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BIG STORY: Uganda’s Growing Debt Burden Worries Museveni

President Museveni has expressed concern over Uganda’s growing public debt, saying the continued servicing of loans worth billions of dollars, yet the economy can be self-sufficient is “wastage of our national resources.”

The president’s concerns are contained in a confidential letter to Finance Minister Matia Kasaija.

Museveni earlier this year publicly blasted the media for ‘sensationalising’ the public debt, saying it is manageable.

However, his correspondences paint a picture of a president worried about the rising debt burden.

Writing to Kasaija, Museveni said, “With the present budget of Shs 32tn, it is not correct that Shs 10tn of it should be borrowed or begged for from outside.”

He added: “The grant element of this year’s budget is only Shs 1.6tn. Much of the non-revenue budget expenditure is, therefore, borrowed money paid back with interest.”

Museveni said this “borrowed money is always paid back with interest, moreover.”

Uganda’s Public debt stock, which comprises both domestic and external debt, in 2018 hit the US$ 10.7bn mark, which is the equivalent of Shs 41.326.1tn.

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The Finance State Minister in charge of Planning, David Bahati told Parliament in October that out of the US$ 10.7bn, the external debt (disbursed and outstanding) stands at US$ 7.2bn or Shs 28tn (67.2 percent); whereas the domestic debt is US$ 3.5bn (Shs 13tn) equivalent of 32.4 percent.

The Minister remarked that the Present Value (PV) of public debt to GDP has increased from 27.4 percent as at end June, 2017 to 30.8% in June 2018.

Museveni’s letter to Kasaija

Regarding the creditor composition, Bahati noted the bigger part of Uganda’s debt disbursed and outstanding is sourced from multilateral creditors like the World Bank, African Development Bank, Islamic Development Bank while 31.1 percent is from bilateral creditors like Japan, France and others.  0.7% of the total external debt portfolio is from the commercial banks.

Museveni’s concerns about the sovereign debt comes against the backdrop of warnings from the central bank, the World Bank and economists that Uganda risks falling into a debt trap.

BoU said in the State of Economy report (March 2018) that total government revenue, including grants, has continued to reduce, forcing government into borrowing, which has nearly tripled in the last three years to more than 50 per cent of gross domestic product.

The Central Bank said this creates “default risk” since nearly two-thirds of that borrowing is external.

Uganda currently collects revenues equivalent to about 14 percent of GDP, well below the estimated tax collection potential for such a growing economy, which, it’s estimated at between 18 percent and 23 percent of GDP.

Projects

In his letter to Kasaija, Museveni is visibly concerned that the amount of money spent by the government annually on servicing debts could be used to finance important projects.

“Currently, we are spending Shs 3.tn each year for debt payment,” said Museveni, adding, “This is equal to seven Masaka-Kampala roads if you remember that we spend Shs 440bn reconstructing that road.”

Museveni further said “the interest part is Shs 2.5tn of that debt payment. This is misuse of our national resources although, of course building roads and dams with loans is better than doing nothing.”

World Bank Country Manager Ms Christina Malmberg Calvo said widening the tax base would allow Uganda locally fund infrastructure projects.

“Government’s ability to borrow domestically is also constrained, due to the crowding out effect this can have on private sector credit growth,” said Calvo at a recent function in Kampala.

“At the same time, however, alongside a fast-rising population, Uganda needs to scale up the financing of important infrastructure, and continue to build human capital through the provision of better education and health services. Thus, to stay its development course and not compromise fiscal stability, the country needs to urgently increase the mobilization of domestic revenues,” she cautioned.

Aid flows have slowed, and public debt is rising – expected to increase above 40 percent of GDP by the end of 2019, compared to the threshold set under the Fiscal Responsibility Charter under the EAC.

Museveni, in his letter to Kasaija agrees that expanding the tax base and strict enforcement on compliance are necessary to avoid the debt trap.

“With a GDP of about Shs 110tn, Uganda should by now be budget self-sufficient if we only collected taxes that would be 30 percent of GDP,” said Museveni, adding, “Even if we did not aim at 30 percent of GDP, still this relationship between the budget and tax collection should be borne in mind in whatever we do.”

Experts say if, for instance, revenues collected over the past three years had met the government’s target of 16 percent, the additional 2 percent would have been sufficient to triple government’s spending in the health sector or fully finance the Entebbe-Kampala expressway without having to borrow.

Currently, less than 7 percent of the working age population and less than 10 percent of firms with a fixed location are registered as tax payers in Uganda.

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