How to ease Uganda’s soaring public debt stock

This will mainly come from budget support (Shs2.7 trillion), project support (Shs8.2 trillion), domestic debt (Shs3.3 trillion), and Shs3.5 trillion FY2023/2024 supplementary budget. In addition, the Bank of Uganda has kept a high Central Bank Rate to control inflation and bring it within its target of 5 percent. 

However, this has led to expensive domestic credit for the government, increasing interest payments on loans. 

This has also made it hard for the private sector to obtain affordable credit for private investments, despite the low-cost government support for post-Covid-19 businesses, as these funds come with stringent requirements. 

The government must prudently manage the debt through fiscal consolidation, given the various competing social and economic financing demands and challenges such as climate change adaptability that require significant financing. 

Uganda’s resource envelope is under strain due to dwindling donor support, forcing the Finance ministry to repurpose the national budget. However, to determine Uganda’s debt sustainability, I use metrics of the debt-to-GDP ratio, total domestic interest payments-to-revenue ratio and external debt service-to-revenue ratio. 

The real debt-to-GDP ratio has been rising, for instance from 48 percent in the fiscal year 2021/2022 to 53 percent in the fiscal year 2022/2023, which shows unsustainability. The total domestic interest-to-revenue ratio and external debt-to-revenue ratio show otherwise. Against a set target of 14.0 percent as stipulated in the Charter of Fiscal Responsibility, in fiscal years 2022/2022, 2022/2023 and 2023/2023, the total domestic interest payments to revenue ratios reduced from 15.2 percent, 14.6 percent and further to 14.1 percent, respectively. 

Further, against the low income countries’ debt sustainability threshold of 18 percent, the external debt service to revenue ratio has been 9.5 percent, 12.9 percent and 12.1percent respectively, this is below the target of 18 percent. 

Therefore, using the external debt to GDP ratio reveals that Uganda is still capable of repaying its external debt obligations without much difficulty. Apart from fiscal consolidation, the government can leverage the available debt relief initiatives such as The Common Framework for Debt for low-income counties developed by G20 countries and the Paris Club, aimed at supporting low income countries in dealing with insolvency and liquidity problems in their debt obligations. 

Also, the government can introduce subsidies for climate change interventions around renewable financing. This step will create the fiscal space for funding other priority needs. Further, the government should explore innovative instruments to mobilise resources for climate finance such as the issuance of a framework for green bonds. The framework will help in mobilising funds to support climate-smart initiatives in the country. 

In conclusion, Uganda’s public debt has risen at an alarming rate, and while it is currently sustainable, there is a need for prudent management to ensure that the country’s debt levels do not become unsustainable. The government must find ways to meet the competing social and economic financing demands while managing the debt and avoiding overburdening the country’s already constrained resource envelope. 

The government must use the available debt relief initiatives and subsidies for climate change interventions to address the challenges that come with debt servicing for the sustainable development of the country.

Mr Ronald Ochen is an Economist at the Civil Society Budget Advocacy Group. 
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