Uganda’s Public debt of Ugx 68Trillion becoming a burden

Julius Kapwepwe, the director of programmes at Uganda Debt Network, a debt monitoring NGO, Uganda’s national says, to control the country’s spiraling debt, the Ministry of Finance officials must ask themselves some questions every time they are packaging a loan request.

Where do our domestic revenues go for every major project we borrow? At what cost are we borrowing? To what extent are we borrowing? These are some of the usual questions economic experts throw at Finance officials every time there is a loan government is acquiring.

The spiraling national debt was in the news for the last one week and the Ministry of Finance officials appearing before the parliament committee on budget had no clear answers as they took the heat from committee members led by chairman Amos Lugoloobi on how to rein in uncontrolled borrowing and spending.  The debt was Shs68trillion on April 15, 2021.

“The debt burden is unbearable. As a committee we want to know how you are going to bring down this problem” Lugoloobi asked Matia Kasaija, Minister of Finance Kasaija who was flanked by his deputy David Bahati; Deputy Treasury to the Secretary Patrick Ocailap; Kenneth Mugambe, Director of Budget.

Kasaija’s usual fallback position of giving incentives to manufacturers and farmers did not cut it. It also emerged that in an interview with Reuters, Kasaija was reported as saying he may approach Uganda’s main creditors like World Bank, International Monetary Fund (IMF) and China for debt relief.

And MPs grilled the Finance officials over what looked like padding of the budget as the committee found that other allocations to his Finance Ministry were a duplication of other ministries roles.

Debts in 2020

In 2020 Uganda took up a number of loans to deal with the unexpected covid19 pandemic and its impact on the economy. One of the first loans was signed in April, one month after the lockdowns, a $300m facility from the World Bank. Soon after European Union extended the country 125million Euros to boost the private sector.

In May, the IMF approved a loan of $491.5m under the Rapid Credit Facility (RCF) to help the country overcome its economic difficulties.

In July, African Development Bank lent Uganda $31.6m to boost the government’s response to covid19. After, it was hard for some to keep up with the rate of government borrowing. Reuters reported that the national debt has grown at 35% in the last one year. The appetite for loans has not relented even as the economy has slightly opened up although with the lingering effects of the devastation wrought by the lockdowns.

Borrowing criticised

There has been a lot of criticism of the government for the growing public debt as a result of an incoherent policy on borrowing and some say President Yoweri Museveni and his cabinet have a cavalier attitude on the issue because they know they are passing the debt baton to another generation.

Uganda borrowed to the tune of $2bn for Karuma and Isimba; two of the biggest hydro power projects in the country. Although Isimba was commissioned in 2019, it is the delayed works on the 600MW Karuma dam that is ticking some people off.

Karuma whose construction works commenced in 2013 has suffered numerous delays by the contractor and some have started questioning the value for money for a project that was supposed to be completed in 2019. The completion date of the project seems to have become a moving target just like the national debt figure which is expected to grow further into the next financial year.

The loan for the construction of Karuma was $1.7bn from the Exim Bank of China. Isimba was financed by the same bank at $567m. In both projects, the government of Uganda financed a measly 15%.

Those optimistic about the projects say the returns on investment will be invaluable but the interest on the loans is what has some civil society actors and economists worried. However there is also the reality of the lack of transmission lines for the immense hydro power project whose mission was to power Uganda’s industrial growth.

Kapwepwe says not all borrowing is bad since government may have to borrow for infrastructure development. Citing the Rukungiri–Kihihi–Ishasha–Kanungu Road, he says it is important because it “goes into the hinterland of tourism and connects the Kigezi region to Queen Elizabeth park”. He says the road has also facilitated transport of tea from surrounding areas.

“That’s a worthwhile investment,” Kapwepwe says. The 79km road has links with the border of Democratic Republic of Congo (DRC) and was constructed with a $57m loan from the African Development Bank.

Kapwepwe juxtaposes the above road with another in the eastern part of the country- the Mbale Lwakhakha Road which is also funded by ADB is mainly used for “drying of miserable cassava”.

“That is a white elephant,” he says.

