The government of Uganda plans to borrow up to €207.77 million, or about $243 million, from Citibank and other foreign financial institutions to develop its road infrastructure in the eastern part of the country.
This is even though the government of Uganda is concerned with rising public debt as well as rising cost of servicing the same. Reuters article on the borrowing plans of Uganda from Citibank
Key Eastern Road Infrastructure to be Financed by Borrowing
The borrowing is meant to finance road infrastructure projects in Uganda aimed at improving transport links in the Busoga sub-region.
The biggest portion of the project will include the construction and upgrading of the Jinja-Mbulamuti-Kamuli-Bukungu road, which spans 127 kilometres.
The government further plans to improve the 10-kilometre-long roads in Jinja city.
The financial arrangement would include around €179.26 million for civil works and commercial insurance, and €28.51 million for land acquisition compensation and project supervision.
Government Says The Project Will Yield Economic Returns
The Ugandan government believes that this infrastructure project is financially feasible and will yield considerable returns in the future.
It has been found that this project is estimated to have an EIRR of 16.7%, which is higher than the economic opportunity cost of capital in the country, estimated at 11%.
The government believes that improved roads will help in reducing transportation costs and improve access to markets and movement between the community and commercial centers.
Road infrastructure may prove helpful for the agricultural producers as well as the business community in the Busoga region.
Citibank Loan Increases Uganda’s Financial Requirements
The loan proposed by Citibank comes at a time when Uganda’s government has come under pressure with regard to its borrowing requirements.
This is because the country has been spending heavily on its infrastructure, besides gearing up for the commercial production of oil in the near future.
Additional external borrowing will help raise the finances required for the completion of critical infrastructure, although more borrowing will add to the future debt obligations of the government.
The International Monetary Fund (IMF) had earlier warned about the debt servicing difficulties experienced by Uganda as the government attempts to balance its budget.
Debt Sustainability Becomes an Important Issue for Uganda
The question of debt sustainability has become increasingly relevant for Uganda as it considers new infrastructure borrowing.
According to projections, the debt-to-GDP ratio of the country can climb up to 55.5%, with the potential of rising above 60% in the early 2030s.
Such a path might limit the government’s fiscal flexibility should debt payments grow at a faster rate than revenue.
Kampala’s main problem will be to make sure that borrowed money generates enough economic activity and revenue to warrant additional debt.
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Infrastructural Investment Meets the Debt Dilemma
The potential loan exemplifies the challenge that the Ugandan government faces.
The creation of such infrastructure could help boost economic production and connectivity, resulting in future gains. On the other hand, financing through loans exposes the government to debt repayments.
The Ugandan government feels that the roads in the east would create economic value in more ways than just the construction process itself.
Thus, the government would have to prove that the gains from the improved infrastructure exceed the costs of the loan.
