Uganda’s growing public debt

PUBLIC DEBT: Why is it growing? Is it prohibitive, unsustainable?

Kampala, Uganda | ANDREW M. MWENDA | On January 10, I watched with increasing depression a debate about Uganda’s national debt on the NBS Frontline show. Although the Minister of State for Finance, David Bahati, made many good arguments in defence of government, his delivery was not effective.

The moderator, Charles Odongotho, appeared uninformed about the subject and failed to generate the right questions or direct the discussion well.

I expected Fred Muhumuza, with a PhD in economics and who once served as an advisor in the Ministry of Finance, to lift the debate to some higher intellectual plane. Instead he plunged into narrowly focused theoretical arguments spiced with the usual Ugandan populist talk that attracts praise on social media but has little substance.

Opposition politicians Salamu Musumba and Nandala Mafabi could not get themselves out of cheap politicking. Instead of raising the many vital criticisms of government borrowing, they kept heckling and speaking a lot of inconsequential things.

Ofwono Opondo was, as usual, logical but uninformed. Norbert Mao looked completely lost.
In my view, any discussion on Uganda’s national debt must first lay down the following facts: It is hard to nail down out actual debt since it is a moving figure. But as of end of March 2018, Uganda’s total public debt stock (excluding undisbursed debts) was $10.5 billion (Shs38.8 trillion). Out of this foreign debt was $7.2 billion (Shs26.5 trillion) or 68.2% of the total while domestic debt was $3.4 billion (Shs 12.4 trillion) or 31.5%. The debt to GDP ratio was 39.9% below the recommended ceiling of 50%. I will explain the implications of these figures later in this article.

Be that as it may, such a debate needed to be premised on the fact that Uganda is not an island on Mars cut off from what is happening in the region (East Africa), continent (Sub Sahara Africa) and the globe. Therefore, any serious discussion of our growing debt must provide not just the historical context of Uganda but also the broader regional and global context.

For example, the Standard Gauge Railway, which will add $2 billion to our debt, is a regional project. Second, across Africa, all nations are borrowing heavily to invest in transport and energy infrastructure.
I have attached a table here giving the debt to GDP ratio of all the 44 nations of Sub-Sahara Africa. Only 13 of them have a debt to GDP ratio lower than Uganda’s.

Why is debt growing?

Placing Uganda in the regional and global context helps illuminate the broader factors driving borrowing. It helps us avoid the pathology of claiming that borrowing is a Museveni/Uganda problem – if it is a problem at all. So why is growing debt common across the entire Sub Sahara Africa region? This was never addressed.

It is understandable though not excusable, for politicians such as Mao, Musumba and Mafabi to score political points by making arguments stripped of context, but not for Muhumuza, a scholar.

There are four critical questions on public borrowing, which I felt the moderator would try to focus the panellists on. One is the purpose of debt: is it financing consumption or investment? Second is the cost of this debt. Is it prohibitive? Third, given Uganda’s current and projected domestic revenue and foreign exchange earnings, is the debt sustainable? Fourth, and related to the third point: do the investments financed by debt have a good return?

All Uganda’s foreign debt is nominally going to develop infrastructure – roads, railways, dams, transmission lines, airports etc. Some money is lost to corruption but it is a very small fraction. The rest goes to the right things: transport and energy infrastructure has potential to give the economy future productivity gains. Uganda’s economy grew rapidly at an annual average rate of 6.92% between 1986 and 2013. That made Uganda the 17^th fastest growing economy in the world, 6^th in Africa. If we remove oil and gas producing countries from the sample (because they were enjoying God’s or nature’s bounty), Uganda was 9^th fastest growing economy in the world; in Africa it was second to Ethiopia.

Muhumuza argued that Uganda’s economy has been growing below her potential. What is it in “Uganda’s potential” that would generate growth rates higher than those experienced? Uganda is landlocked, was engulfed in civil war from 1986 to 2005 i.e. 20 out of 28 years of this growth marathon. It is neighbouring Rwanda to the south, which was engulfed in a civil war from 1990 to 2001.

To the West is Congo which has been in civil war since 1996. To the north is Sudan, which has been at war for all this period except between 2005 and 2013. And beyond we have Burundi, Somalia and Central Africa republic all of which are at war. This is not to mention that from 1986 to 2000 most of Sub Sahara Africa was stagnating.

