Uganda’s debt spills over amid shrinking revenue, rising expenditure
The government last week secured a $130m (Shs472b) loan syndicated by local commercial banks as its initial financial commitment to the proposed East African Crude Oil Pipeline (EACOP) to run from Hoima in mid-western Uganda to the Tanzanian Indian Ocean port of Tanga.
Of the $130m, $70m (Shs254b) is the first instalment of the $233.5m (Shs848b) and $60m (Shs220b) was to offset historical costs; expenses met previously by French Total E&P in pre-project construction activities. Uganda’s equity stake in the pipeline is 15 per cent, equivalent to $233m.
The commitment of the money by March 25 was a pre-condition to signing the remaining three agreements to commercialise the pipeline, and tentatively close the Final Investment Decision (FID). Hence, government had to scramble around to raise the money.
The signing of the agreements had been scheduled for March 22 but was deferred to this month—now scheduled for April 11— to allow the mourning of Tanzanian president John Magufuli.
Initially, according to people familiar with the matter, government planned to issue an infrastructure bond—a debt instrument to raise funds from the capital markets for infrastructure projects—but officials said it “did not act fast thinking that negotiations on the agreements would drag on as they have.”
“Things happened so fast to this point, and we had to quickly raise the $130m by the time of signing or at least have a commitment,” one official intimated. “The infrastructure bond, which was our plan, needed time to carefully structure; we did not have that time.”
After negotiations inside the cloistered halls of the Treasury, Finance minister Matia Kasaija late last month hurriedly tabled before Parliament a supplementary request to borrow $130m which was first rejected by Members of Parliament (MPs) but Speaker of Parliament Rebecca Kadaga forwarded the request to the committee on national economy to have it scrutinised.
French Total E&P owns a majority shareholding in the pipeline with 72 per cent, followed by the Uganda National Oil Company (Unoc) with 15 per cent, Chinese Oil Company—Cnooc with 8 per cent, and Tanzania through its national oil company, TPDC, with 5 per cent. The capex for the project is $3.8b (Shs13.8 trillion).
This shareholding, the official further indicated, “is unique in its way so we had to avoid raising money through our traditional means”—borrowing from multilateral or bilateral direct lenders.
These often come with a host of stringent conditions, including waiving sovereign immunity, and in other instances dictate Engineering, Procurement, and Construction (EPC) contractors as a condition to their loans.”
With the infrastructure bond, interest payments (and repayment of the principal) are typically funded with a direct linkage to the cash flow revenue generated from the underlying infrastructure project.
The official indicated that they are mulling the alternative to raise the remaining balance of $173m (Shs628b) to the pipeline financing in the second year once construction commences—tentatively in the Financial Year 2022/2023. And if not, government would rather turn to commercial banks.
Pushed to the limit
In the grand scheme of things, a Finance ministry official speaking anonymously explained separately that the infrastructure bond is “just another” innovative way of varying the country’s debt stock, which ballooned by 70 per cent from Shs33.5 trillion in June 2017 to Shs56.94 trillion in June 2020.
The International Monetary Fund (IMF) set a 50 per cent debt to GDP ratio threshold for developing countries but Uganda is currently inching past 49 per cent. Several developing countries including next door Kenya have over-shot the 50 per cent threshold, however, this is synced with the growing domestic revenue mobilisation.
For Uganda, while tax collections have improved considerably over the years, the tax-to-GDP has not grown correspondingly.
In 2020, taxes on products declined by 2.6 per cent to Shs8.4 trillion from 9 per cent in 2019 as the economy shrank due to the Covid-19 lockdown. Revenue collections for this FY 2020/2021 have already been downgraded from Shs21 trillion to Shs18 trillion.
Seasonally, adjusted estimates by Uganda Bureau of Statistics (UBOS) figures indicate that the GDP fell by 1.2 per cent year on year to Shs126.9 trillion in the 12 months to last December; the slowest since 1985, according to World Bank data.
Owing to its debt position, Auditor General John Muwanga detailed in his latest report that the country’s credit outlook was revised from stable to negative by Fitch ratings, a credit rating agency that rates the viability of investments relative to the likelihood of default.
“The above have had a resultant effect of a higher cost of borrowing which may deny future generations the opportunity to sustainably borrow,” Mr Muwanga noted in the report, the problem exacerbated by shrinking revenue collections amid cumulative expenditure.
Likewise, across the East African region, owing to the number of variables, debt sustainability remains vulnerable.
The ministry of Finance, and sometimes President Museveni, have routinely discounted concerns on debt arguing it is within “manageable levels.”
Last year in November, amid a cash crunch in an election season and low tax collections, the Treasury ring-fenced all available money for State House, Electoral Commission, the Defence ministry, and payment of salaries, wages and pension, debt servicing and interest repayment.
But Ausi Kibowa, the financing for development programme assistant at SEATINI, a budget and taxation advocacy group, told Daily Monitor that “the fact that we are paying our debt doesn’t mean it is not a problem.”
“To start with, the cost of serving this debt keeps rising year after another …say that is not a problem?” Mr Kibowa asked.
SEATINI and several other local non-governmental organisations (NGOs), including Uganda Debt Network (UDN), and Civil Society Budget Advocacy Group, have echoed calls by other global actors for the IMF to release up to 3 trillion Special Drawing Rights (SDR) for developing countries to avert looming debt crisis and defaulting.
The NGOs argue that the country’s “debt sustainability has continued to worsen while the fiscal adjustment remains nearly impossible” while government is faced with several tough options, including increasing taxes to raise money to procure vaccines for Covid-19.
In an interview with UK’s Financial Times last Monday, UN Secretary General António Guterres warned of a coming debt crisis for the developing world which could plunge countries into a wave of poverty and social unrest.
