Tuesday, June 13, 2017


Finance minister Matia Kasaija read us his sh29trillion budget on Thursday. In it he reported that the domestic revenues from URA will cover about sh15trillion of the budget and the rest will come from domestic and external borrowing.

In the lead up to the budget reading the pundits were screaming blue murder about how much money we are borrowing and wondered whether we will be able to pay when the debt comes due.

The critics argue that our debt burden is growing as we play catch up in trying to lay down much needed infrastructure in the roads, rail and energy among others. I have listened intently to these arguments and I struggle to see either point.

To simplify let us use our own personal experience with debt. The banks will lend you about 15 times your net salary for up to six years. So if you earn a million shillings they can lend you sh15million shillings, which will be about 25 percent higher than your total annual salary.

So if we look at your debt to earnings ratio at the beginning of the loan it will be about 125 percent of your earning power for that year.

Hence the insistence of judging Uganda’s debt, in proportion to our GDP, a country’s economic output, of about, which the minister said was about 33 percent but when future payments discounted to today’s value about 27 percent of GDP.

Our GDP is about $26.4b and our public debt $8b.7b as at the end of last year.

That last part is based on assumption that future value of money is lower than the current value and so to get a more accurate read in present terms you need to take this into account.

"But I think what is more important is to measure our debt against our ability to pay our obligations as they come due....

Returning to our personal experience, that will we be able to meet the banks monthly repayment demands given our income?

Assuming a rate of 25 percent for your sh15m loan the bank will ask for a monthly repayment of about sh400,000. Assuming you keep the job you should be able to repay the back the full loan given your current income.

But imagine that every year your income increases by five percent, over the period of the loan your net income before loan repayments would have grown to about sh1.34m. Meaning your loan repayment will be much less worrisome to you by the time you finish paying the loan.

Extrapolating that same scenario to our national affairs.

Over the last ten years URA’s ability to collect revenue has risen to sh13trillion in 2016/17 from sh2.6 trillion in 2006/07. It would be interesting to use GDP but our revenue collections is where we should look, given our personal experience. Our revenues are what repay the loans.

This means that on average URA’s collections have grown by an average of about 17 percent a year over the last ten years.

While the minister reported they had not met their target but URA officials are confident that by the end of the month they will have at least meet their target.

URA commissioner general Doris Akol told Shillings & Cents last week that their confidence comes from the fact that the banks have had a good year and their corporate tax is not yet in.

In 2006 the GDP of Uganda stood at $9.9b according to the World Bank, which means it has been growing at compounded average rate of about 10 percent annually using the finance minister’s current estimate of about $26.4b.

Looks high but can be explained I think by the rebasing of our economy in 2014 to capture new sectors. It grew 13 percent that year.

"This is interesting because according to the ministry’s figures we paid sh159.5b in 2006/07 in debt repayments which accounted for 6.1 percent of that year’s revenue collections. In the coming financial year we will be paying sh916b of the sh15trillion collected or about 6.1 percent....

The point is that while we will be paying about six times as much in debt repayments in the coming year compared to a decade ago, in terms of our ability to pay there is no difference in how much we are paying because we have developed the capacity to meet our added obligations.

If we are to be concerned about Uganda’s increasing debt burden we need to focus on whether our debt is being used for productive endeavours, things that will stimulate more economic growth and hence more revenues to pay for the debt.

So for example the privatising of power distribution and the commissioning of the 250MW Bujagali dam has seen Umeme’s revenues leap to sh1.31trillion in 2016 from under sh200b in 2005. In that year they paid sh52b from zero a 2005.

We should be concerned about the mounting debt but this should be seen in its right perspective.

To return to our personal analogy when you were earning a million shillings a sh15million debt was a daunting prospect but not so for today when you earn sh10m!

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