Uganda on track for faster growth depending on debt management

August 14, 2024 in Business, Finance, Policy by Editor

Government’s approach to debt management is multifaceted, being focused on driving economic growth, initiating commercial oil production, enhancing tax collection through the Domestic Revenue Mobilisation Strategy and wrapping up key infrastructure developments.

PwC Uganda, part of the global financial services consultancy, has published the second edition of its 2024 economic outlook, pegged on optimism as the Ugandan economy appears well positioned to achieve its status as one of Africa and the world’s fastest growing economies in the next five years.

Latest figures show GDP growth for financial year (FY) 2023/24 at six percent compared to 3.5% the previous year. PwC is a network of firms in 151 countries with more than 364,000 people involved in assurance, advisory and tax services.

According to the report, ‘Uganda outperformed sub-Saharan Africa’s average growth of 3.8%, highlighting its relative economic strength in the region. Globally, the projected growth for the calendar year 2024 will slow down to 2.9% year on year from 3.1% in 2023, making Uganda’s growth significantly higher than the global average’.

It goes on to state that the economic growth trajectory suggests the existence of business opportunities arising from a favourable economic climate. The authors say, ‘In a growing economy, it’s common for consumers to experience an increase in disposable income, which supports greater purchasing power and therefore more growth opportunities for business.

Indeed, there was a notable increase in household consumption which grew by 8.2% in FY2023/24 from the 3.6% growth seen in FY 2022/23, presenting new opportunities for businesses to expand their operations and create more jobs’.

The drop in consumer price inflation has been a result of good coordination of monetary and fiscal policies, leading to low inflation for most food crops, manufactured foods, and essential commodities like laundry bar soap, sugar and cooking oil. Reduced and predictable inflation rates benefit organisations by improving financial planning and resulting in more steady operating costs.

Despite the tight global financial conditions, the Uganda shilling has been relatively strong against the US dollar reflecting the tight monetary policy of Bank of Uganda and supported by relatively improved commodity export revenues. These inflows more than outweighed the strong demand from domestic corporations, notably manufacturing, energy, and trade, reflecting strong economic activity.

For more than 10 years, infrastructure development has been a key government priority in Uganda. This focus has led to the expansion of the road network, expansion and modernisation of the airport, installation of telecommunications infrastructure to expand access to communication services and development of renewable energy projects, among others.

On a cautionary note the report states, ‘This expansion has come with a downside. Uganda’s public debt has escalated significantly due to the heavy investment of these infrastructure projects. According to the Ministry of Finance, Planning and Economic Development Debt Sustainability Analysis, between the fiscal years 2021/22 and 2022/23, Uganda witnessed a rise in its public debt, from $20.99 billion to $23.66 billion’.

The ratio of Uganda’s debt to its overall GDP saw a slight increase from 46.9% in June 2023 to 47.9% in FY 23/242. This is below the 52.4 percent threshold provided for in the Charter for Fiscal Responsibility for FY24 and less than 50% of GDP Government policy target for debt sustainability.

While the debt-to-GDP ratio was predicted to rise to 49.2% by mid-2024, it is expected to trend downwards by the end of the year. Government’s approach to debt management is multifaceted, being focused on driving economic growth, initiating commercial oil production, enhancing tax collection through the Domestic Revenue Mobilisation Strategy and wrapping up key infrastructure developments.

The authors suggest, ‘Given the concerning trajectory of Uganda’s public debt levels and the high individual debt burden faced by its citizens, it is important for Government to prioritise prudent debt management. Immediate actions should include implementing measures to enhance fiscal discipline and transparency in public financial management to control expenditure’.

According to Moody’s, a credit ratings agency company, Uganda’s credit worthiness has been downgraded from B3 to B2 due to fiscal challenges, external vulnerability and economic concerns. The downgrade is largely due to concerns over Uganda’s debt affordability and financing options which have become increasingly constrained. The rating also means that the Government may face challenges accessing global credit markets and attracting investors.

In the Medium Term Debt Management Strategy 2024/25-2027/28, the Government has committed to manage borrowing costs and risks by determining an appropriate balance between domestic and external borrowing. To this end, the Government envisages to source 60% of the debt domestically as well as prioritising concessionary borrowing.

The report states, ‘However, the heavier reliance private borrowing raises more concerns around the associated interest costs as well as foreign exchange risk associated with repayments. In addition, since part of these borrowings go towards funding non-productive sectors of the economy and therefore do not, of themselves, generate foreign exchange or other cash inflows to support debt repayments, this is expected to place an increased burden on taxpayers to meet any shortfall without necessarily having contributed to growth of taxable incomes’.

The anticipated increase in public debt for the next fiscal year highlights the necessity of careful budgetary management. The sizable amount set aside for domestic debt refinancing emphasizes how critical it is to manage short-term debt commitments in order to prevent defaults and preserve investor confidence in the nation.

According to the authors, ‘Uganda will need to strike a balance between funding growth-promoting initiatives and debt servicing going forward to keep debt levels under control and promote economic resilience and development’.