Uganda: Is Uganda's Debt Sustainable?


Prof Hyuha Mukwanason wrote in Daily Monitor of April 13 a 4,214 words-long article responding to my article published in The New Vision of January 21 (2,400 words). In his response, he purported to demonstrate that Uganda's debt is unsustainable. Yet nowhere in that long article does he make any effort to meet this promise. Instead he went into a host of irrelevant theoretical abstractions about debt generally that have little or no relevance to Uganda's actual debt situation, ironically the very issue he was criticising me for.

For instance, he does not bother to state Uganda's debt stock, its tax revenues, foreign exchange earnings or even the annual cost of servicing these debts. He also makes no reference to the debt burden (the ratio of debt service to revenue) - the very elements that are fundamental to explaining whether a country's debt is sustainable. He does not refer to the purposes for which the country is accumulating debt (such as investments in transport and energy infrastructure) and whether they have potential to give the country future productivity gains from whence it can generate tax revenues and export earnings to meet her debt service obligations.

I got the sense that Hyuha went to his notes, which he took as a student or a lecturer, and just copied and pasted them for an article perhaps to show-off that he knows the economics of debt. This is why his article made a lot of abstract theoretical arguments common in textbooks but had nothing concrete about Uganda's debt. Yet as an academic who claims to have studied and "published two graduate level textbooks" on the economics of debt, readers should be looking up to him for a concrete (as opposed to an academic or classroom) analysis of our debt situation.

Public debt is not a static figure. On any given day, week or month, government signs new loans and services others. To be accurate one has to pick a date and say on this day, Uganda's debt was this or that. As of end of June 2018, Uganda's total public debt was $10.5 billion or Shs 41.3 trillion. Of this foreign debt was $7.2 billion (68%), domestic debt $3.3 billion (or Shs 12.4 trillion) - 32%. Domestic debt interest payments were Shs 2.0 trillion per year while foreign debt service was $209m (Shs 800 billion) per year.

Ability to service this debt depends on government revenue and on the credit worthiness of a country - which allows it to borrow new loans to pay old ones. Government of Uganda collects tax and non-tax revenues and also gets grants (a part of foreign aid) all of which it uses (or help it) pay local debt. It also uses her revenues to buy foreign exchange to pay foreign currency denominated debt. Shs2 trillion domestic debt service is expensive and has many negative consequences on private sector growth but it is only 11% of domestic revenue (domestic revenue is Shs 18 trillion). Is this unsustainable? If yes, how and why?

Hyuha knows or should know that a country cannot default on local-currency denominated debt because it can always print the money and pay its creditors. Of course there is a cost here: if government prints money not backed by an appropriate level of output, it will cause inflation. But that depends on how much inflation a country is willing to tolerate and the effects of this on the cost of future borrowings. William Easterly and Michael Bruno (both economists at the world bank when they did this study) have shown that below 40%, inflation is not very harmful to economic growth. There are many arguments about inflation here that will divert my argument, so let me reserve them for another day.

So this leaves the issue of Uganda's debt sustainability on the foreign debt, which is $7.2 billion. Although this is more than double domestic debt, its service is $209m (Shs800 billion). This is because it is given on highly concessionary terms, a factor that Hyuha dismisses. Ideally, foreign currency denominated debt can be worrisome because a country needs to earn the foreign exchange to pay it back. Uganda earns $7.0 billion in export of goods and services. So foreign debt service here is only 3% of export earnings, 4.44% of domestic revenue. Is this unsustainable?

For a historical perspective, in 1990, average debt service in Sub Sahara Africa was 50% of export earnings. Some countries debt service obligations exceeded their export earnings. IMF and other donors were always rescheduling these debts for countries in this region continually but our countries could not pay. By 1989, more than 100 loans had been rescheduled without making our countries solvent.

One cannot analyse debt sustainability without looking at a nation's financial assets i.e. its net debt (total debt minus financial assets). If a country has a lot of foreign exchange reserves or a sizeable sovereign wealth fund, it means it has money it can draw to pay its debt obligations. Uganda has $3 billion in foreign exchange reserves, which makes our net debt $7.5 billion.

Finally we come to the issue of the debt burden, which is the ratio of debt service to revenue. The higher the percentage of debt service to public revenues, the greater is the debt burden. Uganda's total debt service is Shs 2.8 trillion which is 15% of revenue! Given that Uganda also gets grants from donors, this reduces her debt burden. Of course one can say that donations cannot be part of such a calculation. But that would be a technical argument. As long as one has generous benefactors willing to pick some of his/her bills, their debt burden would be low.

Finally, Hyuha's arguments are not without merit. There are many cases of mismanagement of foreign loans, corruption, delays, etc. some of which Hyuha quotes from an IMF assessment. Indeed, in my article I mention some. While it is important to point out such weaknesses, it does not vitiate the fundamentals.

I am aware that many Ugandans are frustrated with President Yoweri Museveni's long and corrupt rule. This has led many of our intellectuals to imagine that things must be going badly for our country. This is partly correct. However, in many cases this is often not true!

Absolute success, more than absolute failure, is what drives these frustrations. The problem with very many Ugandans could be with the relative success. When they look at those around them who are doing well, they feel left behind even when their own circumstances have improved in absolute terms.


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