Is Uganda sliding into a debt trap?

Ahmed Ddamulira, a lands min­istry official and Wakiso Local Government Registrar of Land Titles wears a well pressed grey suit as he appears before the Justice Catherine Bamugemereire Commission of Inquiry into mismanagement and corruption al­legations at the Uganda National Roads Authority (UNRA).

The Makerere University law graduate, who doubles as a legal advisor to the Wakiso land board speaks with a slight quaver as the prosecution team led by Andrew Kasirye and Mary Kutesa point out to him that he issued close to 63 land titles in the Lubijji Swamp, the Nambigirwa/Mpala swamp and the gov­ernment owned Kajjansi forest reserve.

Also in the dock, is a one Samuel Lu­twama, a brick layer and LC 1 repre­sentative of Nakigalala village along the $476m (Ugx. 1.6 trillion) Kampala-En­tebbe expressway project where many of the ‘beneficiaries’ claim to have been residents.

Ddamulira, a trainer on land rights and senior lands ministry official says he was completely unaware that the 63 or so land titles he issued were invalid. On his part, Lutwama tells the com­mission of how surveyors confused him with a Ugx. 50,000 bribe to sign off falsified valuation documents.

The committee heard how a brick layer and two associates pocketed Ugx. 4.1b for land they seemingly never and logi­cally could not afford. Also peculiar was how a businessman was paid Ugx. 18b for 2.5 acres of land along the express­way.

Collectively, the country has so far lost close to Ugx. 48b in over valuations and outright fraud in a single road project. These are funds that the country could have spent on hospitals, stadia, a village model project for agriculture, schools, or general welfare of the entire country. Most importantly, these are part of bor­rowed funds from China that Ugandans will repay over the next 40 years. How our current recklessness will constrain the future citizens of this country!

As Ddamulira passes the buck of responsibility over the scheme to sur­veyors, then to the land valuers then to the National Forestry Authority, Justice Bumugereire pauses and says: “Someone has to be blamed either for gross negli­gence or for obtaining money by false pretenses. These are billions of money that our grandchildren will repay in the future,” she says. She then asks: “Who should be blamed?”

And the question remains unanswered.

Over the years there have been numer­ous inquiries. Some popular ones have been the Julia Sebutinde commission into the Police and the Uganda Revenue Authority (URA). Others have been the junk choppers case, the valley dams’ case, the LC bicycle saga, the GAVI funds saga, and the Office of Prime Minister case.

In each case, billions of shillings meant for developmental government projects were wasted through corruption. Some of this money was borrowed and slowly but surely the debt are starting to pile up. The challenge with the current set up is that integrity does not pay. For how long can a well-qualified and exceptional medical doctor, lawyer or accountant work in order to accumulate a Ugx. 5 billion asset base without en­gaging in corruption? You find it would take one’s life time of work, and even fail to attain even 30% of that.

However, our laws not makes it easier for one to steal such a money, gets sub­jected to the legal system and serve 2-6 years jail period. In the end, this is the most clear shortest way to wealth. Plus when one has money, they have access to some luxuries in prison. That is the unfortunate state we find ourselves in the country to.

A lot of money spent in commissions of enquiries, only for the reports to remain classified. The culprits may be pardoned, transferred or given light sentences. The end result is a distorted economy.

We trust in the UNRA commission of enquiry. We pray that the facts come to the fore and those found guilty are held accountable. Obviously there may be many other innocent souls, being sub­jects of the enquiry. We hope these great Ugandans are acknowledged and let free with the merit they deserve.

The ambitious infrastructure

Though the 2014 World Audit report on corruption ranks Uganda (119th) ahead of Kenya (121st), we seem to be headed in the direction of Spain and Greece as debt piles. This year alone, government will borrow a gross amount of Ugx. 6.6 trillion from the domestic money markets.

Sources at the Finance Ministry say the funds are broken down into Ugx. 4.79 trillion which will used for do­mestic debt principal repayments. This is money already borrowed and spent. Sometimes well spent, and quite often, misspent.