Even a third rate economist would tell you that Uganda’s average annual GDP growth performance of 6.92% between 1986 and 2013, in these circumstances, is a miracle. Indeed no lesser a person than former Singaporean Prime Minister, Lee Kuan Yew, said in an April 14^th 1988 speech, that Uganda’s world had “collapsed” and could not be rebuilt even in 100 years. Yet it took only 14 years (1986 to 2000) for our country to rebound and reach her 1970 peak in GDP per capita. This recovery, in face of such doomsday predictions, shows how remarkable Uganda’s economic reconstruction and state reconfiguration have been.

More critically for Muhumuza, historically few countries have ever sustained an average annual GDP growth rate of 6.92% for 30 years. In his book, `The Next Convergence’, Nobel Laureate in economics, Michael Spence, looked at all economies of the world from 1955 and 2005 (a period spanning 50 years). He found only 13 countries have ever sustained an annual rate of GDP growth of 7% and above over a 30 years period. I have attached Spence’s table below. No Western democracy, not even America, ever achieved this. So what gives Muhumuza confidence to declare that an annual average rate of 6.92% for Uganda over a period of 28 years is below the country’s potential?

I agree that from 2012 to 2018, Uganda’s rate of GDP growth has decelerated to 4.1%. I have attached here a table of the GDP growth rates of 12 of Uganda’s closest neighbours over this period, which shows we were number eight. So we can agree with Muhumuza that over the last seven years Uganda has performed below her potential. Why? This was a critical question that Odongotho could have brought forth. Part of the answer is embedded in the ballooning of domestic debt, which we must worry about in large part because of its high interest costs.

There are many factors. One of them is that in 2012, Uganda passed the Anti-homosexuality Act. For the first time under Museveni, this decision enjoyed broad-based support across the political and social spectrum. Western donors responded by cutting aid, yet government was not willing to cut down her spending in the face of this shock. Instead it went on the credit market to borrow to fill the gap. This was the first time government of Uganda was borrowing to fund the budget; previously it only sold treasury bonds for monetary policy objectives.

As a consequence, interest on treasury bills reach 21%. Banks smelling profit shifted a lot of their lending from the private sector to government, or increased their lending rates. This was a double edged sword: on the one hand government borrowing crowded the private sector out of the credit markets while on the other it made the little credit available to the private sector extremely expensive – in some cases hitting 30%. 

Companies that had borrowed at lower rates all of a sudden had to pay more than they had projected. Many began to default, others would not borrow and invest, banks became vulnerable and growth decelerated.

This shock was compounded by another factor: Uganda, like most other nations of Sub Sahara Africa, had run a growth marathon of 25 years with little investment in transport and energy infrastructure. Thus as businesses expanded, demand for transport and energy infrastructure outstripped supply. Businesses increasingly faced unreliable power, constant outages, and expensive alternatives like diesel generators not to mention bad roads to transport goods across the country. This began chocking national economic growth.

This challenge was not unique to Uganda. All our neighbours to wit Rwanda, Tanzania and Kenya faced it. All of them have since been borrowing heavily to invest in transport and energy infrastructure to fill the gap between demand and supply of these critical public goods and services.

Uganda is beginning to overcome these infrastructure bottlenecks, part of the reason growth has picked apace. In 2018, Uganda’s economic growth reached 6.1%. A 2017 Harvard study projects that between now and 2025, Uganda will be the second fastest growing economy in the world – growing at 7.2%.
This may not come to pass, but it is wrong to argue that borrowing to invest in energy and transport infrastructure is wrong policy.

FILE PHOTO: Some Experts say when the government decides to borrow for infrastructure projects such as the Kampala Entebbe Expressway, it should fast-track them to reduce the debt burden.

 Is debt prohibitive, unsustainable?

This leads us to the second and third questions: is the cost of borrowing prohibitive and is the debt therefore unsustainable? First, 99% of Uganda’s total foreign debt is from multilateral and bilateral bodies. It is given on highly concessionary terms: it has a high grant component (20-40%), with a long grace period (six to ten years), and an even longer maturity period (30-40 years) at very low interest rates (0.75% to 1.5%). This is what makes our foreign debt sustainable. Sustainability of foreign debt is measured by the ratio of debt service to export receipts. In 2018 Uganda earned over $6.4 billion from export of goods and services. However, debt service is only  $209 million – 3.27%.

Now to the final question: do our investments in transport and energy infrastructure have a good rate of return? It depends on what you are looking at. In terms of economic return, some do, some do not. 

But I do not think the only reason a country develops infrastructure is about dollar returns. For example, Uganda built a road from Sorori to Moroto and from Moroto to Nakapiripirit, which I suspect has no viable return in a strict economic sense. But it has an important social return of taking services to Karamoja and integrating that region into this nation. The opposition can argue, quite convincingly, that we can invest in productive regions first, and the gains therefrom can finance investments in Karamoja. But the opposition does not argue that.

