By Moses Kaketo
Speaking recently at a one day workshop organized by Economic Research Policy Centre on the theme: Linking Plans to Budgets in a constrained institutional and resource environment, Economists Fred Muhumuza noted: going by our debt serving strain, some international financiers are not comfortable investing in Uganda. They foresee a possibility of default. Foreign Investors also see a possibility of Uganda going into junk status, which can happen over-night. He warned: ‘‘we need to watch out.’’
According to the latest Bank of Uganda State of the Economy report, Uganda debt levels has moved from low to moderate. According to IMF Debt Sustainability Framework, moderate risk is step to debt distress.
There are four ratings for the risk of external public debt distress: Low risk, moderate risk, high risk and in debt distress
Generally, moderate risk is when stress tests indicate that thresholds could be breached if there are external shocks or abrupt changes in macroeconomic policies.
The march 2017 Bank of Uganda states that: Debt vulnerability indicators show that Uganda’s debt may be moving from a level of low to moderate risk of distress.
The BoU March 2017 report reveals that as at end January 2017, total public debt outstanding increased to Ugx. 32.45 trillion compared to Ugx. 29.61 trillion recorded at the end of June 2016.
The growth in the stock of total public debt between January 2017 and June 2016 was mainly driven by increase in public external debt.
As at end January 2017, external debt rose by 10 per cent to Ugx. 19.89 trillion from Ugx. 18.08 trillion in June 2016, while domestic debt increased by 8.9 per cent to Ugx. 12.56 trillion from Ugx. 11.53 trillion over the same period.
The same report notes that: the Total committed external debt, stood at about Ugx. 38 trillion as at end January 2017, out of which undisbursed external debt amounted to approximately Ugx. 18 trillion, bringing the share of undisbursed external debt to about 47 per cent of the total committed debt and partly reflecting one of the major challenges to project implementation.
The IMF’s Debt Sustainability Analysis (DSA) indicates that total public debt based on end June 2016 public debt stock levels was sustainable over the 20-year projection period starting 2017.
The analysis also highlighted deviations from fiscal objectives, relating to revenue mobilisation and expenditure reprioritisation, as the main risks to debt sustainability.
Other risks to debt sustainability included exchange rate depreciation, increased non-concessional borrowing for infrastructure spending and relatively flat export earnings, which have a direct impact on the debt service burden.
The current Policy Support Instrument (PSI) will be concluded in June 2017 and a new program is to be negotiated. However, IMF seems to be sceptical largely on account of the worsening debt rating. Discontinuation of the PSI programme could lead to down grading Uganda’s economic rating.