Kampala, Uganda – Borrowing induced by the coronavirus pandemic saw Uganda’s public debt rise 3.1% to Shs 73.78 trillion from June 2021, Bank of Uganda said in its latest state of the economy report.
The report released at the end of last month indicates that the increase in debt between June and October 2021 was mainly due to a Shs 1.67 trillion increase in domestic debt.
“Exposure to external debt stood at Shs 45.3 trillion (US $ 12.7 billion) at the end of October 2021, an increase of 2.7% from June, mainly due to the ‘increase in the debt of multilateral creditors and private banks,’ the report said. .
The country’s total external debt exposure (outstanding debt disbursed and debt committed but not disbursed) represented 62% of total public debt in October. However, the external debt committed but not disbursed stood at 15.6 trillion shillings (US $ 4.4 billion) at the end of October.
Debt Sustainability Analysis (DSA) indicates that the external debt burden and public debt indicators remain moderate. This is due to the fact that although the budget deficit for fiscal year 2020/21 widened to 9.1% of gross domestic product (GDP), bringing the public debt to 48.3% of GDP from 41.7% in fiscal year 2019/2020, and closer to 50% of target GDP, the fiscal target for fiscal year 2021/22 reflects post-Covid-19 consolidation, with a budget deficit relative to GDP of 6.4%.
However, the debt service-to-tax revenue ratio gradually increased to reach 27.1% in October 2021, from 24.4% in October 2020.
Current account is deteriorating
The country’s current account deficit is expected to deteriorate as goods and services balances deteriorate in the short term. The trade deficit is expected to widen as import growth is expected in response to the opening of the economy.
However, the increase in external demand combined with the continued strong performance of coffee exports is expected to partially improve the trade deficit.
The report further states that the deterioration in the services deficit may persist as the recovery in the tourism sector remains protracted as travelers remain cautious of emerging strains of the coronavirus.
“In addition, the increase in expenditure on transport services linked to the growth of imports is likely to further contribute to the worsening of the services deficit,” the report said, adding that the current account balance is likely to be supported by the increase in remittances associated with the holiday season.
Moderate FDI inflows
At the same time, foreign direct investment inflows are expected to remain modest, in part due to the gradual recovery in domestic economic activities and weak investors, reflecting the slow recovery in global private capital flows to developing countries. . This indicates that budget and project aid disbursements are likely to be the main sources of financing the current account deficit.
In the medium term, the current account deficit is expected to worsen further with the resumption of exploration and oil production activities, particularly the construction of the pipeline, leading to increased import spending.
However, the widening deficit will be partially offset by the increase in revenue from travel services in response to developments in the tourism sector. The recovery trajectory of the tourism sector is conditioned by the evolution of the Covid-19 pandemic and the pace of vaccination.
Given the increased immunization efforts in source and recipient countries, revenues are expected to increase. Private transfers or remittances are likely to increase as economic activity picks up in advanced economies. Likewise, NGO inflows are likely to increase as donors provide grants to address the impact of Covid-19.
However, the financial account surplus will widen, as developments in the oil sector for first production in FY24 / 25 are expected to improve the investment outlook, thereby significantly boosting FDI.
On the downside, portfolio inflows are expected to decline as interest rates begin to rise in advanced and emerging market economies.
“Project aid and budget support disbursements are expected to remain significant as the government continues to implement investments in transport and energy infrastructure,” the report said, adding that private borrowing by financial companies and other entities are expected to increase as economic activities recover.