Money goes through a money-counting machine. The Ugandan government has borrowed to build roads and power plants, among others, because the up-front costs can be extremely high. PHOTO/FILE
Year in year out, Uganda’s government does budgets for recurrent and development expenditures both at the local government and central government levels.
This is because, through the budget, the government can influence income distribution, provide services to its citizens, and transform the country through strategic investments and resource allocations.
However, over the years, there have been problems related to unspent money, which is always taken back to the consolidated fund account, which affects budget performance.
Unspent money
Responding to Prosper magazine’s inquiry over the unspent money, the executive director research Bank of Uganda, Dr Adam Mugume says unspent money is usually returned to the consolidation account under the single account framework and becomes part of the funding for the subsequent years through the usual parliamentary appropriations.
“However, there are cases where spending units retain the unspent money if the work is still ongoing because returning it to the consolidation account would involve re-budgeting,” he said.
As Uganda’s government keeps on borrowing externally and internally, the amount of undisbursed loans keeps on accumulating, which requires a solution so that the money is disbursed in time.
Dr Mugume says on average, about $3.6 billion (Shs13.5 trillion) of the debt committed is yet to be disbursed largely because of the projects’ implementation time lines.
A woman counts money in a bank.. The Ugandan government has borrowed to build roads and power plants, among others because the up-front costs can be extremely high. PHOTO/EDGAR R. BATTE
“For instance, a loan for a power dam is committed at signing of the loan agreement but the construction will take more than five years, meaning that disbursement of the loan will be per milestone achieved rather than the total loan contracted,” he says.
The external debt situation of many developing countries remains a source of serious concern including Uganda. The servicing of debt obligations built up over the years of high borrowing has reduced consumption levels in some problem debtor countries below where they might have been otherwise and has reduced the level of investment, thus limiting future consumption.
Regarding Uganda’s performance on repayment, Dr Mugume explains: “Public debt as a means of finance enables a country to finance its public expenditure which improves social welfare and encourages economic growth and development through capital accumulation, for example infrastructure.”
Dr Mugume notes that Uganda’s external debt is currently estimated at 27 percent of Gross Domestic Product and Uganda has not defaulted on its debt obligations since the 1990s. In FY2023/24, external debt service is estimated at about $1 billion. This is arising from interest payments for passed borrowing, which have supported the current growth of 6 percent.
“The biggest challenge, however, is growth in the tradable sector, which should give higher export proceeds, has been moderate. Like a double-edged sword, drawing from recent external debt servicing challenges in Kenya, Ethiopia, Ghana, and Zambia, foreign borrowing that doesn’t result in higher foreign currency inflows can result in debt servicing pressures,” he says.
When it comes to what the government is spending on interest payments, Dr Mugume says in FY2023/24, interest payment was projected at 3.2 percent of GDP or Shs 6.6 trillion. The bulk of this is domestic interest payment, estimated at 2.6 percent of GDP in FY2023/24.
Impact on economy
How is this affecting the country in the form of economic management? Dr Mugume says the government borrows to spend beyond what it can or wants to raise through revenues largely to invest in the future. The Ugandan government has borrowed to build roads and power plants, among others because the up-front costs can be extremely high, and so repayment is spread over many years.
About $3.6 billion of the debt committed is yet to be disbursed largely because of the projects’ implementation time line. PHOTO/Edgar R. Batte
However, he says: “These investments boost longer-term growth, justifying the borrowing. As well as physical capital, the government can also invest in human capital, such as education and health. Again, the long-term benefits should outweigh the cost of borrowing. Therefore, the interest payments estimated at 3.2 percent of GDP should be evaluated based on the returns from public investments.”
Dr Mugume says so far, with growth projected at 6 percent in FY2023/24 and projected above 6.5 percent in outer years. This suggests higher returns to government borrowing for public investments. Nonetheless, borrowing can rapidly become expensive and too risky because of the changes in the global and domestic economic conditions. This points to a need for the government to minimise the cost of borrowing—the interest rate—while preventing the structure of its debt from becoming too risky.
Ms Hilda Tumuhe, the programme officer debt and aid SEATINI, explains to Prosper magazine that while undisbursed debt stock decreased by 1.32 percent in December 2023 to $3.78 billion from the previous year as stated by Ministry of Finance in March 2024, government still incurs commitment fees on such debt.
The Auditor General’s report for FY 2022/23 highlighted that government paid Shs112.018 billion as commitment in FY 2022/23, indicating a 44 percent increase from Shs77.524 billion in FY2021/22.
Ms Tumuhe says this can be attributed to key constraints in project implementation, such as design challenges, right-of-way issues, delayed procurements, and the unreadiness of projects at the loan stage, among others. These persistent public investment management challenges highlight the complexity of reforming Public Investment Management frameworks.
“Therefore, the Public Investment Management Unit at the Finance Ministry should ensure that proposed debt-funded projects in the National Budget have undergone through the PIM system (for example feasibility studies fully conducted, availability of counterpart funding) to ensure that public debt is acquired for only ready projects to avoid costs that arise from acquisition of bad debt,” she says.
Interest repayments
Speaking about the interest repayments on borrowed funds, Ms Tumuhe says in FY2024/25, interest payments will account for Shs9.546 trillion, reflecting a 58 percent increase from Shs6.046 trillion (projected outturn) FY 202/23.
Over the years, the cost of Uganda’s debt has been increasing as reflected by the increasing interest payment as a percentage of GDP ratio from 1.8 percent in FY 2017/18 to 3.8 percent in FY22/23.
“This is as a result of a significant increase in the domestic debt stock and commercial external borrowing which are both typically characterised by high interest rates. Moreover, government has continued to utilise such expensive borrowing to finance recurrent expenditure, for example, Auditor General in his report for FY 2022/23 highlighted that Government obtained two (2) non-concessional loans for FY2022/23 amounting to $739,812,180 which was intended for budget support,” she says.
For fiscal economists, the concerns in budget execution are whether deficit targets are likely to be met and whether any budget adjustments, both on the revenue and expenditure sides, agreed upon during the preparation stage (or in-year), are being implemented as planned.
Concerning budget expenditure, the key issue is whether the outturn is likely to be within the budget figure among others.
