Analysis: Will Uganda’s mega-project spending spree generate growth or drive up debts?
In a hamlet, 7km south-west of Uganda’s capital Kampala, a group of cyclists rests under the shade of a flyover under construction. They watch as heavy-load vehicles full of building materials race past. “I can’t wait to ride on this road when it’s complete,” says one of the group.
The flyover forms part of the 51km Kampala-Entebbe espressway, linking the city and Entebbe international airport. It is costing $476m (£383m) and is due to be finished in 2018, one of the major infrastructure projects taking shape in east Africa’s third largest economy.
Another is the 600MW dam being built on the Nile in Karuma, 264km north of the capital, for an expected cost of up to $1.65bn (£1.33bn).
Meanwhile, discussions are continuing about the construction of a $3.2bn railway from Kampala to the Kenyan port of Mombasa, 1,152km to the east. And Uganda will soon begin construction of a $4bn refinery and a $3.5bn crude oil pipeline to support its nascent oil and gas sector.
All these projects have one thing in common: they depend on borrowed money, mainly from China.
The infrastructure boom has increased Uganda’s exposure to debt and there are fears the country could be headed for a financial crisis.
Enock Nyorekwa, an infrastructure economist for the EU delegation in Kampala, says: “The [debt] risks have become more pronounced. The question remains whether [this kind of] debt is generating the growth or dividends.”
The country’s external debt has grown rapidly. It was estimated at $10.7bn at the end October, according to the Bank of Uganda.
Uganda’s public debt (pdf) burden has risen by 12.7% from 25.9% of GDP in 2012-13 to 38.6% in 2016-17. It is projected to rise to 45% by 2020.
As debt stock grows, revenues have not grown at the same pace to match public debt servicing obligations. In November, Moody’s downgradedUganda’s long-term bond rating and said debt as a percentage of revenues had risen by 54% since 2012 and is expected to exceed 250% by 2018.
“Debt affordability is also deteriorating, in part due to a shift in composition of the debt burden towards non-concessional borrowing,” Moody’s said. “Debt affordability has been a persistent vulnerability for Uganda, and the higher debt burden combined with the shift in financing sources will lead to further deterioration.”
Yet despite debt distress fears mounting, half of Uganda’s borrowed funds had not been disbursed by the end of October. This means the country continues to borrow money without proper plans of when and where to spend it.
In September, the World Bank suspended new lending to the country. It said: “Ugandan authorities [must] address the outstanding performance issues in the [debt] portfolio, including delays in project effectiveness, weaknesses in safeguards monitoring and enforcement, and low disbursement.”
In an earlier assessment of Uganda’s investment strategy, the Bank said the country had not been getting value for money on investments on most public projects over the past decade. It found Uganda’s projects were characterised by “endemic delays in implementation, cost overruns, and corruption means that sometimes projects come in at twice the original cost”.
The Bank added: “For every shilling invested in the development of Uganda’s infrastructure, less than a shilling (about 70%) of economic activity has been generated.”
The Kampala-Entebbe expressway may add glamour to the changing face of the capital, but the benefits may not outweigh the heavy costs.