Government to Pay Suppliers in 10-Days, Moves to Clear Domestic Arrears

Going forward, any company which gets a road construction project contract will have to finance the entire road construction project and only be repaid after, between seven and 10 years from the start of construction.
A total of 400 billion Shillings has been earmarked for the payment of local contractors and suppliers of government services and supplies in the next financial year.

This is part of the government’s move to contain the growing debt but also ensure a boost to the cash-constrained private sector in the country. The same amount is planned for payment by the government in the subsequent financial year, 2023/24, to clear the backlog, according to the National Budget Framework Paper.

This is done “to avoid stifling private sector investment and associated consequences such as the increase in rates of non-performing loans, which in turn increases the cost of borrowing and lead to distress, loss of employment and production,” according to the paper.

To avoid further accumulation of arrears, after this, the Ministry of Finance, Planning and Economic Development says that all government institutions will be required to pay suppliers within 10-days from the date of invoice. However, the directive will not apply to contractors in the road subsector, where the government is also introducing a pre-financing model.

This means that any company which gets a road construction project contract will have to finance the entire road construction project and only be paid on completion of the project. “For us to remain sustainable in dealing with pre-financing of projects and to ensure that there is fiscal space, particularly in the Roads Sub-Sector, next fiscal year and over the medium-term, we propose to use this Alternative Financing,” the ministry says in a proposal for next year.

The government will then repay the contractor within a period of seven to ten years, including the construction period. “I will, together with the Minister of Works and Transport, present the detailed Paper on this matter to Cabinet soon,” says Minister Matia Kasaija.  

In total however, the government also plans to pay its lenders 15.2 trillion Shillings in the financial year 2022/23, including interest payment, external debt repayment and domestic refinancing.  By the end of June 2021, Uganda’s national debt was recorded at 69.5 trillion Shillings and rose to 73 trillion Shillings at the end of October.

According to the Paper, the debt measured against the country’s GDP is expected to rise to 52.7 per cent by the end of this financial year, from the current 49 per cent. By the end of 2023, it is expected “to peak” at 53.1 per cent, or anything around 78 trillion Shillings. The Bank of Uganda has consistently warned the government to reduce its appetite for debt, in vain.

Lack of proper planning and ignoring the frequency of emergencies, is the main reason why the government keeps requesting for loans, says the Central Bank Deputy Governor Michael Atingi-Ego. 

But the Ministry of Finance is aware of the fact that the debt level, compared to the GDP is getting closer to the dangerous threshold.  

“The Charter of Fiscal Responsibility has three fiscal objectives including total public debt reducing to below 50 percent of GDP by 2025/26,” says the Ministry in the Paper. The growth in debt is expected to come from borrowing for investments in the oil and gas sector and other energy and infrastructure projects.

This year, it was pushed up by the funding needs created by the persistence of the COVID-19 pandemic, which had serious adverse effects on the health sector and the economy as a whole. The risks related to public debt include refinancing risks due to high presence of short term liabilities in the financing mix, and the increased cost of debt especially by increased borrowing on non-concessional or commercial terms, which also attract high and variable interest rates.

The ministry says they have put in place strategies to avoid this and proper management of the budget and speedy economic recovery. These include scaling up revenue mobilization and limiting commercial borrowing, including domestic borrowing to bring back public debt and the fiscal balance within the fiscal objectives.

This, according to the ministry, will safeguard on crowding out of the much-needed private investment, as part of the strategy is ensuring growth of personal and household incomes. “The overall fiscal strategy is to promote inclusive growth to increase household incomes and improve quality of life of Ugandans without compromising fiscal and debt sustainability. This will entail implementation of Domestic Revenue Mobilization Strategy to reduce the share of the budget that is financed through borrowing,” says Kasaija on the proposals.

Domestic revenues are projected to amount to 25.5 trillion in next financial year, with 23.7 trillion being tax revenues, hoping that the Covid-10 pandemic will weaken. External Borrowing is expected to total 6.87 trillion shillings next financial year, with 4.77 trillion being in form of project loans and 1.23 trillion as budget support loans.

Government plans to borrow from the domestic market some 2.8 trillion, equivalent to 1.6 per cent of GDP. This is expected to decline to an average of 1.3 per cent per annum over the medium-term, to enable increased private-sector lending, among others.

Clearing of external debt is projected to increase to 2,463 trillion Shillings which is equivalent to 1.4 per cent of GDP next financial year, and will continue to rise to 2.3 percent by 2026/27.

“The rise in amortisation is due to the increase in non-concessional financing, which is typically characterised by shorter grace periods, and maturity of some loans,” the ministry says.

Interest payments are projected to amount to 5.1 trillion Shillings, with four trillion covering domestic interest payments and the rest going to foreign interest payments and commitment fees.