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Interest payments on public debt now takes 23.5% of tax revenues
Interest payment on particularly domestic public debt has been increasing, clouding out other priority budgetary items. Photo / Edgar R Batte
What you need to know:
- The public debt, Bank of Uganda indicates, had by March grown to Shs86.35 trillion, which is approximately 49.6 percent of gross domestic product
The share of interest payments on public debt increased by 2.9 percent in the quarter ended March, according to Bank of Uganda.
In details contained in the Bank of Uganda April State of the Economy Report, which assesses macroeconomic developments and associated monetary policy decisions, indicate that the increasing share of debt servicing is affecting short and long-term prospects due to limited resources to fund development expenditure.
The report, which was published on Tuesday, indicates that interest payments on public debt now take the largest share of tax revenue, thus “clouding out other priority budgetary items”.
Public debt, which the Central Bank indicated had grown to Shs86.35 trillion in the quarter to March, is now approximately 49.6 percent of gross domestic product.
It remains a serious challenge on economic growth, amid relatively flat growth in tax revenue, which has been hit by a slowdown in growth occasioned by Covid-19-related effects and the Russia-Ukraine conflict.
The report further indicates that tax revenues from, especially indirect taxes, undershoot their targets during the period, resulting in a fiscal deficit of Shs6.32 trillion, worsened by underperformance in grants.
During the period ended March, Bank of Uganda indicated that the continued growth in public debt was exerting pressure on tax revenues with the ratio of total interest payments to domestic revenues increasing to 23.5 percent from 20.6 and 21.3 percent in the same periods in 2022 and March 2021, respectively.
For instance, between January and March, the report noted, the value of domestic revenues that went into interest repayments, increased by 25 percent or Shs979.1b, rising from Shs3.45 trillion in the same period in 2022 to Shs4.35 trillion.
Of the Shs4.35 trillion, at least Shs3.38 trillion went to fund domestic debt interest payments, which the report indicated had grown from Shs2.96 trillion in the same period in 2022.
Domestic debt repayments, Bank of Uganda noted, contributes the lions share, taking 18.2 percent of tax revenues.
The rapid growth in interest repayments, on particularly domestic debt, the report noted, had continuously breached the 2018 Public Debt Management Framework, which requires the threshold to remain at 12.5 percent.
The high interest repayments on domestic debt suggest that government has been borrowing internally at relatively high interest rates.
The increased internal borrowing, as well, remains a challenge to the private sector, given that it has to compete with government to borrow money from the same sources.
During the quarter to March, the report indicates, interest payments on external debt increased substantially to 94.5 percent from Shs496.8b in the same period in 2022 to Shs966.3b.
