Will Uganda’s public debt continue to rise in 2024?
by AMOS SANDY · The ObserverUganda’s public debt has risen to unprecedented levels, reaching shillings 96.1 trillion ($25.286 billion) as of June 2023, according to the Auditor General’s report released recently.
This amount excludes the Shs 7 trillion worth of loans pending approval by parliament. Debt servicing costs now account for 32 per cent of the national budget. At the current level, each Ugandan is now indebted to the tune of Shs 2.5 million. Rising public debt coupled with growing debt servicing costs, stagnating domestic tax revenues, and declining export revenues are putting Uganda in debt distress and at greater risk of a debt crisis.
Uganda faces a critical financial challenge as interest payments on loans now consume a significant portion of the budget and domestic revenues. According to the December 2023 report from the Bank of Uganda, escalating debt service costs are straining tax revenue collection.
The central bank projects that external debt servicing will account for 35 per cent of GDP in 2024/2025. However, this is not unique to Uganda. According to a recent International Debt Report by the World Bank, “record debt levels coupled with high- interest rates have set many countries on a path to crisis”.
The report further notes that “every quarter that interest rates stay high, results in developing countries becoming distressed – and facing the tough choice of servicing their debts or investing in public health, education or infrastructure”.
Multiple factors, such as a shift in spending toward infrastructure and the impact of the Covid-19 pandemic, explain the recent rise in Uganda’s public debt. Before the pandemic, public debt as a percentage of GDP was 34.6 in 2018/2019 but surged to 50.6 in 2021/2022, and is projected to reach 53 per cent in 2023/2024. This surpasses the IMF’s recommended threshold for low-income countries at 50 per cent.
Other shocks, such as global fluctuations in interest and exchange rates, are also contributing to the rise in Uganda’s external debt due to foreign currency exposure. A depreciating domestic currency increases the value of foreign currency-denominated debt, exacerbating the external debt burden.
Rising public debt has led to growing public anxieties and sparked concerns about potential sovereign default and a debt crisis if the current trend is not promptly addressed. High debt levels hamper economic growth, curtail public and private investment, and strain social service delivery.
The soaring costs of servicing public debt divert crucial resources away from social services, resulting in disproportionate spending on debt at the expense of vital sectors such as infrastructure, labour productivity, human capital, and public health. Sluggish tax revenue collection exposes Uganda to debt servicing vulnerabilities. Declining domestic revenues are expected to push Uganda’s debt beyond the current status of 53 per cent of GDP.
If we do not control the prevailing debt trends, despite the government’s measures to reduce the debt burden, including fiscal consolidation and obligations to service earlier debt, I foresee debt financing turbulences emerging in 2024.
Growing evidence suggests that Uganda may become caught up in a “public debt safety trap” where a favourable debt position, largely based on traditional debt sustainability metrics, falsely signals that the country has more fiscal headroom to borrow, especially when debt is still below the set national or international limit.
The writer is a research associate at EPRC, Makerere University.