A further Ugx. 0.172 trillion will be spent on external debt principal repay­ments and Ugx. 1.66 trillion will be interest payment on domestic and ex­ternal debt. On net terms, government will borrow Ugx. 1.4 trillion through treasury bills and bonds in 2015/16.

This implies that in 2016/17, govern­ment will have to borrow way above this financial year’s Ugx. 6.6 trillion in gross terms to meet the need at the time, and to service debt already incurred. The key assumption is that the economy will be growing, and major infrastructure projects will be done within schedule.

However, very few projects in Uganda are completed within schedule. Key ex­amples are the Northern bypass project whose timeline and budget increased dramatically. Other examples are the Karuma and Isimba power dams that took a bit longer to start than had been planned. There are also delays on the ongoing Entebbe-Kampala expressway and the oil refinery project. Funds for these projects were accumulating inter­est at the expense of tax payers, while productivity was at zero. The delays in the release of funds for the projects also affected the level of domestic economic activity.

Now you need to be seated to continue reading.

A recent dossier from the Office of The Auditor General of Uganda shows an escalating cost of contingent provi­sions for court awards against public resources in respect of cases before Court under the Ministry of Justice and Constitutional Affairs. The figure rose from Ugx. 2.2 trillion in 2014 to Ugx. 4.5 trillion in 2015! That is a whop­ping 95% increase or 8.2% of the our national budget! Keep in mind that the accounting officers explained to the Auditor General that “the provisions excludes those intending to sue govern­ment.” But that is not all. Unsettled court awards against government have continued to rise from Ugx. 54 billion in 2012 to 442 billion in 2014. This has attracted interest payments amounting to Ugx 60 billion attributed to the inad­equate provisions for the losses.

Any country owes it to her service men and women, and for that matter, pension payments is always a prior­ity. Not in Uganda. A report seen by this magazine reveals that outstanding pension liabilities under the Ministry of Public Service increased by Ugx. 81billion. Accordingly, people prefer to continue on the government payroll, than process their life certificates for enrolment on the pension. A total of 19,135 pensioners who had attained the maximum pensionable period of 15 years were still on the Ministry’s payroll!

Taken together, such scandals and abuses slide the country into unneces­sary financial difficulties that hurt those outside the system deep.

Nicholas Malaki, the Senior Vice Presi­dent and Chief Investment Officer for PineBridge Investments East Africa Ltd says too much debt is always a concern for any economy. “The current spend has been public knowledge for some time as well. The government of Uganda as well as its regional counterparts have been committed to improving infra­structure in the region. That is good.

Uganda’s priorities are increasing energy production particularly hydro, roads, a standard gauge railway and in­frastructure to facilitate oil drilling, re­finery and transportation. In hindsight oil revenues were expected to relieve the national budget of these infrastructure costs. With delays in the production of oil coupled with the recent decline in oil prices, these flows are likely to come a little further out,

What we notice for example in Ghana is a front load of investments into infra­structure and that by the time oil flows materialize, they are earmarked for debt repayment. Note that this occurs over a number of years, Malaki says that with GDP (Gross Domestic Product) ex­pected to grow by 5% – 6%, adjusting for currency fluctuations year on year we could be looking at GDP of USD 24 bil­lion in FY2014/15. The previous Debt/GDP ratio of 33% would dramatically rise if all the borrowing materializes within this financial year to 137%!

He however contends that this is unlikely. “Government would need to stagger these over a period of time say 5 years. As duly noted most of these projects have been halted for one reason or another. “What we would expect though is over the investment period is a relatively more volatile currency being an open economy, credit rating down­grade if the Debt/GDP ratio rises above 60%. Notwithstanding the expectation of project success within the current projections. Inflation is already pro­jected to increase this year for a number of reasons. The depreciating currency as well as growth in money supply should precipitate inflationary pressure. A fiscal angle would further this expectation.”

The rise in interest rates (monetary tightening) definitely impacts the growth in new loans and can lead to defaults on existing facilities as well. Banks tend to become a little more con­servative in this environment favouring government securities purchase instead of commercial lending.

