Uganda's debt dilemma – examining the implications for development

ByNangayi Guyson

Uganda's debt dilemma – examining the implications for development

Uganda, like many developing countries, relies heavily on borrowing to finance its development projects and programs. Over the years, concerns have been raised about the country’s borrowing practices and the potential misappropriation of funds.

As of June 2023, Uganda’s state debt had reached the historic level of 96.1 trillion shillings (UGX) ($25.3 billion, or 52% of GDP) according to a report recently released by the Auditor General. Of this, 44.6 trillion UGX came from domestic sources and 52.8 trillion from overseas. This sum does not include the UGX 7 trillion in loans that are awaiting Parliamentary approval.

There are currently 45 million Ugandans, and each one of them owes about UGX 2 million. Uganda is experiencing fiscal hardship and has become more vulnerable to a debt crisis as a result of rising public debt, increasing debt servicing expenses, stagnating domestic tax receipts, and diminishing export income.

Overview of Uganda’s debt situation

Leonard Okello, a policy expert and the CEO of the Uhuru Institute, commented that:

“Uganda has been borrowing since the 1960s to finance its budget deficit due to insufficient revenue collection. Initially, borrowing from the World Bank and the International Monetary Fund, the country’s borrowing ability was curtailed by political instability and deteriorating governance. In the late 1990s and 2000s, Uganda entered a comprehensive debt relief arrangement under the ‘Multilateral Debt Relief Initiative’, achieving debt sustainability”.

However, in 2006 unfavorable investment laws caused the cancellation of export credit cover which caused development projects to stall and private sector growth to slow down. The government resorted to borrowing to finance this deficit which resulted in an accumulation of debt.

Uganda’s top creditors

Okello says that the projectization of government programs plays a significant role in influencing borrowing decisions in Uganda. This often leads to “funds being diverted away from their intended purposes, resulting in widespread corruption and inefficiency which brings about repayment challenges”.

He further commented that:

“the three major debt sources are the International Monetary Fund (IMF), the World Bank and the African Development Bank. Yet, the most worrying type of debt is project-tied loans which are mainly sourced from the China Exim Bank, the China Development Bank and the Industrial and Commercial Bank of China. This is because, in case of default on debt repayment, Uganda may have to relinquish the legal title to specific assets which were put up as security for the loan”.

Okello highlighted that:

“this puts Uganda in a very compromising situation in the sense that its capacity to pursue economic and social development initiatives independent of its development partners is restrained and that failure to manage these project-tied loans prudently may enslave future generations”.

Corruption in development projects

With project-tied loans, the creditor requires the money that has been borrowed to be used for a specific project, the funding to be spent in a particular way, and the contract is usually awarded to bidders from that creditor nation. There are also very few opportunities for citizens to debate the need for the project, the terms of the loan or the effectiveness of its implementation thus leading to a high risk of corruption.

“This situation in a way makes it difficult for Uganda to pursue economic development initiatives because the projects, be they infrastructure development like the construction of the Standard Gauge Railway or the construction of the CH 5G hydroelectric power project, are going to be sourced solely from China. All these projects are not only going to be done by Chinese companies but are also not going to provide an opportunity for the Uganda technology and skills transfer programs to happen,” Okello concluded.

Impact of Uganda’s debt dilemma

The consequences of Uganda’s debt predicament for its development potential are complex and multidimensional, according to Winnie Byanyima, the Executive Director of Oxfam International and a well-known politician and activist in Uganda.

“Uganda’s mounting debt load has made it possible for the government to make investments in vital fields like health, education, and infrastructure – all of which are necessary for the country’s long-term economic growth. For instance, Uganda’s investments in road building and education have facilitated better market access and the development of human capital, setting the foundation for long-term prosperity”, she said.

However, she called for more transparency in Uganda’s debt management and increased investment in social services to combat poverty and inequality, noting that “excessive borrowing has led to a debt trap that hampers the country’s development prospects and it raises questions about the country’s capacity to meet its debt payments and preserve fiscal sustainability”.

How can Uganda address the issue?

Patrick Bitature, a prominent Ugandan entrepreneur and philanthropist, noted that progress has been made in reducing the debt burden through initiatives such as debt relief programs, but he calls for more efforts to achieve long-term debt sustainability and to promote inclusive development in Uganda, including addressing structural issues such as corruption, weak governance, and inadequate public financial management to ensure that the funds borrowed are used effectively and transparently.

“Uganda’s debt dilemma presents significant challenges to the country’s economic development and social progress. By adopting a comprehensive debt management strategy and addressing the root causes of the debt crisis, Uganda can overcome its debt dilemma and pave the way for sustainable economic growth and poverty reduction” he said.