Why our country continues to take more and more loans and what this means for the economy
THE LAST WORD | ANDREW M. MWENDA | Uganda is at a crossroads. Early this year, government passed a budget of Shs32 trillion for the 2020/2021 Financial Year. It also projected to collect Shs21.8 trillion in taxes and then would raise the rest from international loans and grants, non-tax revenues and domestic borrowing. Then COVID struck.
The lockdown slowed economic activity. So government revised its revenue targets downward to Shs19.3 trillion but did not revise its expenditure plans.
Governments can respond to a crisis like the one created by COVID in four ways: by collecting more money through taxes, or printing money, imposing austerity (i.e. cutting spending) or by borrowing.
It is difficult to raise significant sums of tax revenues in a short period. In any case, precipitate tax hikes can be counterproductive since taxpayers can take evasive actions or even stop producing.
The Uganda Revenue Authority (URA) is also small and underfunded to reach every segment of the economy and collect taxes. To make matters worse, COVID lockdown led many companies to downsize and therefore unable to pay more in taxes.
So the government has only three viable options: to print money, impose austerity or borrow. If government prints money it risks inflation. There is always a fear that when a government gets on the money printing trade mill, it is hard to stop the slide to hyperinflation. And once inflation goes above 20%, it creates a self-fulfilling prophecy. Once above that threshold, it is hard to stop it climbing to 100%. Of course the inflation fear is sometimes overstated.
For instance, what is the reasonable level of inflation that a country should target? No one has a clear answer to this question. The government of Uganda targets inflation not to exceed 5%, the government of the United Kingdom targets 2%. However, South Korea, for instance, had inflation averaging 19% between 1960 and 1990. Yet this was also the period of its intense transformation from a poor peasant nation into a rich, modern industrial society. France and Germany had inflation of up to 13% to 17% between 1945 and 1980; the period of their rapid GDP growth, which marked their recovery from the destruction wrought by World War Two.
Indeed, William Easterly, a professor at New York University, and Michael Bruno, previously a chief economist at the World Bank, published a research paper in 1998 where they argue that below 40%, there is no evidence that inflation is harmful to growth. But government of Uganda is hooked to the magical 5% limit and is unlikely to change this position. However, sources tell me they have printed some money to finance the current budget but I do not know how much.
The theoretically feasible option would have been austerity, but this is politically difficult. This is because cutting spending would antagonise many constituencies in an election year. For instance, government of Uganda will not cut salaries of public sector workers without facing a strike. It will not cut back on its road construction agenda, because we are facing elections. And there will be no cuts on our obese political patronage for the same reason i.e. elections. The problem with public spending is that once a government makes commitments, it is forever hard for it to change course.
Because of the above, government has been on an international and domestic borrowing spree. This has raised Shs6.6 trillion of new loans i.e. over and above the original borrowing plans. The new money is to cover a revenue shortfall of Shs2.5 trillion and the rest is going to the stimulus spending and other new expenditure demands that arose – like classified. If you cannot read between the lines on what increased “classified” spending does around elections, stop reading this article right here. But our debt levels are already high.
Most governments avoid taxing their citizens or squeezing public spending because both options are not popular with the public; especially the voters. Borrowing is always a sweet option. For instance, it is the rich who lend government money (by buying its treasury bills and bonds) and thereby make a killing off interest paid on them. So instead of squeezing its rich citizens by taxing them to finance gaps in the budget, borrowing enriches them by giving them fresh investment opportunities. So they can now sit doing nothing but earning from government paper.
In an ideal world, borrowing is not very bad for the country if the lenders are its own citizens. Take the example of a country where all the holders of government treasury bills and bonds are its own citizens. Also treat the country as a company and give it a balance sheet. This is actually the position of Japan whose debt to GDP ratio is about 280%. Whatever lies on the government liability side are actually assets to citizens. Here you can have an indebted state but a wealthy citizenry. In such circumstances, the nation has zero net debt since the liabilities of government are assets of citizens.
A government cannot default on such loans, which are given in local currency since it can print its own money. Historically, some countries have used inflation (printing money) to pay off their debts – Britain and France being prime examples after World War Two. Many analysts ignore the fact that inflation can be redistributive. While it destroys the value wages for fixed income earners (who are often the poor), it acts as an effective tax on idle capital. When rich individuals are not using their capital productively but lending it to the government to earn interest, they become a rentier, as opposed to an entrepreneurial, class.
Uganda’s case is different. The largest chunk of our loans is from abroad and foreign currency denominated. Its interest costs are low because most of it is concessionary. This demands that we sustain export revenue growth otherwise the risk that we can fail to raise dollars to pay it off remains. Unless productively used, such loans repayments are a net deduction from the nation to foreigners. Yet even our domestic debt is largely held by foreign interests i.e. offshore investors (we can best call them speculators) and the multinational banks that dominate our banking industry. This means that a lot of what we pay as interest goes abroad, enriching fat capitalists in London, Paris and Dubai. While we may be happy to borrow, we must know who we are enriching.
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