Cheap concessional loans increasingly hard to get

Whilst speaking to bankers, Louis A. Kasekende, the Deputy Governor of the Bank of Uganda said the overall fiscal deficit is projection of 7% of GDP, though larger than the forecast outturn for 2014/15 of 4.5% should not cause panic.

“The domestic deficit will rise from an estimated 2.2% of GDP in the current fiscal year to 3.8% of GDP in the next fiscal year. The increase of less than 2% of GDP, which represents a fiscal stimu­lus to aggregate demand, is relatively modest and will not, by itself, generate significant inflationary pressures in the economy,” Kasekende said.

“We forecast real GDP growth to rise to 5.8% in 2015/16, which is 0.5 percent­age points higher than the forecast for the current fiscal year. The main factor pushing up growth in the next fiscal year will be stronger aggregate demand. Our current estimate of the economy’s potential output growth, which is deter­mined by supply side factors such as the growth of the labour force, the capital stock and productivity, is between 5% and 6% per annum. Hence real growth in the next fiscal year should be in line with the economy’s potential rate of growth. As I have already noted, all of the increased borrowing to finance the fiscal deficit in the next fiscal year will be met from external sources; either concessional or commercial lending specifically for infrastructure projects,” Kasekende explained.

Though Kasekende mentions ‘con­cessional’ loans as a possible external source of increased borrowing, com­mercial lending and non-concessional loans are likely to be the more likely source going by what Ana Lucia Coro­nel, the International Monetary Fund (IMF) senior resident representative has revealed.

Concessional loans contain at least 25% of grant money. Coronel says that owing to the European debt crisis, donors are on the continent is less will­ing to give cheap concessional loans for capital projects but are more inclined to supporting social projects in the areas of justice, health, and education sectors.

Stock of outstanding public debt is projected to have reached $7.6b (Ugx. 26.4 trillion) by June 2015 from to $7.2b worth Ugx. 19 trillion in June 2014 when the dollar was selling for 2,674.52 shillings. At press time, one dollar was worth 3, 475.7 shillings.

Sixty percent of Uganda’s debt stock is external and 40 percent is domestic. The increase in public debt reflects the increased borrowing to finance infra­structure investment.

A stress analysis of the economy by IMF, World Bank and government shows that the levels of debt will be slightly below the 50% to GDP thresh­old after the Isimba and Karuma dams, the Entebbe express way and first $2b phase of the Standard Gauge Railway are completed in the next 10 years.

However, the analysis assumed that all planned projects are completed on time and that the economy grows as pro­jected in the next decade. But, the trend of ballooning infrastructure project budgets, the faltering exchange rate and corruption; it might take a miracle to re­main within the 50% debt to GDP ratio, mark you, in the next 5 years.

Important assumptions in the 2015/16 national budget;

The annex to the budget speech contains Ugx. 6.33 trillion in domestic financing. Domestic Financing consti­tutes funds paid into the Consolidated Fund by Bank of Uganda (BOU) as well as domestic debt maturing this year (FY 2014/15).

Initially BOU used to borrow money from the public for monetary purposes until FY 2013/14 when such monies were used for fiscal purposes.

Domestic Financing includes

Ugx.4, 787-Old Domestic Debt trans­ferred from Bank of Uganda Account to the Consolidated Fund

Ugx.1, 384 New Domestic Debt FY 2015/16

Ugx.200 New Domestic Debt for capital­ization of Bank of Uganda

External funding is projected to jump by Ugx. 3 trillion to Ugx. 5.6 trillion in the FY 2015/16 on account of imple­mentation of the new large projects such as;

Karuma and Isimba – Ugx.2.2 trillion

Japanese earth moving equipment – Ugx. 409 billion

Defence equipment – Ugx. 264 billion

Further Ugx. 5.6 trillion is expected from donors for project support in FY 2015/16.

The budget framework paper mentions debt worth Ugx. 6.6 trillion.

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