It is a battle of wits for economists on either side of the divide to explain the debt situation in a way that is neither alarmist nor dismissive of the bulging debt portfolio. The debt stock which combines both domestic and external debts as of 2018 stood at $10,5bn(sh41.3tr) of this external debt was $7.2bn and domestic debt was $3.3 bn(sh12.4tr). The domestic debt interest payments were Shs 2tr, foreign debt service was $290m.
Uganda’s domestic revenue stood at sh18tn. A country’s revenue is the aggregate of net taxes, net returns on public investments, revenue from fines, rates, grants or net foreign transfers. The national budget estimates are based on the daily collections that take place throughout the fiscal year. Any shortfall in the monthly collections means that the government must devise ways of plugging the gap. This is where borrowing starts because planned expenditure (EG) has exceeded revenue earnings (RE). Borrowing in any economy is not bad however, a debt problem arises when the debtor is not in position to meet the debt obligations. This involves failure to service the debt and payment of the principle.
Failure to pay the internal debt may not necessarily mean inability to pay debtors on part of government per se, but rather it can be used by the central bank as a restrictive fiscal policy to manage inflationary pressures. Withholding liquidity out of the hands of the public tempers the velocity of circulation which controls the effective demand and ultimately controls price hikes.
Our biggest concern is the external debt, which is the aggregate of the stock of past and current outstanding public and private loans(guaranteed)and advances. A debt is a stock not flow, that is why in the circular flow of national income, it is reflected as a leakage. The debt starts being a problem when the debtor is not in position to meet the debt obligations; failure to pay back money borrowed plus interest and other charges i.e. debt servicing. Payments are usually structured in periodic instalments with specified dates.
Now the intriguing question is “is Uganda’s debt sustainable”? This question can be answered when we analyse the need and application of debts acquired, its productivity ( return on debt) and the management of the proceeds it generates. The debt problem arises if I< (D+R+C). If I>(D+R+C) this would be an ideal situation. The bigger the variance between I and (D+R+C) the better for the debtor. However, it should be noted that even at zero interest rate, or concessionary rates, the debt may not be sustainable if the principle is not properly managed to have the ability to redeem itself.
With Uganda’s debt portfolio at $10,5bn, are there concerns about its spiral into a debt trap and therefore debt repudiation? The answer lies in analyzing the debt stock visa vis the tax revenues, foreign exchange earnings, the cost of servicing it, investment sectors and management. At $10.5bn, the interest payments stood at shs 2tn for domestic debt and $290m for external debt. This translates into 11% of revenue for domestic debt service. This means that 11% is a figure that is sustainable given that our domestic revenue purse is 18tn. It is not common for governments to fail to pay its internal debt because in dire straits it can print money (fiduciary issue) and pays it off, though it comes with the effects of monetary inflation. However, it is believed that inflation below 40% cannot be harmful to investment.
A look at the external debt which is $7.2bn shows that the debt service stands at $290m (8000bn) representing 3% of $7bn in export earnings or 4.44% of domestic revenue. This also looks sustainable. Analyzing the overall debt burden; which is the ratio of the debt service to revenue. The debt service is shs 2.8tn which is 15% of revenue, however, when it is discounted by revenues got as grants and foreign transfers, reduces the burden to about 9%. Then after looking at the figures, where could be the concern of those apprehensive about our debt stock?
It is fair to be concerned by any public debt because it mortgages the future though it also benefits it, if the infrastructure built now, lays affirm foundation for the generations to come to reap the dividends. To achieve this there is need for proper productivity evaluation. With a growth rate of 6.92% per annum, the economy is rated as one of the best performing in the region however, the absorption capacity of the economy renders challenges. The absorptive capacity has a coloration to inflationary pressures and skills inadequacy. The more debt acquired the more the money in the economy, which is not a result of investment and consumption. This distorts the free competitive market system.
The concern of corruption among the managers of the debt and the weak accountability agencies, raises a big question whether the debt stock is sustainable. If the intended target is not achieved, then it can not be a good venture. Infrastructure development is a long term investment whose dividends accrue with time. So the burden is felt more in the interim than in the long term. So it is not fair to analyse debt sustainability in terms of its returns but rather how consistent is its absorption capacity to the future ability to repay at its maturity time. For instance, a debt to finance a railway line, with a view of boosting industrialization will take time to realise the benefits.
However, a country’s ability to repay a debt may be influenced by actions in the international domain. Protectionism, regional blocks and variance in technology, play a huge role. This is coupled with the cost of doing business and constraints in resource flow. Looking at Uganda’s debt management strategy, there is a deliberate move to stem the debt burden right from the point of securing the loan. The strategy stresses that any new borrowing to be on a highly concessionary terms. At least 82% of loans should be on the international development agency(IDA) terms of 40yrs,10yr grace period and 075% interest rate, any other bilateral loans should not exceed 2% and 23yr maturity with a 6year grace period.
In conclusion, the effects of the debt burden is the cost we have to pay for our inability to raise internally generated revenue, the same cost that is experienced by a private business man who borrows from a bank to start a shop. Our ability to remain focused on the strategy to generate a high rate of return on investment and management of the timelines for its redemption will save us from pangs of a debt burden and delivers us from the shame of debt repudiation.
