Uganda can expect to experience further increases in its fiscal deficit and public debt that will undermine its economic potential. This is largely due to fiscal complacency, profligacy, and incomprehensive debt sustainability diagnostics that mainly rely on ambiguous concepts such as the net present value of debt. Pressures from politicians, overly optimistic forecasts and pandemic-induced uncertainties also play a prominent role in explaining these dismal fiscal outcomes. This makes it hard to reconcile the alleged safety of Uganda’s public debt with a sharp rise in the debt stock.
Recent Debt Sustainability Analysis (DSA)[2] reports by the Ministry of Finance and the IMF show that Uganda’s debt is sustainable but at moderate risk of debt distress in the medium and long term. Earlier DSA reports drew the same conclusion – signalling that Uganda’s public debt, though bulging, was still safe.
Over the years, however, an accumulation of evidence suggests that Uganda may be caught up in a “public debt safety trap” in which a favourable debt position based largely on DSA results falsely signals that the country has more fiscal headroom to borrow, especially when debt is still below the set national or international limit. Consider the following.
First, during the past five years, Uganda’s borrowing decisions have been made mainly by reference to the debt rule and because Uganda’s debt[3] is projected to be sustainable over a 20-year forecast period. Due to the over-reliance on DSA results to inform borrowing decisions, the debt increased from UGX 29.6 trillion (34.6 percent of GDP) in 2015/16 to UGX 69.5 trillion (47 percent of GDP) in 2020/21. The favourable DSA results increased the borrowing appetite for non-concessional financing because of the perceived safety of Uganda's total public debt, which is mainly concessional.
Second, though well-designed, the government did not follow its fiscal deficit rule[4]. The deficit (including grants) increased from UGX 4.1 trillion (4.9 percent of GDP) in 2015/16 to UGX 13.4 trillion (9 percent of GDP) in 2020/21. This sharp increase could result from a misunderstanding of the purpose of rule, thus its poor implementation, and not an intrinsic weakness of the rule itself in failing to influence fiscal decisions. The deficit rule was used to signal that the government is committed to ensuring fiscal sustainability, but without the necessary degree of political will and commitment.
Third, the fiscal pendulum continued to swing toward deficit spending to accommodate emerging spending needs that were not budgeted earlier. The practice of implementing "supplementary budgets" signalled that the government could always reallocate money from other spending units or borrow to meet emerging spending needs.
Relying on DSAs alone is harmful because countries such as Kenya and Uganda tend to disregard other possible indicators or warning signals of impending risks to debt sustainability. Debt sustainability analyses that overlook other external and internal macroeconomic (fiscal and monetary) factors, which are not captured in the LIC-DSF, as well as the quality of government spending, can lead to unrealistic assessments.
Getting out of the public debt safety trap requires a holistic view of debt sustainability. This includes, first, thoroughly understanding the external and internal macroeconomic environment and its relationship with debt sustainability. This is mainly because sound debt management is more effective when linked to a credible macroeconomic framework that promotes economic stability and sustainability. Second, ensuring sound and good fiscal management minimises riskier debt portfolios and reduces a country’s vulnerability to shocks. Third, strengthening the link between budgetary or debt management and monetary policy, especially in a climate of increasing domestic debt and inflation. Fourth, a longer-term objective, improving the institutional environment by reducing corruption, promoting fiscal transparency, rewarding accountability, and enforcing fiscal rules.
[1] Economic Policy Research Centre, Uganda.
[2] Uganda uses the Joint World Bank-IMF Debt Sustainability Framework for Low Income Countries (LIC-DSF).
[3] Public debt in net present value terms is maintained below 50 percent of GDP.
[4] The fiscal balance (including grants) is reduced to a deficit of 3 percent of GDP by 2020/21.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
