That Uganda is spending as much as 97% of its domestic revenue to service debt should concern us about the sustainability of public debt stock the country has raked up, according to Corti Paul Lakuma, a research fellow at the Economic Policy Research Centre.
Presenting on Monday, June 14, 2021, to Rotarians from the Rotary Club of Kampala North, Lakuma noted that “We are spending at least three-fold more than we’re supposed to on debt repayment. What is recommended for Uganda is 35% [of revenue] but we’re spending 97% of domestic revenue on debt repayment. It means in a year; we leave just 3% of what we collect locally [for service delivery] and then we have to borrow both internally and externally to meet the deficit.”
“We’re in a cycle of debt and we need to do something,” he said.
Paul Lakuma, EPRC
Uganda’s external debt stock as a percentage of GDP is above 40% while debt service, as a percentage of exports of goods and services, increased to nearly 200% in 2016. This is due to poor export performance, Lakuma said.
Covid-19 has led to shrinkage of revenues and it means Uganda has to borrow more to fund the budget. Last year, the International Monetary Fund advanced to Uganda at least $490m to beef up reserves.
This year, the international lender of last resort has indicated it will give Uganda at least $1bn on a three-year credit line arrangement.
Lakuma said Ugandans must “be reasonable and evaluate debt in the context of covid-19.” This is where countries like Uganda have no option but to still go out and borrow.
There are of course more reasons to be concerned, Lakuma indicated. The first being governance where much of the money borrowed ends up in hands of the few elites through corruption. Also, the issue of equity with SMEs supposed to receive money as bailouts unable to do so.
A lot of poor people depend on government to provide social services. With debt service taking between 28 and 30% of GDP, it calls for a pause and rethink.
“Even if our debt was sustainable, we must look back and think about the fact that we’re spending almost 30% of GDP on servicing debt yet services such as education and health if combined, they are not getting more than 12% of GDP,” he said.
This is a pointer to the deterioration of other economic variables such as the inability to deliver critical services like education and health.
Another issue of concern seems to be the mismatch between the debt contracted and the projects the money is spent on. Uganda is increasingly taking on short-term debt but using it to fund the long projects, a recipe for trouble with repayment.
Find Lakuma’s presentation here: Uganda’s Public debt stock: should you be worried? Rotary Presentation EPRC_June 2021