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Costly foreign loans way out for Uganda capital projects

Saturday June 13 2015
EAEntebbejk

The Kajjansi junction of the ongoing construction of the four lane Kampala-Entebbe expressway. PHOTO | MORGAN MBABAZI

Uganda has left a wide window for expensive commercial loans to support its capital projects in the face of a constrained tax base.

Whereas a big chunk of the country’s external debt is composed of concessional loans — relatively cheap credit facilities that bear interest rates of less than 2 per cent and repayment periods of more than 30 years — economists anticipate increased borrowing of more expensive commercial loans from foreign lenders on account of costly infrastructure ventures such as the standard gauge railway, being undertaken by Uganda, Kenya, Rwanda and South Sudan, with Uganda’s investment costs currently estimated at $3.32 billion.

Total public debt is projected to grow to $7.6 billion at the end of this financial year compared with the $7.2 billion recorded in 2013/14 on the back of increased borrowing meant to finance large infrastructure investments that include Karuma dam and Isimba hydropower projects.

About 60 per cent of Uganda’s public debt is external while 40 per cent is domestic, according to latest data from the Finance Ministry.

Nevertheless, the country’s debt burden appears sustainable, a factor that has inspired ambitious borrowing plans by the government as the country seeks to improve efficiency in the economy in a bid to attract massive foreign investments.

Uganda’s debt to GDP ratio is projected to increase to 34 per cent during 2015/16 from 30 per cent in 2014/15, a trend that offers significant room for additional borrowing below the 50 per cent monetary convergence ratio set by the East African Community.

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The government plans to borrow up to $3 billion before 2020 in an effort to execute various infrastructure projects in the energy and transport sectors, but details on the contribution of concessional versus commercial sources were unavailable by press time.

About Ush285.7 billion ($89.9 million) has been budgeted for external debt interest payments in the next financial year.

“We intend to borrow around $3 billion over the next five years without destabilising our debt sustainability levels. Apart from traditional sources like the World Bank, we are considering the African Development Bank’s new infrastructure fund for Africa valued at $500 billion to mobilise resources for future projects. The portion of unutilised funds against foreign borrowing also dropped to about 15-20 per cent in the current financial year. Under new project management reforms, concerned sectors are required to expedite procurement procedures including selection of contractors before receiving money for implementation,” said Patrick Ocailap, Deputy Permanent Secretary in the Ministry of Finance.

In addition, the share of recurrent expenditure in the new budget is projected at 26 per cent compared with 76 per cent allocated to development expenditure, a strategic shift in funding priorities that reflects more focus on investment — a policy response to frequent complaints made by civil society activists and business people over huge spending in non productive areas.

Domestic financing through issuance of Treasury-bills and bonds is estimated at Ush1,386 billion ($435 million) in 2015/16 compared with Ush1,775 billion ($558 million) registered in 2014/15. This development highlights reduced risks of the “crowding out” often experienced by the private sector in times of rising government borrowing in the financial markets.

Though commercial banks are likely to increase exposure to Treasury-bills and bonds amid strong inflationary and exchange rate pressures forecast in coming months, the Bank of Uganda projects minimal impact on average lending rates and economic activity.

“Out of the seven per cent budget deficit, two per cent will be raised from the domestic market while five per cent will be sourced from the external market. Commercial banks’ liabilities are projected to grow by 20 per cent next financial year but will generate limited increases in interest rates. The total debt to GDP ratio is forecast to rise from 30 per cent to 34 per cent in 2015/16 based on heavy concentration of concessional loans. We have indirectly supported economic growth through  creating more conducive conditions for lending and this has seen private sector credit grow by 17 per cent this financial year,” explained Dr Louis Kasekende, BoU’s deputy governor.

Though a notable rise in external commercial borrowing could spur progress in achieving local infrastructure ambitions, economists point to considerable pressures on revenue collection anticipated over the medium term as the government seeks to clear debt-servicing obligations.

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