Is Uganda's middle income large enough to meet is future public debt obligations

The Bank of Uganda state of economy June 2016 report indicates that Uganda’s disbursed public debt was Shs28.1 trillion (about 31 per cent of GDP), an increase of Shs5.6 trillion relative to April 2015. The increment is about 50 per cent of domestic revenues for fiscal year 2015/16. The provisional public debt including undisbursed stood at Shs46.1 trillion (which is about 52 per cent of GDP). The reports highlights domestic debt indicators remain outside the threshold. In fiscal year 2015/16 and 2016/17, Shs4.7 trillion and Shs4.97 trillion of maturing domestic debt were rolled over. This refinancing risk is likely to persist in short-term owing to the composition of domestic debt- majority being of short term nature.  The Uganda public debt views among economists and other practitioners remain varying.

 The debate, however, remains centred on macro assumptions. Also, the debt sustainability assessments are underpinned by assumptions related mainly to the medium to long term projections of the trade deficits, budget deficits, and growth of the economy, inflation, and exchange rate. The recent macro-economic performance trend suggests that some of these fundamentals have weakened over the last five years. This is in part due to structural weaknesses and a difficult global economic environment, which is indicative of the outlook.  What the debate has not sufficiently delved into, are the micro and household characteristics of Ugandans that have a bearing on debt repayment.

Accumulation of public debt essentially means higher future taxes. For an estimated population of 36 million, each Ugandan is indebted to a tune of Shs780,000. The question is how rich are Ugandans today? How large is the middle class? At macro level, each Ugandan is worth Shs200,000 per month (monthly GDP per capita), which suggests that debt is affordable. But is the cake evenly split?

The Uganda Census 2014 shows that most of the Ugandans fall outside the working population, where by 51 per cent of the population depend on 49 per cent working population (between 15 years and 64). The median age of Ugandans is only 15 years and the economic characteristics of this Ugandan are dismal. Only 70 per cent of the working population age is employed and the majority are under employed in agriculture – 64 per cent of working population are involved in the subsistence agriculture- hand to mouth employment. 

This backdrop suggests that Uganda's middle income is rather small. This is also supported by the 2014 Uganda poverty status report that indicates that 64 per cent of population earn less than Shs200,000 per month (($59.5 per month also equivalent to $2 per day). The USD 2-10 is considered as the realm of lower middle income. Less than one million Ugandans, earn more than $10 per day (Shs33, 700 per day or approximately Shs1,000,000).  This narrow income scope is also traceable in the respective registers of PAYE and the NSSF members; each having less than one million. Of the 998,557 on the PAYE register, only 560,000 earn more than Shs410,000 (in the tax bracket exceeding 410,000).   Another illustrative indicator is the number of cars in the economy; the maximum number of private cars within the registered scale UAA 001A to UAZ 999Z are less than 650,000. Factoring in non-private registered cars suggests a total stock of less than one million cars.  

Juxtaposing the sector composition of GDP and the respective employment suggests a paradox. The service sector that accounts for more than 50 per cent of GDP employs the smallest share of labour force. The state of nation address 2016 indicates service sector only employs 430,000.  The employment of the industry sector that includes manufacturing is un-auspicious.  While over the last three decades, the economic structure has changed from agriculture driven economy to a service driven economy, the employment structure has not changed. The prospects of oil on employment are very mitigated, with only 15,000 direct jobs and a total of 150,000 including indirect employment (1 per cent of the current labour force).

The middle income class argument in isolation does not tell the full story and probably is not a compelling argument but arguably it has a bearing on macro assumptions that underpin overall debt assessment including tax collection. In developed countries, income taxes particularly from this class, account for a sizeable proportion of public revenue.  As Uganda aspires to become middle income, in part leveraged by public loans, it is prudent to address the bottlenecks to meaningful employment, the vast of whom are youth.