Most countries at one time borrow; this is usually because of the complexity and increased demand for better goods and services amidst changing roles of government and limited tax resources in relation to the planned public expenditures. While it is considered an optimal decision for governments to entirely rely on domestically generated revenues from taxes, public borrowing is at times sought to bridge the resource gap between tax revenues and expenditures. Uganda’s total public debt has been rising gradually over the years. As of the end of December, the total debt stood at shs73.5 trillion (equivalent to $20.7b), of which the external debt amounted to UGX 45.72 trillion and domestic debt amounted to shs 27.77 trillion. This represents a nominal debt-to-GDP ratio of 49.7%. The substantial increase in Uganda’s debt was mainly due to the need to support the economy and preserve the welfare of households as a result of Covid 19 and other external and domestic shocks. It was also used to finance the shortfalls in domestic finance.
However, due to extensive analysis and predictions, there is a likelihood of Uganda defaulting on the debt obligation. This means that when the need for more borrowing arises, Uganda will attract a higher interest rate on loans from external sources since the ability to pay back is becoming questionable. Hence the lenders will attach more stringent conditions to recover their money in case it is offered. Further, the substantial rise in the debt is now affecting the budget. This is where a bigger chunk goes to debt servicing at the expense of key developments of the Country such as human capital development. Although the Government of Uganda claims that the public debt is sustainable, there is fear of reaching the unsustainability levels in the near future. Henceforth, the following ways should be adopted by the government in a bid to minimise the risks associated with rising debt.
- Channel the borrowed resources to productive sectors. Creating fiscal space also requires assessing all public spending to ensure not only that it is directed towards improving productivity but also that it is aligned to the achievement of the SDGs. Additionally, governments will need to leverage public-private partnerships to enhance resource mobilization and investment in priority areas
- Develop innovative tools to finance development. Support the development of the domestic capital markets, potentially through the introduction of safe assets, with senior tranches potentially guaranteed by the MDBs and marketed to international investors as a mezzanine, investment-grade exposure to frontier market debt. The government should also put across stringent targets to reduce domestic debt that is not only expensive in terms of interest paid but also crowds the private sector.
- Reduce reliance on risky and volatile debt sources. Developing innovative and alternative mechanisms of development financing such as Public Private Partnerships (PPP), securitization of infrastructure assets, and privatization as recently demonstrated by Ethiopia. In addition, creation of an asset class for public projects, using the leverage afforded by safe capital from multilateral institutions is equally important. However, it is important to adequately quantify and mitigate the underlying fiscal risks from PPPs and government guarantees.
- Appeal to multilateral organisations for total debt cancellation. While debt relief in form of delayed repayment, restructuring of loan repayment or swapping of debts for equity have been proposed, they may not be sustainable for Uganda. Uganda is already revenue trapped which will consequently lead to debt default. Complete debt write-off will bring substantial liquidity, and represents constructive collective action in building and protecting Uganda’s financial safety nets.
- Greater transparency in debt management, including commitment by governments to release in real-time all data on old and new debt from all sources. This will require efforts to standardize data gathering practices and developing data collection systems. Other measures include addressing data gaps, notably in the accounting of state-owned enterprises-related liabilities and contingent liabilities arising from sovereign guarantees to individual projects, and consolidate government accounts, agencies, ministries and institutions. At the same time, government should reveal all loan conditions including the 33 required guarantees and collateral that put national assets at stake.
By: Nantongo Shamim