Uganda on edge of debt distress, needs 35 years to settle domestic arrears

January 13, 2024 in Business, Finance, Policy by Editor

Are you a Ugandan supplier and you are owed money by the government? You might have to wait for 35 years.

Uganda is tottering on the edge of debt distress amidst a sharp rise in compound debt, poor domestic revenue performance and declining budget support by development partners.

In a joint statement on the budget framework paper for fiscal 2024/25, civil society organisations led by the Civil Society Budget Advocacy Group (CS BAG), warn that without corrective action, Uganda will soon plunge into a deep crisis. Presenting the joint statement to the media January 12, Jeff Wadulo, the program and policy advisor at CSBAG, pointed to allocations to debt servicing, which now outstrip the development budget and the mounting domestic arrears that are chocking the private sector.

According to Wadulo at the current rate of budgeting for domestic arrears and assuming no new domestic debt is contracted, it will take the treasury 35 years to wipe the slate clean. The combined stock of domestic and foreign debt stood at UGX 96.168 trillion at the end of fiscal 2022/23. Of this, external debt was UGX 52.472 trillion or 54.6 pc while domestic debt was 43.696 trillion of 45.4pc of total debt. The numbers represent a 10.74pc increase in overall debt over the previous year.

Although the economy expanded nearly 40pc in the five years between fiscal 2018/19 and 2022/23 to UGX 184.895 trillion in 2022/23, the CSOs warn that public debt is growing faster than the GDP.

“This worrying trend of debt increase is due to the government’s increased expenditure, which has exceeded the domestic revenue, thus leading to a fiscal deficit,” Wadulo explained.

Matters are not helped by supplementary budgets which are projected to take public debt to UGX 106 trillion by June 2024. Soaring debt is also impeding the government’s capacity to invest in critical areas such as infrastructure, education, and healthcare.

“In addition to these challenges, the country is also grappling with under absorption of funds, and a lack of fiscal discipline, which has led to inefficient use of resources and reduced public trust in the government.”

The CSOs are irked by abuse of the supplementary budget process which is contributing to runaway arrears. Although the Public Finance Management Act limits supplementary expenditure to items that are unabsorbable, unavoidable, and unforeseeable, the Ugandan Parliament has over the years fallen into a habit of approving supplementary budgets which do not meet the three criteria for supplementary financing.

For instance, of the UGX 3.5 trillion supplementary budget that was approved by last November, UGX 2 trillion was for addressing shortfalls in expenditure, including teachers’ salaries.

“This not only shows abuse of the supplementary provisions but also indicates poor planning practices within MDAs,” the CSOs argue.

According to indicative tax performance figures by URA, by November 2023, the tax collector was short UGX 446.6 billion short of target. Net tax and non-tax collections were UGX 8,017.5 billion of which net URA tax revenue was UGX 7,487.3 billion and NTR UGX 530.3 billion.

While the 2024/25 budget is projected at UGX 52,722.68 billion, a reduction of 14.10 billion relative to the current financial year, the discretionary resource envelope will also shrink by UGX 3,470.92 billion to UGX 21,734.24 billion in fiscal 2024/25. This is mostly attributable to a projected UGX 3,223.8 billion in debt servicing obligations. Domestic revenue is projected to increase by only UGX 285.60 billion from UGX 29.6 trillion in fiscal 2023/24 to UGX 29.9 trillion in 2024/25.

The CSOs are concerned about the tilt towards recurrent expenditure ion the budget. In fiscal 2024/25 for instance, despite a UGX 980 reduction in total expenditure to UGX 38,968 billion, recurrent spending will increase UGX 1 trillion to UGX 26.272 trillion. Development expenditure will also shrink by about 1 trillion to UGX 12.248 trillion.

“The contrast between recurrent and development spending threatens development and sustainability, as resources available for service delivery are low. However, it is also important to note that some MDAs mandates require more of the recurrent than the development expenditures, and thus a balance needs to be struck between the two components stemming from the mandate attached to every institution,” the CSOs note.

The CSOs further recommend adequate planning by government agencies and departments to strike a balance between allocations for their recurrent and development budgets.

They also called for robust enforcement mechanisms to eliminate domestic arrears which stood at UGX 7.55 trillion in 2022. Domestic Arrears surged 62pc in a single year from UGX 4.65 trillion in 2021 UGX 7.55 trillion in 2022.  At the proposed allocation of UGX 217 billion in the fiscal 2024/25 budget, it would government 35 years to clear the current stock of arrears, assuming no new domestic debt is contracted.

 

Table A1: Proposed Programme Allocations FY2024/25 (UGX Billion)

Program	Priority Rank	FY2023/24 Approved Budget	FY2024/25 Proposed Budget	Share of total budget FY 2024/25	Variance
Development Plan Implementation	1	18,864	22,096	41%	3,232
Human Capital Development	2	9,580	9,327	17%	-253
Governance And Security	3	7,676	7,434	14%	-242
Integrated Transport Infrastructure and Services	4	4,491	5,883	11%	1,392
Private Sector Development	5	1,911	1,878	3%	-33
Agro-Industrialization	6	1,814	1,644	3%	-170
Sustainable Energy Development	7	1,343	1,326	2%	-17
Regional Balanced Development	8	1,041	1,039	2%	-2
Legislation	9	946	946	2%	0
Sustainable Urbanization and Housing	10	525	77	0%	-448
Sustainable Petroleum Development	11	447	1,066	2%	619
Administration Of Justice	12	432	432	1%	0
Natural Resources, Env’t	13	427	420	1%	-7
Innovation, Technology Development & Transfer	14	257	198	0%	-59
Tourism Development	15	249	249	1%	0
Public Sector Transformation	16	229	227	0%	-2
Manufacturing	17	219	106	0%	-113
Digital Transformation	18	192	174	0%	-18
Mineral Development	19	47	32	0%	-15
Community Mobilization and Mindset Change	20	35	35	0%	0