Uganda is still in a position where it can sustain it current debt obligations even when the appetite for borrowing is still high, the Bank of Uganda (BoU) said in its September report on the ‘State of the Economy’.

“Despite the increase in borrowing, Uganda’s debt levels remain sustainable with low risk of debt distress; however, significant vulnerabilities are evident,” reads the report in part.

The positive report has come even when President Museveni and some activist groups in the face of Covid-19 urged foreign lenders to write off debts to the East African nation.

In May, the president called on international creditors to cancel all of Africa’s debts to ease the economic distress caused by the outbreak of the novel coronavirus.

“The external friends, if they are friends at all, should cancel all the multi-lateral and bilateral loans because this problem (coronavirus) has been created for Africa by Asia,” Museveni said.

In September, the Uganda Debt Network (UDN) declared that cancelling these debts would help Low-Income Countries (LICs) like Uganda re-direct the funds spent on servicing debts to development projects.

UDN recommended cancellation of all debts to LICs and also rooted for these countries be given a 10-year action of no-interest on new debts.

“The two-fold approaches would consign the LICs into more public expenditure investments tagged to protecting the rights and social protection of the citizens, economic recovery, improved healthcare and others,” it said.

“Uganda Debt Network implores the IMF, WBG and G.20 (world’s richest countries) during 2020 to coordinate such a compelling broad global participation of all global actors to this two-fold approach to revival of economies of the LICs, including Uganda.”

According to BoU, the total public debt stock stood at Shs56.53 trillion, 40.8 percent of GDP, as at end June 2020 which is an increase of 20.5 percent relative to June 2019.

“The increase between June 2019 and June 2020 was mainly due to a Shs6.4trn increase in external debt largely attributed to borrowings from the IMF, Trade and Development Bank (TDB), and Stanbic Bank towards countering the economic distress brought about by the COVID-19 pandemic,” the BoU report says.

“Public external debt continued to maintain the dominant share of 66.2 percent of the total public debt. External and domestic debt increased by 18.0 percent and 19.4 percent, respectively in FY2019/20. The external position in FY 2019/20 was supported by budget support loans from the Trade and Development Bank, IMF and Stanbic Bank.”

Between January and August, Uganda acquired about 16 loans acquired to counter the effects of the pandemic and for other interventions in the economy. Those loans exclude the grants and supplementary budgets at end of FY2019/20.

However, the more debts the country plunges in the harder it becomes for it to acquire loans, that is, it could be subjected to higher interest rates, implying more expenditure on debt servicing.

“Although the multilateral creditors have put in place facilities to dampen the adverse effects of the COVID-19 pandemic, uncertainties relating to the ensuing expenditure pressures, subdued economic activity and declining tax revenues, and a possible further decline in grants could lead to further borrowing on non-concessional terms,” reads the BoU report.

“The associated increase in interest payments will be a substantial drain on resources that could have otherwise been used to finance development.”

In Uganda, debt repayment remains a key constraint to comfortable fiscal space and liquidity positions. Uganda, for instance, paid $42.8 million (including $4,488 i.e. nearly $5 million interest payment) between January and December 2019 as external debt servicing alone.

This translated into an approximate Shs160 billion off estimated Shs19 trillion domestic revenues under the Shs40 trillion total national budget for fiscal period 2019/20.

The Covid-19 calamity alone has seen Uganda’s abject poverty levels elevate from the prior 21% to a projection of 25% between January and August 2020, with over 2.6 million people likely to slip into poverty by December 2020.

“Numerally, this will add onto the 8 million poor people at pre-Covid-19 time; thus, totaling up to nearly 11 million people (out of a total of 43 million) in 2020 alone, even higher if vulnerability numbers (due to job loss, shrunk salaries and wages, excess production capacity of firms) were to be included,” UDN said in September.

Uganda allocates more funds to debt servicing than to the budget for healthcare, social development and agricultural sectors.

Meanwhile, Uganda’s balance of payments recorded a surplus of US$625.5 million, higher than a surplus of US$ 68.7 million recorded in FY2018/19.

The current account deficit improved to US$2,121 million or 5.7 percent of GDP from a deficit of US$2,541.5 million of 7.2 percent of GDP in FY2018/19 resulting from a lower trade and primary income deficits and higher secondary income surplus due to higher non-governmental organisation (NGO) inflows.

According to the report, the services account deficit deteriorated substantially to US$ 1,035 million from US$ 356.9 million. The surplus on the financial account was US$2,275 million during FY 2019/20, owing mainly to lower foreign direct investment inflows coupled with sustained portfolio investment outflows.

The financial account inflows were sufficient to absorb the CAD; consequently, there was a build-up in reserve assets to the tune of US$ 625.5 million during FY2019/20.

Private Sector Credit subdued

According to BoU, growth in private sector credit (PSC) remained subdued in the quarter to July 2020 on account of the decline in economic activity coupled with poor asset performance.

“The slow growth in credit was aggravated by business closures due to the lockdown aimed at containing the spread of the COVID-19 pandemic,” the central bank says.

“The average year-on-year growth in PSC averaged at 8.9 percent in the three months to July 2020, down from 10.5 percent in the previous quarter. New net lending in the quarter to July 2020 mainly comprised of capitalized interest which rose to Shs158 billion in July 2020 up from Shs96.6 billion in April 2020 reflecting bank of Uganda’s credit relief measures in response to the COVID-19 pandemic.”

The report shows slower growth in lending to major sectors of the economy during the quarter to July 2020. Average annual credit growth to the agriculture, manufacturing, trade, personal & household and Building, mortgage, construction and real estate sectors declined to 9.0 percent, 0.6 percent, 3.4 percent, 5.8 percent and 12.7 percent respectively in the three months to July 2020.

“Weak credit disbursement to major economic sectors poses challenges for private investment and consumption and may further constrain economic growth prospects,” the report shows.

On a good note, high frequency indicators of economic activity show there was recovery in the three months to August 2020 following the easing of the lockdown in May 2020. The month-on-month growth in the CIEA grew by 5.7 percent and 3.1 percent month-on-month in June and July 2020, indicating a pickup in economic activity relative to the contraction registered in the three months to May 2020.

In addition, the Stanbic Bank Uganda Purchasing Managers’ Index (PMI) for August 2020 also indicated continued improvements in economic activity.

However, going forward, many consumers are likely to be hesitant to resume their previous spending patterns, partly due to fears of contracting the virus and uncertainty about earnings.

“Moreover, even those whose incomes were not affected may increase their need for precautionary savings,” says BoU.

“Furthermore, low exports of goods and subdued tourism receipts are projected to continue to eight on economic growth given weaker global demand. Therefore, economic growth in Financial Year (FY) 2020/21 is projected in the range of 3.0-4.0 percent, further increasing to 5.0-6.0 percent in FY 2021/22. Economic growth is consequently expected to remain below the potential growth rate until FY 2022/23.”