April 6, 2018 / 9:58 AM / a year ago

Uganda's economy must grow 7 percent a year to service rising debt: central bank

KAMPALA (Reuters) - Uganda’s economy needs to grow at least 7 percent a year for the next few years, up from an average 4.5 percent for the last five years, to service the rapidly growing public debt, a central bank official told Reuters on Friday.

The public debt climbed to $15.9 billion as of the end of February, Adam Mugume, Bank of Uganda (BoU)’s executive director for research, said in an interview.

That includes all debt already disbursed by creditors and debt for which agreements have been signed but money has not yet been received, Mugume said.

The East African nation’s debt has nearly trebled in the last three years. It represents 62 percent of Uganda’s gross domestic product, according to BoU’s latest estimation of GDP at $25.65 billion.

“The rate of growth of debt is raising a lot of risks,” said Mugume, who also sits on the bank’s monetary policy committee.

“Debt...is rising very fast when tax revenues are not growing as fast, so that’s really where the risk is coming from.”

Unless the country ramped up economic expansion to “higher growth in the range of 7 percent and above...servicing the debt will become a problem,” he said.

That is well above the BoU’s projection of 5.2 percent growth for the financial year beginning in July.

Mugume said the low growth of the last few years meant the economy will not generate sufficient revenue to service the growing debt load.

Long-running President Yoweri Museveni has ramped up borrowing, mostly from China, to fund infrastructure projects including roads, power plants, fiber cable networks and an airport expansion project.

His government is hoping the projects could improve the economy and shore up sagging political support.

The pace of growth has sagged in recent years due to poor agricultural output, weak exports, widespread graft and bureaucratic dysfunction.

Last month the central bank, which meets to set interest rates on Monday, said in a report that soaring indebtedness could stunt growth as public projects are starved of funds otherwise used to service the debt.

The opposition and other critics have accused Museveni of squandering an expected windfall from crude oil sales. They say rapid borrowing is effectively mortgaging the country’s own future.

Officials reject that, saying it is necessary to borrow to build critical infrastructure and improve the business environment.

Reporting by Elias Biryabarema; Editing by Maggie Fick and Hugh Lawson

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