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ANALYSIS: Is Uganda’s Increasing Appetite For Borrowing Sustainable?

Finance Minister Matia Kasaija has seen Uganda borrow trillions of shillings

Is Uganda’s increasing public debt sustainable? That’s the pertinent question many Ugandans are asking.

The stock of Uganda’s public debt increased from US$ 12.55 billion in FY 2018/19 to US$ 15.27 billion in FY 2019/20, the Debt Sustainability Analysis Report 2019/20 released in December 2020 by Ministry of Finance, Planning and Economic Development has revealed.

According to the report obtained by Business Focus, External debt increased from US$ 8.35 billion in FY 2018/19 to US$10.45 billion in FY 2019/20, while domestic debt measured in US Dollars increased from US$ 4.20 billion to US$ 4.82 billion over the same period.

As a percentage of GDP, public sector debt rose from 35.3 percent in FY 2018/19 to 41.0 percent in FY 2019/20. Of this, external debt contributed 28.1 percent of GDP, while domestic debt contributed 12.9 percent of GDP.

“In Present Value (PV) terms, public sector debt

amounted to 31.8 percent at end June 2020 up from 26.7 percent a year before,” the report reads in part.

It adds that the increased rate of debt accumulation during FY 2019/20 is largely explained by the impact of the COVID-19 outbreak on the economy, and the containment measures enacted to curb the

disease spread.

“The COVID-19 outbreak and the disease containment measures enacted (lockdown) resulted in a slowdown in both global and domestic economic activity, leading to large revenue shortfalls. Moreover, Government’s emergency response to the COVID-19 shock

led to additional expenditure pressures towards the health sector and enhancing the welfare of the vulnerable during this period. The combination of a revenue shortfall and increase in

expenditure led to additional borrowing,” the report reads.

Composition of Public Debt

As at June 2020, the report says external debt comprised 68.4 percent of total public debt up from 66.5 percent the previous financial year. “The increase in external debt is majorly on account of the COVID-

19 related borrowing to meet both the revenue shortfalls that arose and additional expenditure requirements,” the report says, adding that the share of domestic debt in total public debt reduced from 33.5 percent to 31.6 percent.

The share of external debt owed to commercial banks increased significantly, from 1.8 percent of total external debt in FY2018/19 to 7.2 percent in FY2019/20.

The share owed to multilateral lenders amounted to 61.9 percent of total external debt, of which 34.6 percent was from IDA (International Development Association) compared to 40.1 percent a year ago. Bilateral creditorsaccounted for 30.9 percent of the total external disbursed and outstanding debt stock in FY2019/20.

Composition of Domestic Debt

“Consistent with Government’s deliberate decision to issue more long-term debt, the share of longer term dated instruments (treasury bonds) in public domestic debt has been increasing

over the years. This is in attempt to reduce the refinancing risk associated with the  portfolio, and to smoothen the redemption / repayment profile,” the report says.

As at end June 2020, it reveals that  short-term

debt (treasury bills) constituted 24.8 percent of total domestic debt down from 26.3 percent a year before, while long-term debt (treasury bonds) accounted for the remaining 75.2 percent up

from 73.7 percent at end June 2019.

As at end June 2020, the largest share of public domestic debt was owed to commercial banks, which held about 40.5 percent of the outstanding stock. These were followed by pension and

provident funds at 39.0 percent, with the dominant player under this category being the National Social Security Fund.

“There has been a consistent increase in the share of domestic debt held by the “Others” category, from 8.9 percent in FY2016/17 to 13.2 percent in FY 2019/20. This shows that there has been some deepening of the market for Government securities as there is

increased diversification of market participants,” the report says.

More Borrowing Projected

In the next few years, says the report, public debt is projected to increase on account of the increase in the pace

of borrowing to finance key infrastructure projects, especially in the transport and oil & gas

sectors.

“Nominal public debt is projected to increase to 49.9 percent of GDP by end June 2021 and peak at 54.1 percent in 2022/23 before starting to gradually decline. In present value terms, total public debt will follow a similar trend, increasing to 39.3 percent of GDP in

FY2020/21 and then peaking at 42.9 percent in FY2022/23, well below the ceiling of 50 percent in the Charter for Fiscal Responsibility and convergence criteria under the East African Monetary Union protocol,” the report says.

It adds: “While this DSA reveals increased risks and vulnerabilities in the next few years, public debt is projected to remain sustainable. The escalation in risks increases Uganda risk of debt distress

from low to moderate. The major vulnerabilities to the outlook relate to the slow growth of exports and the increasing debt service burden. Debt service as a percentage of revenue has increased over recent years to over 20 percent, a level usually seen in low income countries

faced with high risk of debt distress. The increase in debt service has majorly been a result of increased domestic borrowing (which is typically costlier) and non-concessional / commercial external debt.”

Taddewo William Senyonyi
https://www.facebook.com/senyonyi.taddewo
William is a seasoned business and finance journalist. He is also an agripreneur and a coffee enthusiast.

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