2013.

Tread carefully

He noted, “I am calling upon the Committee on National Economy and the 9th Parliament to only approve loans after establishing that the necessary capacity, institutions and tools are in place for utilizing the loans.”

“The government is currently paying billions in commitment fees on undisbursed loans; this is unacceptable.”

The committee which compiled the report warned that Public debt expansion was likely to significantly increase interest rates for government debt, thereby increasing interest costs for future generations.

“Moreover this could increase interest rates for all private debt such as home mortgages, consumer loans and business loans. The near term consequences of the debt expansion, present weaker economic recovery and the private sector will absorb the larger effect of increased public debt.”

The committee further advised that government borrowing should be done at the lowest possible long-term borrowing costs.

Experts speak out

Government borrowing creates public debt, which must be repaid in the future.

Bank of Uganda governor Tumusiime Mutebile recently said Public debt becomes problematic if it becomes unsustainable, which usually  occurs because the debt has grown too large in relation to the capacity of the Government to continue servicing the debt.

“If public debt becomes unsustainable, Government will be forced either to default or to undertake a  severely disruptive fiscal adjustment in order to generate the resources needed to service the debt, which is what is currently happening in several of the periphery countries of the Euro zone,” Mutebile, adding, “The fiscal consolidations being undertaken in countries such as Greece to try and reduce their public debt to more sustainable levels are exacerbating the economic recession in these countries and causing severe hardships for the population.”

Uganda had incurred a build up of public debt to unsustainable levels in the 1980s. By 1990/91, public debt, which at that time comprised almost entirely external debt, had reached 107 percent of GDP, and the debt service ratio was 96 percent of export earnings.

Uganda was unable to service debt of this magnitude and hence it defaulted; the Government ceased to make payments as they fell due to its external creditors. Uganda’s external public debt was only restored to sustainable levels because the country received debt relief from the Multilateral Debt Fund in 1995, the Heavily Indebted Poor Countries (HIPC) Initiative in 1998 and the Enhanced HIPC Initiative in 2000.

The provision of external debt relief allowed Uganda to resume borrowing modest amounts of external finance on concessional terms, mainly to fund development projects, in line with the Government’s Debt Management Strategy.

Mutebile says government now also borrows from the domestic market by issuing Government securities; Treasury Bills and Treasury Bonds and that public debt now consists of a combination of external debt and domestic debt.

The governor further points out that one of the key economic responsibilities of government is to provide “public goods and services”; these are goods and services which cannot be supplied optimally by the market, usually because they cannot be sold on a commercial basis or because efficiency considerations require that they be provided free of charge.

“The need for public goods and services usually outstrips the resources to pay for them which governments can mobilise from tax and non tax revenues, which means that fiscal deficits are incurred: government expenditures exceed revenues. Fiscal deficits must, by definition, be financed, mostly if not entirely by government borrowing,” he added.

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