Government debt sustainable but risk is imminent

When one lives beyond their means, it can be catastrophic. Evidently, in the case of Uganda, the first class infrastructural investments in roads has come at a risk of heightening debt to unsustainable levels. Uganda has a history of an unsustainable debt burden that translated into debt relief in 1998 and 2000, and eventually in 2006, which reduced the country’s debt stock to $1.3b from $4.5b.

The recent debt sustainability analysis points to depreciation of the Shilling as having increased debt burden. Uganda’s debt threshold was revised downwards to 40 per cent from 50 per cent on account of governance, institutional and policy gaps as assessed by the World Bank, which downgraded performance from strong to moderate. The weakening Shilling coupled with the growing fiscal deficit and heightened interest rates have led to revision of credit rating by Moody’s from B1 to B1 negative.

Uganda’s external public debt exposure has been growing at an annual average of 30 per cent since 2007, increasing from $2.45b to $9.2b by February 2015. The Shilling has depreciated by nearly 30 per cent implying that Uganda’s external debt has grown by $5b times 600, thus by Shs3 trillion. In short, a depreciation of the Shilling by 20 per cent leads to an increment in external debt to a magnitude of 30 per cent of annual budget or 4 per cent of GDP. This is way and above the annual target of increasing revenue to GDP ratio by 0.5 per cent per annum.

In addition, the trend of approved undisbursed external debt has incrementally been growing reaching $2.09b as of February 2015 excluding approved loans of $2.9b. The associated commitment fees paid on undisbursed loans attracted $2.8m during the 201415 financial year with the slow disbursement in part explained by borrowing for projects not ready for implementation.
While external borrowing allows a country to secure funds for domestic currency strengthening, the new forms of borrowing from non-traditional countries such as China are associated with a high import component that will continue to weaken the Shilling.

On the domestic scene, the risk emanates from interest rates on government securities that have increased from about 12 per cent to an average of 20 per cent over the last year. As of June 2015, the total outstanding government domestic debt, at cost, was Shs9.93 trillion, higher than the total public revenue in the 201415 financial year of Shs9.72 trillion. Given that the majority (83 per cent) of domestic securities have maturity tenors of less than five years and low tax revenues, the imminent risk is roll over of the maturing securities at higher interest rates. Nearly Shs5 trillion is to be rolled over in the 201516 financial year.

Uganda’s debt is assessed as sustainable premised on the assumption of future austerity but whether this is feasible in the current electoral cycle remains to be seen.

Enock Twinoburyo is a PhD research fellow at the University of South Africa. Email:



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