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Home OpEd

PROSPER MUBANGIZI: Is Covid-19 turning into an opportunity to appease Uganda’s insatiable appetite for loans; foundations of a mortgaged nation?

PML DAILY EDITOR | PML Daily Editorial by PML DAILY EDITOR | PML Daily Editorial
May 11, 2020
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Prosper Mubangizi, a Policy Analyst with Parliament Watch (PHOTO/File).

KAMPALA – On Wednesday 6th May 2020, the International Monetary Fund approved $491.5 million which is approximately 1.9 trillion shillings in emergency funding for Uganda. The loan which is under the Rapid Credit Facility of the IMF is meant to enable the landlocked East African nation to address the economic impact of the coronavirus pandemic. According to the details of the fund, $340m will go to the Central Bank to buttress the country’s reserves and this is projected to ensure stability in the financial sector as Bank of Uganda will be in position to support the currency and other monetary policy duties.

Another USD150m will support budget spending with support directed to the health sector and supplies of medicines while part of this USD150m will support private sector businesses through recapitalizing the Uganda Development Bank (UDB). Though the loan is interest-free with a grace period of five and a half years and a 10 year payment period, it raises more questions than answers.

The fear on many people’s minds is that not only has the government of Uganda failed to come up with a coherent policy proposal to address the economic impacts of the COVID19 Pandemic, the country has almost drained its coffers under the pretext of responding to the pandemic. It should be noted that the Ministry of Health had projected that it needed only 25 billion shillings to handle the Coronavirus pandemic and even after submitting a supplementary budget to that effect, it is reported to have been puzzled when Parliament increased the budget to 114 billion shillings as the Ministry could not find activities to channel the money to. That is where the 10 billion cash bonanza to Members of Parliament originated from.

Furthermore, the Ministry of Finance, Planning and Economic Development (MOFPED) has come up with a myriad of loan proposals and requests as part of disaster response. Among them is a loan request before the floor of Parliament in a bid “to deal with the fi¬nanc¬ing gap in the Gov¬ern¬ment bud¬gets for FY 2019/20 and FY 2020/21, Min¬istry of Fi¬nance will seek for a bud¬get sup¬port loan on con¬ces¬sional terms worth US$ 100 mil¬lion for FY 2019/20 and US$ 90 mil¬lion for FY 2020/21 from the World Bank.”

With this insatiable appetite for borrowing, Uganda is fast morphing into a nation whose foundation is debt. Uganda’s outstanding stock of government debt increased by more than 10% in one financial year from UGX 42.4 trillion in 2017/18 to UGX 47.3 trillion in 2018/19. According to the 2018/2019 Bank of Uganda annual report,   Uganda’s debt to GDP ratio increased from 38% in FY 2016/17 to 43% in FY 2018/19 and the Ministry of Finance, Planning and Economic Development in its fiscal Risk statement of 2018 projected debt to GDP ratio to increase 52% in the FY 2021/22.

With the trend of borrowing that COVID19 has ignited and with no signs that the appetite for borrowing is yet to be quenched, Uganda’s debt to GDP ratio may sooner than later surpass the threshold of 50% by end of FY 2020/21 given that Parliament recently passed a 44.5 trillion budget yet revenue collection is only projected to bring in 23 trillion meaning that the country may have to borrow more than 20 trillion to finance its budget.

There are lots of fears about the rampant embezzlement and misuse of public funds and the tough conditions that were set on the government by the IMF as a condition to lending have not arrayed the fears of many Ugandans mainly in the civil society. This is exacerbated by the low absorption capacity and delays in disbursement of borrowed funds and commencement of projects while the government pays interest on the no operational loans. The 2015 Value for Money report by the Office of the Auditor-General unearthed a meagre 37.7% average absorption level and Auditor general’s report for the 2017/18 showed a 10% absorption level for some loans.

Therefore, the conditions set by the IMF that require the government to publish large procurement contracts where this money will be spent and the establishment of an independent audit on the usage of the money are inadequate and do not address the other systemic issues like low absorption capacity of the loans which are lying idle yet accruing interest. Such a scenario depicts what Hon. Nobert Mao normally likens to shooting and targeting after.

Cognizant of the absence of substantial domestic revenue to unlock Uganda’s binding constraints to production and export enhancement, I opine that debt is a realistic outside option. However, Uganda’s insatiable appetite for borrowing is taking the country to unsustainable debt levels and is even crowding out the private sector as government is becoming a leading internal borrower. It is my opinion that Uganda addresses its loan absorption capacity and also initiates measures to ensure the loans are used to enhance its production and export potential.

============================================

Prosper Mubangizi is a Policy Analyst with Parliament Watch. He is a consultant on Governance, Post Legislative Scrutiny and Youth Inclusion

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