The increasing uncertainty about the duration of the lockdown and other containment measures has justified fears about its implications for Uganda’s debt. First announced to last for 14 days (1st – 14th April), the lockdown was extended for 21 days (15th – 5th May) and then for 14 days (6th – 19th May). The concerns about Uganda’s public debt are also linked to the uncertainty about the recovery of the global economy.
Also, the measures to contain the spread of COVID-19 ranging from the lockdown to social distancing measures among others are likely to have a significant impact on Uganda’s revenues and expenditures. Therefore, the effect of these measures on the government’s revenues and expenditures could have ramifications for Uganda’s debt.
The data from the Ministry of Finance Planning and Economic Development indicates that Uganda’s public debt was 49,433.1 billion as of December 2019, of which 17,376.1 (35 percent) is domestic debt and 32,057 (65 percent) is external debt. Also, the stock of domestic arrears was 3,627 billion in June 2019. The public debt was increasing and it was predicted to increase before the outbreak of COVID-19 in Uganda. However, the containment measures are likely to lead to an increase in Uganda’s debt.
These measures can affect Uganda’s debt through several channels due to reduced economic activity. First, through reduced government revenue due to low tax collections from exports, imports, businesses, individuals and non-tax revenues. Second, through increased (unanticipated or budgeted for) government spending on measures to contain the pandemic (however, some of the increases have been haphazard). Third, due to the increased demand for government securities (bonds and treasury bills) by financial institutions on account of the perceived riskiness of domestic borrowers (investors). Fourth, through reductions in the inflow of grants, remittances, export earnings, foreign investments and money from foreign tourists.
Consequently, the widening gap between revenues and expenditures could be closed by deficit financing (borrowing). The government (because it needs revenues from all possible sources) will be inclined to sell treasury bills and bonds for both monetary and fiscal policy purposes. The government may also borrow to ensure that we have sufficient foreign exchange reserves for the import of essential commodities or for honouring the scheduled debt repayment or for cushioning the shilling from depreciating against the major currencies. Therefore, this move (to borrow) by the government would have effects on the debt size, debt composition, scheduled debt repayment (principal and interest) and debt sustainability (debt management).
First, Uganda’s public debt will increase; however, this increase is expected to be small if directed towards the current priorities. In addition, borrowing should be solely to close the gaps in tax and non-tax revenues. There is some merit in government refraining from exaggerating the need to borrow during this time amidst compelling incentives to do so.
Second, because the government is cautious about crowding out private investment (though it has reduced due to uncertainty and risk aversion), it is likely that the external debt will increase more than the increase in domestic debt. Besides, borrowing from multilateral lending institutions like the International Monetary Fund and the World Bank might be more preferred to borrowing from individual countries like China. This is partly because loans of the former are concessional.
Third, we may default (or fail to honour our debt obligations falling due) in case there is fiscal pressure due to a trade-off between stabilising the economy (and containing the pandemic) and meeting the scheduled debt repayments (external debt and domestic debt). This is because, during such trade-offs, it is ideal for the government to prioritise containing the pandemic or stabilising the economy over the debt repayment. However, the preferred course of action would be to lobby for debt relief in the form of rescheduling, after all, where is the merit in pushing for debt repayment when the ability to mobilise revenues is uncertain. Whereas domestic debt relief is a rare phenomenon, its implementation could even be more hurtful to the economy.
Fourth, whereas domestic arrears have been a recurrent problem for Uganda, the government ought to prevent a sudden increase in arrears by immediately clearing those that supply during this period since their survival (during these times) will depend on the government’s commitment to pay them in time. Lastly, the recent evidence from the debt sustainability analysis done by MoFPED indicates that Uganda’s debt is still sustainable at a low risk of debt distress. Though the economic shock due to the pandemic was not considered, it is unlikely that debt sustainability position will significantly change in the short run and the long run.
However, these expectations depend greatly on the duration of the lockdown measures and the recovery of the global economy. Things could likely be better or worse. I do not know. Nonetheless, the government must not take this as an opportunity to prop up unnecessary expenditures under the guise of containing the pandemic or bolstering the economy out of an unpredictable downturn. Also, let us beware of small expenses, lest the pandemic which came to pass leaves us in deep and unnecessary debt.