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• Published Dec 30, 2023

Sustainable, inclusive, and environmentally responsive debt in Uganda: Implication of COVID-19

Uganda’s debt has been rising since 2010, when the country changed its focus from poverty reduction to development. This paradigm shift saw a frontloading of infrastructure projects to address deficits in the road and energy sectors. This trend has continued with disbursements from the multilateral and bilateral creditors to finance COVID-19 mitigating measures. Indeed, COVID-19 has re-emphasised the importance of debt management.

Uganda’s debt stock has increased significantly to 47 percent of Gross Domestic Product (GDP) in 2020/2021 from 41 percent in 2019/20. This debt is primarily non-concessional, with an average weighted interest rate of 14 percent, no grace period, and primarily less than 10 years of maturity. This implies high debt service costs, which may crowd out many drivers of economic growth. There are also concerns about the social implications of the growing debt, especially on the vulnerable groups such as women and youth – who may disproportionately bear the consequence of reduced expenditure and debt-servicing. Moreover, Uganda has experienced a shift from traditional creditors, for example, Paris Club creditors, to new bilateral creditors such as China, India, and Gulf States (United Arab Emirates, Qatar, and the Kingdom of Saudi Arabia, among others).

There is a scope for more information on the size, structure, and terms of debt from the latter group. In addition, Uganda’s debt challenges have a climate change dimension. Yet, the country has not implemented PES (Payment of Ecosystem Services) and PPP (Polluter Pays Principle). However, some debt-funded projects, such as roads and energy projects, contribute to a considerable proportion of greenhouse gas emissions.

Objectives

The study triangulates simulations from a Computable General Equilibrium (CGE) and multiplier model with document reviews and perceptions of Key Informant interviews (KIIs) and Focus Group Discussions (FGDs) to address the objectives of the study.

The main objective of this study is first to examine the stock, flow and usage of Uganda’s debt and the consequences of the emergence of COVID-19 on institutions in the context of promoting transparency, accountability, and participation of youth, women and marginalised groups in the management of debt; second, examine the consequence of new sovereign and private lenders, such as China and commercial banks; and lastly, the study evaluates the impact of debt on environmental degradation and the broader concept of climate change.

Findings

a) Uganda’s debt is largely driven by the shift of development focus from spending on social services to infrastructure. However, COVID-19 has partly contributed to the upsurge in debt. The upsurge in debt has, however, not been matched with the capacity of institutions that improve accountability, transparency, and inclusivity.

b) There is also an upsurge of debt from new creditors such as China and private commercial banks. However, there is scope to improve transparency and participation in debt restructuring initiatives by the new creditors.

c) The outcomes of the upsurge of debt have also been marked by improvements in indicators of economic growth and development such as tax effort, trade, poverty reduction and employment creation. The improvement in the indicators is stronger if the debt is concessional. However, this positive relationship is not inclusive, as women are left behind, and

d) Debt is increasingly responsible for the usage of firewood and charcoal at the household level and petroleum and diesel at the production level, which could be partly driving the increase in climate change.

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