Since 1990, Uganda has sustained rapid growth supported by peace, security, and investments in the social sector and infrastructure.
Currently, Uganda is pursuing socio-economic transformation through three principal roadmaps: the first is Vision 2040, which foresees Uganda as a transformed society from a peasant to a modern and prosperous country as articulated in the National Development Plan (NDP).
The second has been the African Union’s Agenda 2063, and the third is the Sustainable Development Goals. Uganda requires resources to implement the activities to achieve these seemingly unrelated but mutually reinforcing commitments.
Consequently, Uganda has been taking on increasingly large amounts of debt to finance energy, transportation, and other infrastructure, while banking on expected oil revenue to service the debt.
However, the impacts of the Covid-19 pandemic have led to the re-prioritisation of some of these objectives to address the Covid-19 crisis through intervention geared towards increasing household and firm production and productivity, providing jobs, reducing the health impacts of coronavirus, supporting poverty reduction efforts, promoting exports and enhancing economic growth.
Yet, these re-prioritisation efforts are not enough. Like other developing countries, Uganda needs to avert an economic crisis in the wake of the pandemic. With falling domestic revenues because of a worsening business environment, Uganda’s debt is set to increase beyond the ideal limit of 50% of GDP in the medium term.
Uganda’s total debt in 2022 is estimated to be $21 billion. At the same time, tax collection is reported to be less than $6 billion or 13% of GDP. In addition, debt servicing in 2022 consumed one of the most significant portions of the budget, at 30% or an equivalent of $1.2 billion.
Of particular interest is foreign debt servicing amounting to $1.8 billion. This will reduce the import cover provided for by foreign reserves. Declining international reserves may diminish the authority’s efforts to stabilize the foreign exchange market at a time when the external supply of energy and essential products is endemic.
Uganda has recently witnessed a spike in the price of household essentials such as cooking oil and soap. Conversely, the domestic debt front is becoming increasingly expensive. Uganda’s interest on domestic debt averages 14 per cent, and the debt maturing in one year is past one-quarter of the total debt stock.
It is evident that Uganda’s debt will mature more quickly than that of comparator countries. In sum, the high cost of debt servicing suggests growing pressures on taxes to finance debt liabilities at the expense of other priority budgetary items, such as education and health.
While Uganda is not at risk of debt distress, the impact of debt on other sectors cannot be ignored. Notably, domestic debt has contributed to the rise of interest rate, which has limited access to credit to the private sector. Other impending risks include a rise in the prices of household goods and services.
Therefore, Uganda risks losing development gains because of debt pressure, the shocks inflicted by the pandemic and associated shocks. The pandemic also comes at a time when the country is facing climate change-related challenges, impacting production, increasing insecurity in the region, especially in the Democratic Republic of Congo.
There has never been a time when global partnerships are more critical. On the one hand, there is a need for creativity among domestic policy- makers to enhance efficiency in using current resources.
Also, development partners such as the USA, EU, the G20 and China, and other multilateral lenders such as the World Bank and the International Monetary Fund (IMF) need to provide additional resources.
The additional funds will secure a better fiscal space for Uganda to enhance social investment, support climate change adaptation and mitigation, address security needs and resolve development financing challenges.
The article was published in Observer on February 28, 2023.