Kapwepwe says another example of worthy borrowing for infrastructure is the Kapchorwa Suam Road financed by ADB at a cost of $105m. “That road enhances East African integration by connecting Uganda to Kitale (small town) in Kenya. It also boosts Kenya’s efforts to revamp wheat production in Sebei.” The Sebei sub region straddles both sides of the Ugandan and Kenyan borders.

At the time of groundbreaking for the project in August 2018, Kenya’s Deputy President William Ruto was in attendance with President Museveni to signify the importance of the project to the two countries. Both leaders spoke about the addition to the regional integration efforts.

Pro government analysts like Morrison Rwakakamba say “I don’t see reason for alarm” regarding the debt burden. He has been making the case for borrowing arguing that if government is doing it for developing in infrastructure, then it is fine. Rwakakamba also cited Uganda having a lower debt to GDP ratio at 49.1% compared to some of its neighbours. He says Kenya stands at 69% while Rwanda is at 60% with Ethiopia at 55%. But what got Rwakakamba real flak was lumping in the US. Its high debt to GDP ratio at a staggering 98% notwithstanding.

Some more rational reactions pointed out that the U.S. has the capacity to buy out its debt by printing more US dollars- a global reserve currency.

Kapwepwe and Rwakakamba agree on the part of borrowing for roads and dams but Kapwepwe departs on the unchecked thirst for loans that sees Uganda inching towards 50% of its debt to GDP ratio. The 50% threshold was set by IMF for low developed countries and says the fact that Uganda is still below the mark “should not be reason for fiscal indiscipline.”

He also argues that Uganda would be comfortable at its 49% debt to GDP ratio if its economic growth rate was 7% in the last five years and also with a similar projection in the next five years. According to IMF, the projected real GDP growth is 6.3%.

The other issue perturbing debt watchers like Kapwepwe is the undisbursed debt which is about Shs16 trillion- loans signed for but remain unutilised. “We are paying commitment and management fees,” he says.

He says this is common with bilateral lenders like China because of their “contingent conditionalities” such as their trucks not paying taxes and the strict use of Chinese contractors.

Former finance minister Ezra Suruma in a previous interview with The Independent said he had found a solution to untamed borrowing and the resultant effects of poor absorption capacity. When I was minister, Suruma told The Independent in 2017, “they (accounting officers and ministers) used to come with loans looking for signatures, I would ask them whether they had read and understood the conditionalities only to find that most of them hadn’t. I would ask them to go back and read and understand and they would say Suruma is slow.”

Suruma said a large number of loans is signed without prior and thorough understanding and negotiations by the borrowers. “As a result,” he said, “officials cannot meet the conditionalities after signing and the lenders cannot disburse.”

Suruma argued that Uganda needed committed and studious officials who can read and understand voluminous documents before they put pen to paper on these mega projects.

“The problem is not that we don’t need the money,” Suruma argued, “we need the money to implement all these development projects but we must get it after understanding the conditionalities behind it.”

Suruma made the comment after the Auditor General reported that the government had failed to use Shs18trillion it borrowed and now it has become a ritual for the Auditor General to report a huge chunk of unused borrowed money.

Suruma seemed like a strict officer and he did not last long in his position. After three years, he was replaced as minister.

Meanwhile the Uganda government’s ambitions mean it cannot wean itself from loans. The tunnel vision on infrastructure as a route for socio-economic development has seen the government come up with project after project with their attendant financing needs. In March, a US$229.5 million (Shs860 billion) financing agreement with the African Development Bank (AfDB) was completed in an effort to raise money for the Kampala-Jinja Expressway.

The debt problem in developing countries took a dramatic twist when Kenyans, tired of the incessant borrowing by their government, petitioned the IMF to cancel a new loan request at the start of April. The IMF was set to extend a $2.3bn loan to Kenya. Kenyans turned up the pressure on Twitter with #StopGivingKenyaLoans and urged citizens to sign an online petition calling for withdrawal of the loan request.  Kenyans accused their government of corruption and poor implementation of projects.

To reduce the debt crisis, African Forum and Network on Debt and Development (AFRODAD) a forum that advocates for debt cancellation in Africa, and other civil society organisations are calling for $3trillion debt relief measures.