Uganda has registered a change in debt sustainability position due to the rebasing of gross domestic product (GDP) figures and it is not clear whether this will spur increased borrowing. In October 2019, the Uganda Bureau of Statistics (UBOS) released new GDP figures based on rebased national accounts, changing the base year from FY 2009/10 to FY 2016/17. Rebasing involves replacing an old base year with a new and more recent base year upon which future values of the GDP are compared. It is mainly aimed at incorporating economic activities which were previously not captured in GDP computation, so as to depict the true structure of the economy. In Uganda’s case it was aimed at capturing emerging sectors such as the surge in gold exports and oil projects.
Upon rebasing, the size of the Uganda economy increased by 18.3 percent to UGX 108.5 trillion in 2016/17 compared with the previously published estimates of the same year. Given that rebasing results in changes in GDP figures, economic indicators that are usually expressed as a percentage of GDP also change. The debt to GDP ratio—a measure of a country’s ability to repay borrowed funds—is one of the indicators that changes upon rebasing.
Uganda’s outstanding stock of government debt increased by more than 10% in one financial year—from UGX 42.4 trillion in 2017/18 to UGX 47.3 trillion in 2018/19. According to the 2018/2019 Bank of Uganda annual report, the country’s debt to GDP ratio increased from 38% in FY 2016/17 to 43% by FY 2018/19, prior to the rebasing.
Earlier the Ministry of Finance had in 2018 through its fiscal Risk statement projected debt to GDP ratio to reach 52 percent in the FY 2021/22. Presently, the government expects to borrow UGX 6.3 trillion externally and UGX 535 billion domestically to finance the 2019/20 budget. Going forward, government will need to borrow UGX 9.5 trillion to finance the 2020/21 budget, with external borrowing accounting for 73 percent. Interest payments are also projected to increase from 2.9 trillion in 2019/20 to UGX 3.6 trillion in 2020/21. Although the Ministry of Finance maintains that Uganda’s debt sustainability is not threatened, some analysts fear that increased borrowing is likely to increase the stock of public debt and the debt burden.
The new rebased GDP figures however paint a different picture. Upon rebasing, the debt to GDP ratio in 2018/19 reduced to 36.7 percent, relieving the government from concerns about moving with reach of debt sustainability threshold of 50 percent set by IMF. Rebasing the GDP and consequent decline in debt to GDP ratio can be interpreted as having created room for further borrowing. The fundamental question remains whether rebasing indeed eased Uganda’s debt burden to warrant further borrowing. The rebasing may have not in any way eased the debt burden as the changes did not reduce the nominal values of the money that the country has to pay inform of debt repayment.
It is also important to note that the share of debt repayment to national revenue collections remains significantly high. According to the FY 2017/18 Office of the Auditor general’s report, the ratio of debt repayment to national revenue was 54 percent and projected it to reach 65 percent if government was to service the loans expiring in 2018/19 and 2019/20. Uganda’s debt to domestic revenue ratios are highest in the East African region. This implies the country’s revenue is insufficient to sustain the increasing debt repayment obligations. Any further borrowing without commensurate efforts to expand domestic revenue would simply worsen the situation, and perhaps constrain government’s capacity to provide basic services.
There are also other constraints regarding expanding Uganda’s public debt. For instance, low absorption and delays in disbursement of borrowed funds, and commencement of projects, yet government continues to pay interest on these loans. The Value for Money audit report for 2015 revealed that average absorption level stands at 37.7 percent. The Auditor general’s report for the 2017/18, also showed that some loans have absorption levels as low as 10 percent and below. Some delays in commencement of the projects can be attributed to delays in release of funds from government in the case of counterpart financing.
Consequently, although rebasing the GDP improved the theoretical government’s debt position, the relief was only in terms of reduced thresholds. Therefore before taking advantage of the borrowing space created as a result of rebasing, government needs to undertake measures to increase domestic revenue mobilization to enable payment of the debt but also retain sufficient resources for provision of services. There is also need for measures to improve on effectiveness and absorption of loans. Government needs to improve its appraisal process for debt funded projects.
