The government treats the symptoms, not the debt sickness
With little room to maneuver out of the self-inflicted debt trap, the government decided to take on debt to pay off debt, drawing condemnation from several seasoned finance professionals and economists.
The government will refinance an accumulated domestic debt, in the amount of about 8.5 trillion shillings, which is due next year, in about two months.
This action is technically called debt refinancing.
If Uganda were a business, this move – debt refinancing – would conjure up images of a desperate business on the verge of bankruptcy, trying to make last-minute efforts to stay afloat.
Most finance professionals, economists, and fiscal policy experts note that debt refinancing is akin to treating symptoms rather than the underlying causes of a disease. This is because it offers temporary relief before the pain accumulates uncontrollably again.
“The government is putting off a problem it cannot solve,” says Professor Fred Muhumuza, a professor at the Makerere University School of Economics.
He continues, “Look at it this way: it’s time to pay off your debt, but you don’t have the money, you have to renegotiate the payment.”
The problem, he says, is not so much debt rescheduling, but its consequences for the economy, government credibility and service delivery.
Accumulated debt – domestic debt owed to lenders in the country through treasury bills / bonds (which are debt securities) issued regularly by the Central Bank to the investing public – continues to accumulate as long as the government continues to replace existing debt with new debt. a.
The problem does not end there. Whenever there is a postponement, there are also harsher conditions.
“As part of this arrangement, interest rates are being revised upwards. Typically, new conditions entered tend to be more stringent and unfavorable. Debt refinancing is therefore a bad thing! Dr Muhumuza told Prosper Magazine on Wednesday last week when contacted.
Like Dr Muhumuza, Ugandan Parliament Budget Committee Chairman Amos Lugoolobi believes debt refinancing is not worth the risk.
Contacted last week, he said debt refinancing was jeopardizing the government’s image in the eyes of serious potential financiers, many of whom dislike partnering with governments with low credit ratings, due to their story of not paying their bills on time. or have too much money.
In addition to attracting unfair terms, debt refinancing traps capital that private sector actors could have deployed in expanding or creating economic activities instead of being squeezed out at a time when the effects of The Covid-19 pandemic continues to wreak immeasurable havoc on the economy, businesses and livelihoods.
But seasoned lawmakers admit that it’s hard to stop debt refinancing because the government is still caught between a rock and a hard place.
Mr. Lugoolobi was also of the opinion that the accumulated interest rate the country incurs as a result of this action is eroding the income that would have been incurred in the provision of services.
In another interview with the executive director of the Civil Society Budget Defense Group (CSBAG), Mr. Julius Mukunda, the right thing to do would be to get rid of the debts as planned between the two parties. This, he says, is a much cheaper option than debt refinancing.
Previously, debt refinancing was not a budget item because it was not considered to be such. But soon it became a requirement under the 2015 Public Financial Management Act, as Parliament deemed it had an impact on the consolidated account.
While the budget for fiscal year 2021/22 is projected at 41.2 billion shillings, it is actually less than that if you deduct the 8.5 trillion shillings from the domestic debt already incurred by the government to pay for activities. that have already taken place.
“According to Mukunda, debt renewal is actually not bad if it doesn’t increase every year. This, he says, complicates the country’s ability to meet its obligation, given the accompanying rise in interest rates. So this should be avoided.
The Director of Economic Affairs at the Ministry of Finance, Mr. Moses Kaggwa, explains that this is not an easy decision. He said we don’t like to take on debt but very few countries fund their budgets 100% with their own resources.
“You have the Covid-19 pandemic and then we get a shortfall of around 2.5 billion shillings, which is actually due to the pandemic, and remember that we have a responsibility to provide services to the people, so what are you doing? ”he asked. rhetorically.
However, analysts say the government will demand 8 trillion shillings from the domestic market, which means the banks will once again lend to the government instead of you.
While debt refinancing is touted as the number one budget in the short term, areas like security and construction will occupy the lion’s share of taxpayer dollars in the next fiscal year.
Income collection deficit
According to the Auditor General’s report to Parliament for the fiscal year ended June 30, 2020, on domestic refinancing, the government planned to repay maturing Treasury instruments by borrowing again on the market (domestic refinancing) up to ‘just over 6.4 shillings. one thousand billion.
However, this was not achieved as Sh1.4 trillion was borrowed from the Bank of Uganda instead of the market.
In response, the Permanent Secretary explained that the shortfall in taxes was mainly due to the slowdown in economic activity due to the Covid-19 pandemic (70.4% of the deficit in tax revenue was over the last four months of the 2019/20 fiscal year).
Delay and / or non-implementation of certain measures such as the expansion of the scope of withholding agents, the non-implementation of the rental solution as well as the late implementation of digital tax stamps.
In addition, the government’s decision to allow businesses affected by Covid-19 to defer payment of Pay As Your Earn (PAYE) and corporate income tax to September 2020, all have had an impact on revenues, forcing the government to plunder the domestic market through the Central Bank.
Domestic debt has been used primarily to finance deficits and implement monetary policy in many African governments, so it now forms a significant share of total debt stock, according to the African Forum and Network on debt and development (AFRODAD).
As for the coordinator of the East African Budget Network, Mr. Julius Kapwepwe, who is also director of programs at the Uganda Debt Network, Uganda’s total sovereign debt is currently in the order of 66 trillion shillings, of which 30% is domestic debt.
He said, “Officially, whether by the government or even by some of the multilateral financial institutions, the debt is being forgiven somewhat at around 60 trillion shillings. Recall that the domestic debt covers securities such as bonds and treasury bills, domestic arrears to companies and individual suppliers of goods and services to the government, land compensation, recoverable debt owed to mining exploration companies, contingent liabilities and accrued liabilities, both by local government and central government. “
Uganda has a long history of debt.
First, it was one of the countries to have benefited from the Heavily Indebted Countries (HIPC) initiatives in the 1990s and MDRIS in which all of its debts were 100% canceled.
However, recently the trend of public debt has increased at an exponential rate more than three times the rate at which the country obtained debt relief, but the debt and its structure have a big impact on the functioning of the economy. .
In addition, the ratio of domestic debt to private sector credit exceeds the threshold, according to the Auditor General (AG) report.
The AG warned that if the government does not curb its thirst for loans, the debt will not be sustainable and future governments will not be able to borrow.
Mr. Stephen Kaboyo, Managing Director of Alpha Capital.
Debt refinancing is essentially about turning over expensive debt and replacing it with debt with favorable terms. Uganda’s debt profile has an average maturity of four years, which is too short in terms of debt service management, leading to an accumulation of debt repayments, which puts pressure on the debt. budget.
Julius Kapwepwe, the coordinator of the East Africa Budget Network.
It is time for the government to realize that its activities in the domestic market are hurting the economy. As long as its appetite remains untamed, the resources that would have been freed for small and medium-sized enterprises to do business are blocked or taken by the government.
The cost of switching to domestic borrowing
The move to domestic borrowing could encourage institutional investors and banks to absorb “too” public debt, which could have a negative effect on financial stability. In addition, the expansion of the domestic government bond market may have positive externalities for the domestic corporate bond market. But there is also the risk that the public sector will crowd out private issuers.
Finally, there are political economy reasons that can make domestic debt more difficult to restructure. In fact, a few heavily indebted countries that have been able to resort to debt relief initiatives to address their external debt problems are still burdened with high levels of domestic debt. It is also important to correctly assess the cost of borrowing in different currencies. In an environment in which several emerging currencies are expected to appreciate against the US dollar, the ex post interest rate in domestic currency could end up being higher than that in dollars.