Public Debt: Govt insists it is sustainable and still below 50% of debt to GDP ratio

by Christopher Kiiza
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According to the latest Auditor General’s Report for the financial year ended 30th June 2023, the total public debt as at 30th June, 2023 stood at 96.168 trillion shillings, comprising of Domestic Debt Stock of 43.696 trillion (45.4%) and the External Debt Stock of 52.472 trillion (54.6%). This represents an increase of 9.329 trillion, equivalent to 10.74% compared to 86.839 trillion as at 30th June 2022.

This, however, is not the only time the country’s public debt is shooting to the skies. There has been a consistent increase in the total debt evidenced by an increase of 107% in the five years from 2018/19 of 46 trillion shillings, to 96.168 trillion shillings as at 30th June 2023.

In 2020, the public debt increased to 56.9 trillion shillings. In 2021, the debt increased to 75.1 trillion shillings. In 2022, it increased to 86.8 trillion shillings, while in 2023, Uganda’s public debt shot up to 96.1 trillion shillings.

Relatedly, the GDP grew from 132.09 trillion shillings (2018/2019) to 184.895 trillion shillings (22/23) in the same period representing an increase of 52.805 trillion (39.98%). 

This, according to the Auditor General, implies that “the public debt is growing at a higher rate than GDP.”

It, however, does not stop at growing faster than the GDP. The figures show that Uganda’s debt to GDP ratio now stands at 52%.

Although Uganda’s public debt has for years been increasing, Government has always stated that it is sustainable on the pretext that the debt to GDP ratio was still below 50%.

“Debts continue to be a thorny issue that has been of concern to many of us. But I can assure you, our debt remains sustainable. And we are implementing a number of actions under our debt strategy to keep it under control. In fact, we have not yet hit the 50% mark (the 50% debt to GDP ratio). We are still below that, meaning that we are still within the sustainable levels of our debt management strategy,” the state minister for Finance in charge of planning, Amos Lugolobi said in December 2022.

The Debt to GDP ratio is a measure that compares what a country owes (total debt) and what it produces (manufactures or a service provided). The ratio reliably indicates a country’s ability to pay back its debt. A high debt-to-GDP ratio may make it more difficult for a country to pay both internal and external debt and may lead creditors to seek higher interest rates to compensate for financing risk due to likely default or unnecessary debt extension.

The International Monetary Fund (IMF) recommends 50% (debt to GDP ratio not exceeding 50%) as the point of safety, although many developed countries have gone up to 200%. However, according to the IMF, the developing countries such as Uganda are more prone to economic shocks and exchange rate risk, thus advising on a 50% threshold.

Objective 1 of the Charter for Fiscal Responsibility of Uganda (FY2021/22 – FY2025/26) targeted the total public debt in Nominal terms to be reduced to below 50% of GDP, by financial year 2025/26. The charter specifically indicated that the debt to GDP ratio in the FY 2022/23 to be 53.1%. 

According to Auditor General’s Report, “a re-computation of Uganda’s Debt to GDP revealed a consistent linear growth over a period of five years and in the year under review, it was noted that the Debt to GDP decreased by 0.7% from 53.4% to 52.7% in the FYs 2021/22 and FY 2022/23 respectively.”

Uganda’s debt is due to increased Government expenditure compared to the domestic revenue to finance the fiscal deficit.

Senior Economist and Makerere University lecturer, Dr Fred Muhumuza warns that the country’s debt has reached a point of no return, suffocating Uganda’s ability to reduce it to manageable levels.

“I think we have reached a point of no return because when you look through the debt structure, you are borrowing partly to pay debt, meaning [that] if you don’t borrow, you are going to default,” he says.

Dr Muhumuza blames the surge in debt burden on government failure to highlight priorities of the economy.

“The first criteria of budgeting is to meet your creditors’ needs, meaning that if revenue authority raises any money, the first call on those resources is to pay debt, and after paying your debt, the second criteria is you must pay salaries and wages.”

However, Otuke County lawmaker, Paul Omara says it is too early to say that Uganda’s debt is moving out of manageable levels.

“If you look at the midterm macro-economic plan and fiscal framework for the financial year 2024/25, you would note that our debt to GDP ratio is still below the 50% mark. That is true on account of debt growing on a much bigger GDP. Our GDP will exceed over 200 trillion. However, I should say that in terms of the budget proposals which we have seen for the financial year 2024/25, the debt burden is basically exacerbating and decreasing the fiscal space. You will see that because of the budget support which was 2.8 trillion [shillings] this financial year, the next financial year, that amount will drop to 29 billion. So, the drop is about 2.7 trillion shillings. And our debt repayments for example foreign debt repayments is going to grow up from 2.6 trillion to around 3.2 trillion which means we are paying more,” he says.

Omara adds, “the interest component alone is going to move from 6 trillion to 7.6 trillion. Because we are borrowing money annually, the amount of money URA is going to collect is not enough to fund our budget. Therefore, the debt is increasing, but I should not say that we don’t really need to be alarmed at the moment.”

The major driver of the external debt growth is to finance the budget (Budget support). Under the circumstances, the servicing of public debt may not be sustainable in the short and medium term, if not checked. 

With regard to Domestic Debt, the rise was attributed to the need to increase borrowing mainly to support the economy through the Covid-19 pandemic, and mitigate the negative social and economic impacts and also to support the economy, amidst increasing global conflicts like the Russia-Ukraine war. 

The increasing trend in the government debt position without matching domestic revenue increase, strains Government’s ability to repay the debt and deliver services to the citizens. 

The Auditor General advises Government “to review its debt strategy with a view of containing the upward growth of debt, and also strengthen the domestic revenue mobilisation efforts.

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