Equally, Uganda has invested heavily in rural electrification. It does not strike me as an investment with a positive return on the dollar. But taking electricity to the rural poor has political value: politicians win votes, a factor we cannot avoid in a democracy. Secondly, it may have a positive impact on education (kids in villages do not have to read on tadooba (wick candles) and ruin their eyes, health (rural people do not have to suffer chest infections inhaling kerosene smoke), and environment (it may reduce the burning of trees). One would have to look at all these factors before concluding that a particular investment does not have a good return.

Now there is one problem with Uganda’s borrowing for infrastructure, which Mafabi raised – low levels of local content. I wished Mafabi could have focused on Museveni’s 32 years of promoting policies that have either displaced or stifled the growth of local firms; especially in construction. Consequently, Uganda is now borrowing and spending over $20 billion for infrastructure and there is hardly any local firm taking any of these mega construction projects. Chinese firms have also been known to import cement and steel for these projects, although the government has since intervened and stopped this.

Secondly, Uganda has peak electricity demand of 600MW yet by end of this year when Karuma comes on board we shall have installed capacity of 2000MW. Even if we connected every hamlet and home to the grid, domestic users cannot consume all this power. Besides the cost of investment in transmission and distribution cannot be recovered from the tariff without making electricity unaffordable to the poor or causing government to pay heavy subsidies, a point Muhumuza raised.

Let us remember that electricity demand is growing at an annual average rate of 10% i.e. by 70MW. So where can Uganda sell her surplus? Rwanda, Tanzania and Kenya have installed capacity above their needs. Our petty quarrels with Kigali also undermined Rwanda as a destination for our power exports. The only export options are South Sudan and DRC – countries lacking basic transmission and distribution infrastructure (both hard and soft) to evacuate power from the border, sell it, collect money and pay us back. So export markets are closed.

Therefore, only by attracting large manufacturing firms can Uganda hope to increase demand for electricity to meet supply that we shall have. Otherwise we have installed capacity way above our current demand yet we have foreign loans to pay back. This is a strategic risk for the country, which Mao, Mafabi and Musumba could have raised. They didn’t even try.

Government has been investing in hardware (infrastructure) but has done little investment in software (policies that can make investment in manufacturing attractive). For example, there is limited access to long-term affordable credit. Three years ago government decided to recapitalise Uganda development Bank (UDB) with Shs500 billion but only Shs200 billion has been released so far, a drop in the ocean. Government can do more on Ease of Doing Business, on tax and other policy incentives that make investments decisions by firms difficult to resist. On the contrary, the Uganda government seems forever committed to IMF and World Bank policies that are out-dated, ideological, and inappropriate for our context.

What is even absurd is that government has not synchronised her investment decisions. For example, last year a private investor completed a 43MW dam in Aswa. Six months later there is no transmission line to take this power anywhere it can be consumed. Consequently, under the Power Purchase Agreement, the government is paying $43,000 per day to this investor for no electricity being produced because it cannot be evacuated. Delays in procurement to build a transmission line are evidence of disorganisation and incompetence. Even Karuma will be completed before a transmission line has been built. Uganda’s opposition lack even such basic facts as ammunition in their struggle. Why? Because they only care about political power, not policy!

There are many more issues about our national debt and the existing plans or lack of them to make its use more productive. Yet only Bahati made informed arguments. The rest were totally clueless. I am aware that it is fashionable and cool to be seen to oppose Museveni these days, regardless of one’s values, cause or facts. For the mass of frustrated angry Ugandans on social media, a panellist only makes sense if they just denounce Museveni. This has led to development of a culture that does not care about the quality of the alternative. This attitude can cause change but not for the better. Remember righteous anger is rarely a basis for sound public policy or liberal politics. All too often it has led to anti-democratic outcomes and destructive policies.

It is understandable that many Ugandans are tired of Museveni’s long and corrupt rule. Yet those who denounce his misrule are often beaten and teargased by the police, their rallies blocked violently. This has created a lot of sympathy for the opposition but equally blinded many well-meaning intellectual elites in Uganda from the glaring disaster in the opposition; especially their lack of basic interest in and knowledge of public policy.

Many Ugandans hope, quite naively, that any change would be better. I do not agree. Opposition politicians must be taken to task to explain their policy alternatives; we must demand that they do serious research about public issues. The opposition politicians I watched on television that January 8^th night are ill equipped to even manage the economy of a sub-county.

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