IS UGANDA’S DEBT SITUATION A WORRY?

Uganda’s debt burden has grown dramatically over the last decade, during which we have recently crossed the psychological important 50 percent debt to GDP line.

Observers warn that we are moving into dangerous territory, fearing that more and more of our budget will go towards debt servicing and not towards improving education, health and other public goods necessary to drive development.

The critics are right and wrong.

I went back 25 years to a time when our debt burden had reached unsustainable levels, to the point where we were bunched into a new category, Heavily Indebted Poor Countries (HIPC) with 38 other countries.

In 1996 we had debt to GDP ratio of more than 50 percent with debt stock of $3.7b against a GDP of $6b in 1995/96 for every hundred shillings of revenue we were collecting sh21 went to debt servicing.

Fast forward to today and once again our debt to GDP ratio has touched the 50 percent mark and we are spending about sh30 of every sh100 collected to service our debt.

On a purely numbers level we are back to where we were in 1996 and if there were concerns then about the economy then we have a right to be concerned now as well.

From our personal experience the thing about debt is whether you can earn enough to cover your obligations and have something left over to live on. Maybe even more important is what you spend your debt on, on things that will earn you more money in the future – easing the pain of repayment or spending on things which will incur more costs and guarantee that your debt will chock you.

As for people so for countries.

So, while our debt levels have jumped to about $20b, a more than fivefold jump from 1996, GDP during the same period has jumped more than six-fold to $40b from $6b....

In theory it can be argued that we did a good job in employing the debt to generate more economic activity. How efficiently we did this, maybe a debate for another day.

The thing with debt is that when you contract it is always a race against time.

For instance, when you borrow money to stock your shop, you are hoping the sales you make from the new inventory will pay for the loan. However there maybe delays in getting the stock on the shelves or God forbid! Another lockdown and suddenly your well laid plans will count for nothing.

But whatever happens you will have bought stock, which it will be reasonable to think will be sold one day. You could do worse for yourself and buy yourself a car and instead of increasing your income will actually increase your expenses – fuel, service, parking stickers among others. So, in addition to paying off the loan you are bleeding money to run the car.

In respect of this, in 1996 Uganda Revenue Authority (URA) were collecting sh646b while this financial year they are aiming to collect sh22trillion a 34-fold rise in revenues.

Revenues come from taxing economic activity. Of course, it could very well be that URA is becoming more efficient in collecting revenues but the bigger reason is that economic activity has increased during the period.

How do you increase economic activity? You maintain peace and security; you build infrastructure and you improve the capacity of your human resource through education and improved health services.

Lower economic activity, a hangover from the Covid pandemic, is forcing government to cut back on spending causing a lot of pain up and down the economy. But expectations are that the economy will return to its pre-covid growth ways by 2024 and the worst of this episode will be behind us.

It goes without saying too, that the economy’s ability to pay off our foreign debt is much better. In 1996 we had exports of $715m. Exports are important because its where we get the dollars to service our debts. In that year our debt service bill was $132m or about 18 percent of our export receipts. Last year our debt service bill of $760m was covered eights by our exports of$6.34b.

However, government has to improve its efficiency in converting debt into economic enabling assets. Projects are taking twice as long, if not longer to take projects from conception to commissioning. The time wasted has cost implications and also mean delaying economic activity that will reduce were debt servicing woes....

That is why the fight against corruption should go beyond lip service. Corruption beyond concentrating wealth in a few people’s hands, diverts resources from service delivery, depriving the majority the opportunities to climb the economic ladder.

But while we are on the discussion about debt sustainability, according to Bank of Uganda figures, about 20 years ago in 2003 our debt to GDP ratio peaked at 71.5 percent, and we are still here.