UGANDA SHOULD WORRY ABOUT THE NATIONAL DEBT, BUT FOR DIFFERENT REASONS

Last week we learnt that our national debt has risen to sh66trillion and inching dangerously towards 50 percent of GDP.

Fifty percent of GDP has become a psychological barrier beyond which we should not cross to maintain debt sustainability.

What caused jaws to drop was that 40 percent of this debt or about sh19trillion was contracted in the last year, a lot of it as Covid-19 relief. But we also continue to invest heavily in our infrastructure development mainly roads and in the electricity sector.

More fuel was thrown on the fire when it was reported that finance minister Matia Kasaija is considering going to the lenders to ask for a suspension of servicing, presumably until we get over the Covid-19 hump.

American billionaire Warren Buffett put it best when he said, you shall know who is swimming naked when the tide goes out. In good times everyone looks good but when a crisis comes along we will be able to see which people have more style than substance.

Uganda’s growth record has been good by any standard over the last three decades during which time the size of the economy has seen a near nine-fold growth to $35b to day from about $4b in 1986.

In the country’s rehabilitation effort we only managed to attain 1970 levels in terms of per capita GDP in about 2000 and so for the last 20 years we have been adding extra capacity. Put another way we are now where we should have been in 1991 if it wasn’t for the instability of the 1970s and 1980s, which just goes to show how much work there is to do.

But while there has been growth this has not been equitably spread around the population, which should not come as a surprise for two reasons.

The way GDP – the sum total of a country’s economic activity in a year, is measured, the main drivers of the economy have been in services, construction and manufacturing. The main beneficiaries of these have been in the urban areas where most of the schooled population lives.

The explosion in school enrollments since 1997 when UPE was introduced means that more people than ever before are coming into the workspace and competing for jobs in those same sectors. Unfortunately, we are not creating near enough formal jobs to absorb the half a million Ugandans joining the workforce every year.

This calls for more investment by government especially in creating a business friendly environment. It is business that will create jobs not government.

To the extent that we are behind schedule is the extent that we need to accelerate investment...

As an example the average middle income country has a road coverage of about 88 km per square km while us in Uganda with our 5000km of paved road our figure is about 16km. That means to catch up we would have to increase our investment to bring us to 25,000 km of paved road. The additional 20,000km of road would cost – at about a million dollars a km, about $20b or about sh72trillion or about one and half time our entire budget today. Even if we spread this outlay over 10 years it would cost us sh7.2trillion annually at today’s prices.

And this is only roads, there are just as big or bigger deficits to be bridged in electricity coverage or number of doctors, engineers or teachers we need to move to the next level of development.

Given that we are only collecting about sh20trillion in domestic revenue explains why we have to borrow.

Maybe we should slow down on infrastructure development until we can afford it? A real chicken and egg situation.

It would be bad politics and economics to try and develop using only our domestic revenue collections. Bad politics because population growth is not going to wait and bad economics because as shown above, we are already way behind schedule....

So the real question is not why is our debt ballooning but why we are not shouldering more of our own cost of development.

As it is now domestic revenues are coming in at about 14 percent of GDP as compared to a sub-saharan average of just under 20 percent. We are struggling to increase our revenues because it is much easier to negotiate loans than it is to rope in more people to pay taxes.

The truth is the donors will not always be around but Ugandans will always be around. Common sense would suggest that we get more people paying taxes, if only as a guard against the day when the donors withhold their money for one reason or another.

We have anecdotal proof of this. Over the last decade a shift of the budget towards infrastructure development and away from consumption is what has kept the growth figures ticking up in difficult circumstances. The shift was not necessarily popular with everyone but it will pay dividends well into the future.

"Improved infrastructure improves the business environment which increase the revenue collections which in turn makes our debt management much easier....

We have done well raising our domestic revenues over the last three decades – sh5b to the current sh20trillion, but it is not time to rest on our laurels.