Bank of Uganda (BoU) has warned the continuous increase in the cost of servicing debt may crowd out other priority spending.
Bank of Uganda, in its state of economy report for June 2021, said the country’s public debt as of end of April 2021 stood at Shs66.1 trillion ($18.9 billion), an increase of 15.1 percent from June 2020.
BoU attributed the increase to a 33.6 percent growth in domestic debt, attributed largely to an increase in domestic financing. Public external debt also grew, by 13.0 percent largely attributed to the disbursements loans by multilateral and bilateral creditors.
“The ratio of debt service to tax revenue is projected to average 30 percent between FY2020/21 and FY2024/25 and a continued increase in debt service costs may crowd-out other priority spending. Moreover, the recent increases in direct monetary financing of fiscal deficits raise additional macroeconomic risk,” BoU said in the report published on Monday, July 26, 2021.
However, even with the increased fiscal deficits, public debt is sustainable and below the East African Community macroeconomic convergence threshold, BoU added.
BoU said the medium-term fiscal framework is anchored on reducing nominal debt-to-GDP ratio to below 50 percent. This will be achieved through revenue measures to expand the tax base. In FY 2021/22, although nominal debt to GDP ratio is expected to exceed the 50 percent threshold (at 52.8 percent), the overall fiscal deficit is expected to reduce to 6.4 percent of GDP.
The bank explained that incurring large deficits now for the necessary investments in people, communities, and businesses should increase the chance for a strong, widely shared economic recovery and thus contribute to more rapidly shrinking deficits in the future than the case without such actions.
The Bank of Uganda said the second wave of COVID-19 infections and its scarring effects suggest that adverse impact on the economy could become worse before it gets any better.