Uganda's growing debt burden should concern policy makers

Uganda’s growing debt burden should concern policy makers

Uganda has been increasing its debt burden year-on-year since 2009, with current government debt to GDP levels – as of 2017 – recorded at 38.6%. The key drivers of this rapidly rising debt are the loans that it has taken on for large scale infrastructure projects. Much of these funds are lost to corruption. But there are also questions as to whether the government chose the right investments in the first place.

The government announced plans to borrow US$212.7 million from China in order to invest in the expansion of the country’s electricity grid. Uganda has already borrowed US$1.9 billion from China for the Karuma (600 MW) and Isimba (183 MW) hydroelectric power stations which are both scheduled to come on stream at the end of 2018. However, according to the Electricity Regulatory Authority (ERA), Uganda already has an electricity generation surplus with a current installed capacity of 927 MW, but a demand of just 600 MW. Debt servicing on both dams will begin shortly after their completion.

One option is to export excess power to its neighbours. But regional export markets are limited. Both its East African Community (EAC) neighbours, Kenya and Tanzania, have excess capacity and are investing in more themselves. Furthermore, financiers engaged in both countries are reluctant to take on large generation projects because of environmental sensitivity among the regions. Examples include the 2,100 MW Stigler Gorge project in Tanzania’s Selous Game Reserve, and the 1,200 MW coal plant at Kenya’s northern Lamu Island which is also a World Heritage Site.

It is doubtful if the planned Chinese-financed rural electrification programme can accelerate demand sufficiently to absorb any significant part of the new electricity output. Rural retail demand is limited and high electricity prices also act as an obstacle. Much of the power used on the commercial level — and those who can afford it — is generated from diesel powered generators because of their reliability.

The more fundamental problem is transmission rather than generation. The lack of transmission infrastructure prevents many areas from accessing the power distributed from projects such as the proposed dams. Consequently, Uganda has one of the lowest electrification rates in the continent, with only 22% national access to power in 2017, and only 12% access in rural areas.