Uganda struggling to maintain debt within sustainable levels

by Christopher Kiiza
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The state of Uganda’s debt to GDP ratio is worsening due to over borrowing.

The debt to GDP ratio is a measure that compares a country’s total debt to its Gross Domestic Product (GDP). It provides an indication of a nation’s ability to repay its debts relative to the size of its economy.

According to Bank of Uganda, the country’s public debt stands at Ush86 trillion which is approximately 48% of the GDP.

In the April statement of the economy report released by the Central Bank, the total public debt increased by 8.1%, relative to the June 2022 number at cost and the increase was observed for both domestic and external debt where external debt maintained the lions share at 59.9%.

Uganda raises money for financing the budget largely through tax and non-tax revenues.

The State Minister for Finance in charge of planning, Amos Lugolobi says that the resources the Uganda Revenue Authority (URA) is able to collect are far less than what is required to finance the entire budget, including financing debt portfolios as they fall due.

“That means that the difference between what we are able to raise in terms of revenue and overall the total budget, create what we call the fiscal deficit,” said Lugolobi.

He admits that the said deficit has been broadening depending on the demands. 

It is worth noting that whereas Uganda had a budget of Ush48 trillion for the 2022/23 financial year, the same budget has been increased to Ush52.7 trillion for the 2023/24 financial year, suggesting that the demands into the budget have gone higher than what government is able to handle, with URA only targeting to collect revenue of about Ush25 trillion this year.

“So that gap, we finance through borrowing. So, what we need to do is to make sure that we curtail our appetite so that the budget does not increase astronomically. And we have tried to do that in order to reduce the fiscal deficit. But at the same time, we need to grow our GDP because the ratio you are talking about is the debt to GDP ratio, and the sustainable level has to be maintained at 50%. We have not yet hit that ceiling in nominal terms. We are now hovering around 48%,” Lugolobi said.

“The point I am making here is that we have to keep it within those sustainable levels according to our charter of fiscal responsibility. We have made that commitment that we shall maintain it below 50%,” he added.

To achieve this, the country has to grow its GDP. The more the country grows its GDP, the more it reduces its debt burden.

ALSO READ: Uganda’s public debt hits Ugx 86 trillion

In 2021/22 financial year, the economy grew by 4.6%, an improvement from 3.5% registered in the previous year. Over the first quarter of this financial year, the economy grew by 7.5% compared to 2.7% in the same  quarter of 2021/2022 financial year, mainly driven by increased value addition in both the industry and services sectors which grew at 12.7% and 9% respectively. The economy is projected to grow at 5.5% at the end of 2022/23 financial year.

“So this is what we have to make sure that we maintain in order to remain within the sustainable levels of debt. We can only create the wiggle room for borrowing by increasing our GDP. We cannot avoid borrowing. But, we make sure that the GDP grows and we go for concessional borrowing that gives us friendly terms for repayment periods, and interest. So, our debt strategy focuses on those areas; ensure that we go for concessional borrowing, but there are some inevitable circumstances where we have to borrow commercial, especially where we go largely for budget support. But we shall make sure that we live to the commitment of the charter of fiscal responsibility. And so far, we are doing quite well,” Lugolobi said.

Relating to the expansion of the tax base, characterised by the tax to GDP ratio that is not growing, Lugolobi said, “this is a moving target again. As we try to accelerate the GDP growth, the tax to GDP ratio almost remained static because we are trying to accelerate GDP growth, and we want to see the tax to GDP ratio growing to levels like 20%. But we have been stagnating around 13%.”

It is worth noting that the tax base largely depends on the capacity of the economy. Lugolobi admits that Uganda needs to build a strong tax base by among others, collecting huge revenues from sectors that have for a long time enjoyed tax exemptions.

“We have to build the base, the foundation; the industrial sector, the agriculture sector. Remember that from the agricultural sector, we collect very little tax from that sector, it is a consumer of tax revenue, but little is collected from the agriculture sector. Why? Because there are numerous exemptions happening in that sector and the efforts to collect money through taxes in that sector have not been very fruitful. Most of the inputs that we use in agriculture are actually tax free,” he said.

Lugolobi, however, added that there is a movement to address the issue of tax exemptions in all the areas including VAT, excise duty, income tax.

“In the recent presentations in Parliament, we have moved to remove some of these exemptions, and we shall continue to do so. So, as we broaden the economy, I believe that the tax to GDP ratio, and reducing the tax exemptions, we should be able to raise our tax to GDP ratio,” he said.

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