Uganda gets nod to raise debt limit to meet increasing budgetary demands

Saturday January 25 2014

Increased borrowing will finance the new power generation projects that Uganda is currently undertaking. Photo/FILE

Increased borrowing will finance the new power generation projects that Uganda is currently undertaking. Photo/FILE 

By MARTIN LUTHER OKETCH Special Correspondent

The International Monetary Fund has accepted Uganda’s request to raise the debt limit on non-concessional borrowing from $1.5 billion to $2.2 billion, giving the country access to more funds to meet its rising budgetary demands.

In response to an infrastructure-driven increase in public sector spending, this will be the third time the government has expanded its non-concessional borrowing limit under the current Policy Support Instrument (PSI) — a funding arrangement between the IMF and low-income countries.

In previous PSIs, Uganda started with a borrowing limit of $500 million and then gradually raised it to $700 million; $1 billion and $1.5 billion as economic conditions improved.

IMF senior resident representative to Uganda Ana Lucia Coronel said, “Yes, the Fund has supported the request to increase the ceiling on non-concessional borrowing from $1.5 billion to $2.2 billion within its recently completed first review of the PSI.”

Uganda’s bid comes only weeks after Kenya asked the IMF for an emergency loan it plans to use in response to looming economic shocks. The loan was discussed during the recent visit to Nairobi by IMF chief Christine Lagarde on January 6-8.

In Uganda, increased borrowing will finance the new power generation projects that the country is currently undertaking.

“The electricity projects are critical to close the acute infrastructure gap that makes Uganda one of the countries with the lowest levels of electrification in Africa. A more stable electricity supply would lower production costs and lead to job creation and poverty reduction,” said Ms Coronel.

The IMF’s debt sustainability analysis shows that despite the projected increase in external debt, total public debt will remain sustainable and the risk of debt distress will continue to be low as the country’s economy has been growing and past borrowing has been prudent.

Ms Coronel said that the projects, if well managed, look consistent with the absorptive capacity of the economy, and given their high import content, the impact of the spending on inflation or the real exchange rate is not expected to be significant.

“It is important to emphasise that as with all large projects, they are subject to risks. Therefore, it is essential to ensure efficient use of the resources. This will require timely and transparent implementation of the projects, proper public financial management practices, adequate institutional arrangements, and cost recovery strategy,” said Ms Coronel.

The IMF executive board approved the new PSI for Uganda on June 28, 2013 and completed the first PSI review on December 18, 2013. Ms Coronel said that the country will have to balance new infrastructure spending with the need to avoid fuelling inflation or crowding out the private sector.

“Fiscal policy should be co-ordinated with monetary policy to contain any potential aggregate demand pressures. In this context, avoiding spending overruns or resorting to supplementary budgets that increase current spending is essential,” she said.

Ms Coronel said that ongoing government efforts to reform tax policy and administration, without raising tax rates, are expected to alleviate constraints.

She said that the new PSI has a strong focus on public financial management (PFM), pointing that an efficient and transparent PFM system will ensure a more efficient allocation of resources and prevent diversion of funds.

“We hope that parliament will approve the Public Finance Management Bill soon. This will help improve the credibility, integrity and predictability of the budget. While progress has been made on strengthening PFM systems, challenges still remain and we look forward to further progress on some key areas, including the reinforcement of controls over unpaid bills,” she said.

All central government entities are now covered by the Integrated Personnel and Payroll System (IPPS). Test runs are being undertaken on the functionality of the system, and it is expected that payment of salaries will be run through the IPPS starting in April.

Information at the Ministry of Finance shows that the benchmark on rolling out the Integrated Financial Management System (IFMS) to cover all central government votes has been achieved ahead of schedule.

The first phase of implementation of the Treasury Single Account (TSA) was completed in October 2013 by consolidating the central government accounts. The next step will involve establishing cash and debt management units.

Moody’s, the global credit rating firm, on Friday raised concerns over Uganda’s rising domestic debt citing the relatively high repayment rates on the local borrowing.

The firm, which placed a rating of B1 on the Ugandan economy, said the growing local debt component presents a risk to the local economy especially if it grows at a faster rate than currently envisaged and agreed on with the IMF.

“The increase in domestic debt has important implications for the government’s borrowing costs: Over the past five years, the average nominal interest rate on domestic debt was close to 11 per cent,” said Moody’s.

Additional reporting by Peterson Thiong’o