Uganda at Debt Peak; Official says If Oil doesn’t Hit Market by 2020, It will need ‘Forgiveness’ from Lenders


Uganda will be compelled to ask for debt-forgiveness if the country does not start earning from its oil resources by at least 2020, a top official has said.

Adam Mugume, the executive director for research at Bank of Uganda, warned recently that the country was “failing to generate enough dollars to finance the interest on debt.” He was speaking at the post-budget workshop organized by the Uganda Economics Association (UEA) and the Economic Policy Research Centre (EPRC).

Mugume said Uganda’s options were limited to either oil revenue coming on board or asking for debt relief. The worst scenario, he said, was the country could default on its debt obligations if oil does not come on board by at least 2020.

A country defaulting on its loan obligations has serious ramifications. Even before the request for forgiveness is handed in, the country will have to undergo a series of high interest rates of the private sector, which could hurt businesses.

In turn, businesses will have to carry out some cost-cutting measures such as laying off staff or increasing the price of their goods and services to cover up for the interest they have to pay on the high interest rates on credit, both of which are painful. All this could lead to an economic breakdown.

When giving his speech after the 2016/17 budget, President Museveni hinted on the fact that the country’s debt was getting out of hand and the country couldn’t borrow anymore for power projects.

“We can’t borrow for Ayago power dam,” he said. “You have seen investors coming here from Turkey, South Korea. I told them if they want they should make Ayago their investment. They bring money, build it and sell power, but not us to borrow.”

On other occasions, the president has told those who claim Uganda’s public debt was getting out of hand: “I have my oil.”

This heightens debate on the fact that Uganda’s recent spike in borrowing to finance huge infrastructure projects had been pegged on future oil revenues.

It is still not clear when oil revenues will start flowing. Mugume said the central bank had stopped placing oil revenues in the country’s revenue forecasts because of the lack of clarity on when they would come on line. Government had said it would have first oil by 2009, but bureaucracies and financial disputes, especially tax, has seen the industry drag its feet.

Uganda, which has already been a beneficially of two debt reliefs from the IMF and the World Bank in the financial 997/1998 and 2000/2001 has seen its debt grow to $9.1bn (Shs 29.9tn) – about 34 per cent of Gross Domestic Product (GDP).

While some government officials say this debt is still sustainable because it is below the 50 per cent of the GDP threshold for East African countries, Uganda’s issue is that it has simply borrowed more than it can pay back.

In the 2016/17 budget, finance minister Matia Kasaija announced that the country would pay a whopping Shs 6.7tn for debt financing. This money will be borrowed as Uganda may not be able to use taxes to pay it off. Uganda Revenue Authority is expected to collect Shs 12.9tn the next financial year that starts on July 1, which, clearly, is not enough to finance the Shs 26.3tn budget.

Kasaija said the increase in public-financed infrastructure such as the Karuma and Isimba hydro power projects was taking a toll on the country. Still, government plans to invest in the construction of the refinery and an oil export pipeline, both of which have a combined cost of more than $8 billion.

In 2014, the secretary to the Treasury, Keith Muhakanizi, warned that if a country went ahead to borrow $8bn in a lumpsum for the standard gauge railway, it would plunge a country into bankruptcy. A recent World Bank report found a lot of money spent on Ugandan projects had been wasted, with every shilling spent on the projects generating less than a shilling on return.

An inquiry into the roads sector found that between 2008 and 2014, a whopping Shs 4tn was stolen at the Uganda National Roads Authority.


While the country borrows more money, a huge chunk of it is either stolen or remains unspent as it lies idle on government accounts. Remigio Achia, the legislator for Pian county in Nakapiripiriti, who has been vice chairperson, budget committee in parliament, said that there was debt approved in the seventh, eighth, and ninth parliament but had not been used.

“Government enters commitments and signs loans without making enough preparations for projects to start,” said Achia.

Of the $9.1bn debt, only about $5.3bn had been used, Mugume said. Public debt is estimated to reach Shs 30tn by June 30, 2016. Out of this, Shs 18.6tn is external debt while Shs 11.3tn is domestic debt.

Finance minister Matia Kasaija said: “Given our financing requirements for infrastructure development coupled with limited availability of concessional loans, non-concessional borrowing has risen.”

He added: “Given that non-concessional borrowing is a little more expensive, efficiency and effectiveness in the utilization of these loans is paramount.”

While Kasaija says government will borrow in the future for highly-productive fixed capital investments that can generate financial and economic returns to ensure debt sustainability, it is clear they are running out of options.

Source: Observer Newspaper Uganda