• Mon. Sep 25th, 2023

How Uganda’s Spiraling Debt Burden Affects Budgetary and Taxation Policies

The Daily Monitor has reported that Uganda’s debt crisis worsened because of the COVID-19 pandemic. The government borrowed excessively to cushion the economy from the pandemic’s adverse effects. The government got a sum of 1.8 trillion Ugandan shillings ($488.7 million) from the International Monetary Fund (IMF). It will take Uganda over five years to be clear this debt with taxpayer funds.

According to the Auditor General’s report, John Muwanga, in one year, the overall debt portfolio rose from $12 billion in 2018/19 to $15 billion in 2019/20. The government borrowed USh4.3 trillion ($1.2 billion) for anti-Covid-19 interventions alone. Amid growing concerns over Uganda’s ever-spiralling debt burden and limited capacity for the economy to service its debt obligations, the matter dominated budget debates in parliament this month.

Uganda’s public debt has increased to approximately 70 per cent in the last three years, from USh.33.5 trillion to 56.83 trillion by June 2020, according to the Auditor General’s report. Fitch Credit Rating has revised Uganda’s credit rating outlook from “stable to negative”. Fitch is a leading provider of credit ratings, commentary, and research for global capital markets.

The Uganda Revenue Authority (URA) reports that they have proposed tax measures for the next financial year to cover up a tax deficit of 1.3 trillion Ugandan shillings registered in the first six months of the 2020/2021 financial year.

Uganda’s Debts Accumulate

With the ambitious oil pipeline construction project from Hoima to Tanga in Tanzania, the worst seems to lie ahead, as reported by Daily Monitor. As its preliminary financial contribution to the planned East African Crude Oil Pipeline (EACOP), the government recently received a $130 million (USh.472B) loan absorbed by local commercial banks.

Speaking anonymously to Daily Monitor, some government officials said the biggest concern with such loans is they often come with a host of unfavourable terms. These include waiving sovereign immunity and pre-determined contracts, which can harm the country’s balance of payment position.

Daily Monitor reported that the infrastructure bond proposed would fund a relatively favourable solution. This is because interest payments (and repayment of the principal) directly link to the cash flow revenue generated from the completed project. Thus, the finance ministry is contemplating borrowing from commercial banks. Alternatively, they plan to use this approach to raise the remaining balance of $173 million (USh.628B). This sum will finance the pipeline in the second year once construction starts.

Uganda’s Debt: How Deep is Uganda Sinking?

Whereas the country’s tax revenue has been improving over the years, her tax-to-GDP has not reflected a similar trend. Daily Monitor further reported that the Ministry of Finance has often downplayed concerns over the national debt burden, stressing it is within “manageable levels.”

A financial analyst, acting as Financing Assistant at SEATINI, Ausi Kibowa, was quoted by Daily Monitor, saying, “the budget and taxation advocacy group holds an entirely different view.” “The fact that we are paying our debt doesn’t mean it is not a problem.” “The cost of serving this debt keeps rising a year after another, and you say that is not a problem?” Kibowa asked regarding Uganda’s ever-spiralling debt burden.

The Daily Monitor quoted Auditor General, John Muwanga, as saying, “As Government continues to support economic recovery through the provision of a stimulus package to various sectors, we project the debt to increase further over the near term.” I advised the PS/ST (Secretary to the Treasury) to devise a comprehensive strategy to align revenue mobilisation and fiscal policy management, as well as reducing rationalising government expenditures.”

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