Mr Guterres said the fact that only six countries— Argentina, Belize, Ecuador, Lebanon, Suriname and Zambia — defaulted on their foreign debts in 2020, had created the “illusion” of stability and a “misperception of the seriousness of the situation.
For instance, some large, middle-income developing countries such as Brazil and South Africa had borrowed heavily from domestic lenders rather than from foreign investors, at interest rates much higher than those available to rich countries, making the dangers less visible than in previous emerging market debt crises.
Mr Guterres was speaking ahead of the launch of UN proposals for dealing with the debts of low-and-middle-income countries, including new finance from the IMF through an issue of its SDRs — a form of reserve asset that is used to supplement the official reserves of IMF member countries.
The proposals are expected to be approved by the G20 group of the world’s largest economies during the IMF and World Bank’s spring meetings which kick off today (Monday).
The World Bank in Kampala separately told Daily Monitor that government already signed on its Debt Service Suspension Initiative (DSSI), a global initiative aimed at easing the burden of debt service for countries during the Covid-19 pandemic. At least 46 countries out of the 73 eligible poor countries have signed on the DSSI.
This, as the Bank’s debt portfolio to Uganda, currently stands at $4.2b (Shs15.3 trillion) of which $2.4b (Shs8.7 trillion) or 57 per cent of active portfolio is “undisbursed.”
From the outset of the Covid-19 pandemic in March last year to date, the Bank says $1.4b (Shs5.1 trillion) has been approved for Uganda, including $338.2m (Shs1.2 trillion) as grants.
Notwithstanding, the Finance ministry says it borrowed less during the pandemic—between March 2020 and end of February 2021—compared to the years before.
As at end of this February, government had $846m (Shs3 trillion) in external financing, of which $611m (Shs2.2 trillion) in loans had been approved by Parliament as compared to $2.8b (Shs10.2 trillion) approved in FY2019/2020. $234m (Shs856b) were grants, 71 per cent of which went to Works and Transport ministry.
“This reduction in approval of loan financing is attributed to government being cautious about the debt-to-GDP ratios amid the Covid-19 pandemic which impacted on growth and locally mobilised revenues,” the ministry says.
Overall, as at end of 2020 the stock of foreign debt— disbursed and undisbursed—stood at $11.68b (Shs43.2trillion), of which $7.3b (Shs26.6 trillion) or 62 per cent was from multilateral creditors, $3.4b (Shs12.3 trillion) or 29.5 per cent from bilateral creditors, and $885m (Shs3.2 trillion) from commercial banks.
The IDA dominated multilateral debt with 58 per cent, followed by African Development Fund with 20 per cent, IMF with 7 per cent, and Islamic Development Bank with 5 per cent. The stock of bilateral creditors is dominated by China with 74 per cent, United Kingdom Export Finance with 9 per cent, Japan with 7 per cent, and France with 5 per cent.
However, the increase in external debt stock is mainly on account of “bullet disbursements” from Trade Development Bank, IMF, Stanbic Bank, and the World Bank’s International Development Association (IDA) for budget support financing as the Covid-19 lockdown upset domestic revenues.
Bullet disbursements are loans that require the principal balance to be paid in full when it matures rather than dividing it in instalments over its lifetime. Borrowers only cover interest payments before the final payment is due.
The country also has a stock of $4.55b (Shs16 trillion) as undisbursed debt mainly from the World Bank, China, and Islamic Development Bank, which brings the total stock of external debt to $16b (Shs59.1 trillion) up from $11b.
On the other hand, the total stock of domestic debt at end of 2020 increased by 27.3 per cent to Shs22 trillion up from Shs17.3 trillion in December 2019.
The increase was on account of the back to back borrowing to bankroll government’s Covid-19 multi-sectoral response.
The EACOP for which $130m was secured, according to government documents, is among the 40 “core projects” prioritised for external financing under the National Development Plan (NDP) III.
The projects cut across sectors, including the much-hyped Standard Gauge Railway expected to cost $2.1b (Shs7.6 trillion).
One sticking issue year-in, year-out, has been the poor absorption and utilisation of external funds, which was even worsened by the Covid-19 lockdown which brought all activities to a standstill.
The Energy sector tops the list of sectors with poor absorption of loan money acquired at exorbitant interest rates. At the same time government is spending considerably on debt servicing, leaving many sectors starved of resources.
On average, 55 per cent of the revenues collected are going into debt servicing creating a problem of lack of liquidity, which in most cases accelerate more borrowing.
By the end of last December, domestic debt interest repayment stood at Shs1.5 trillion, an increase by Shs167b, from Shs1.37 trillion in 2019; $193m (Shs703b) was the total arrears for external debt service during the same period.
Mr Julius Kapwepwe, the director of programmes at Uganda Debt Network, a debt watchdog NGO, argued that when your tax to GDP revenue yield has oscillated between 10 per cent and 13 per cent since electoral time since the December 1980 election to June 2020, “surely the implication of debt on your financial and service delivery to Mwanaichi can only rightly be anaemic, with just one government primary school in a radius of 50 kilometers in Amuru District.”
How to use the money
Mr Julius Kapwepwe, the director of programmes at Uganda Debt Network (UDN), a debt watchdog NGO, said government has always come out to allay fears regarding our debt “but what brings a tear is where some of the borrowed monies are spent.”
“Actually we think that debt is suppressed; it could be more than Shs60 trillion compared to what they provide,” Mr Kapwepwe said.
He added: “Borrowing is not the problem. It’s how we use the money; you have a Mbale–Lwakhakha road constructed with money from African Development Bank (AfDB) but what are the attendant economic functions to get the best from that road: when you drive along, all you see is drying of cassava. We need to have more linkages to these debt funded projects.”