Uganda’s external debt servicing will account for 35% of GDP in FY 2024/2025

Summary:

• The African Development Bank is meeting with member states in Nairobi to address Africa’s debt burden, with a focus on reforming the global financial system. In Uganda, concerns are rising as the country’s debt reached 96.1 trillion Shillings by March 2024. Despite advocacy for special drawing rights (SDRs) from the IMF, experts doubt their efficacy due to Uganda’s small IMF voting share.

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The African Development Bank has initiated meetings with member states in Nairobi, placing the issue of the African debt burden at the forefront of discussions. The meetings are held under the theme, “Africa’s Transformation, the African Development Bank Group, and the Reform of the Global Financial Architecture.” This issue has heightened concerns among experts, economists, and civil society organizations back in Uganda. They assert that even special drawing rights (SDRs) cannot alleviate the country’s financial woes.

Uganda confronts a pressing financial dilemma as a substantial portion of the budget and domestic revenues are now absorbed by interest payments on loans. As per the December 2023 report issued by the Bank of Uganda, the mounting costs of servicing debt are placing immense strain on tax revenue collection, with UGX 32 out of every UGX 100 collected being allocated to debt service.

According to projections by the Bank of Uganda, external debt servicing will constitute 35% of GDP in the fiscal year 2024/2025. The mounting debt levels in Uganda, which reached 96.1 trillion Shillings as of March 2024, have alarmed civil society organizations. These organizations are now advocating for special drawing rights as a potential solution to Uganda’s debt predicament.

Understanding how special drawing rights work is crucial. SDRs are allocated to countries based on their voting share at the International Monetary Fund (IMF). Many African countries have very small voting shares, resulting in minimal SDRs compared to their substantial financing needs. Observers argue that this disparity means that SDRs will not suffice to extricate Uganda from its debt crisis.

For instance, 1 trillion Shillings from SDRs pales in comparison to the country’s debt, which stands at 96 trillion Shillings as of March 2024. The debate on whether Uganda is experiencing debt distress continues, with the government cautioning about potential austerity measures. There is growing concern that the situation could deteriorate further due to the government’s excessive borrowing habits.

A significant portion of Uganda’s debt comprises short-term borrowing, particularly from commercial sources. This short-term debt has been used for long-term investments, leading to a mismatch. By the time these long-term projects begin generating revenue, the debts already need repayment. This misalignment between borrowing instruments and investment timelines exacerbates the debt problem.

For the financial year 2024/2025, out of a 72 trillion Shillings budget, only 34 trillion Shillings is allocated for debt servicing. This amount covers monetization, interest payments on both domestic and external debt, and debt rollover. As a result, Ugandans may need to brace themselves for tighter financial conditions, as debt repayment is likely to impinge on development and service delivery.

Before the pandemic, public debt was 34.6 percent of GDP in 2018/2019 but surged to 50.6 percent in 2021/2022 and is projected to reach 53 percent in 2023/2024. This surpasses the IMF’s recommended threshold of 50 percent for low-income countries. A drop in aid, budget support and development assistance from development partners due to passage of anti-gay law from 2.781 trillion to 28.94 billion has further contributed to increased borrowing to finance the gap.  Acquisition of non-concessional loans to fund current expenditures, as well as new debt for Budget support coupled with growing gap between revenues and expenditures has always meant government has to borrow to finance the deficit. Rollover of previous debt and bond switches adds to the burden.

Growing evidence suggests that Uganda may become caught up in a “public debt safety trap” where a favorable 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.

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.