Opinions

OPINION: Will the Debt Burden Complicate Uganda’s Covid-19 Recovery Efforts?

By Nathan Were

The Covid-19 pandemic has left a USD 2.3 billion debt hole across the six East African countries since the first Covid-19 cases were reported in March 2020.

Kenya has been the biggest beneficiary of debt financing with a whopping USD 1.5 billion, while Uganda has secured slightly over USD 540 million.

These loans have largely been directed towards cushioning the countries against disruptions caused by the virus – mainly the shortfall in domestic tax revenue orchestrated by the sudden halt in economic activity and the need to invest in health care facilities for better management of the Covid-19 patients.

The pandemic arrived when most countries in East Africa were already struggling with the growing stock of public debt.

Uganda, for example, had closed 2019 with a debt of about USD 13.33 billion [48.91 trillion] with most of the funds directed towards the country’s ambitious infrastructure and social development projects.

The pandemic has added half a billion dollars in debt in a space of four months and with the uncertainty surrounding the return to normalcy, shortfalls in tax revenue, slower economic activity, it is expected that the country will most likely take on more debt to plug its fiscal deficit.

While lock-down measures allowing people to return to work and business are being slowly implemented, the stability of most businesses will take some time given the toll the pandemic has had across the different sectors.

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It is therefore expected that the government will continue to struggle to raise tax revenue, while loan repayments will increase, given the cumulative growth in debt.

The rising loan repayments, coupled with declining tax revenue and huge public expenditures; there’s a strong likelihood that the government’s ability to invest in critical social services, set-up of stimulus packages to quickly catalyze recovery of small and medium businesses and financing of critical infrastructural projects expected to drive economic growth will be affected.

The public debt challenge is also compounded by the cost of loans. While the country remains at low risk of debt distress and its debt to GDP ratio remains under the acceptable 50 percent mark, for now, the interest rates on some of these loans should be a reason to worry as their costly nature could be eroding a significant amount of resources the country needs on its path to recovery.

There have been calls by some civil society organizations for debt forgiveness, given the unprecedented nature of this pandemic.

However, this too needs to be handled carefully and conditions handed down to countries whose debts, finally get forgiven. Debt forgiveness hardly encourages responsible borrowing as it improves governments’ debt ratios thus freeing them to take on more debt.

If this is to be done, lenders must collectively agree to a ban on further borrowing for a specified period to guard against countries that are likely to take advantage of the relief window to pile-up more debt.

The Covid-19 pandemic should be a wake-up call for most countries including Uganda and should offer a reflection on how public finances are managed.

The country’s cost of running the government continues to raise exerting pressure on already dwindling public resources.

The priority sectors such as Agriculture, Tourism among others remain dismally funded limiting their ability to fully contribute to the country’s growth efforts and creation of jobs for young people.

As the country starts to slowly recover, available resources and efforts need to be directed towards sectors whose ability to contribute tax revenue and employment is highest while efforts to slow down the further spread of the virus are activated with a focus on vulnerable groups to lessen pressure on the health care system.

 

Nathan is an access to finance specialist based in Nairobi.

were.nathan@gmail.com

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