IMF Cautions Uganda on Domestic Borrowing

Finance Minister Maria Kiwanuka

In the 2013/14 financial budget, finance minister Maria Kiwanuka indicated that government would borrow Shs 1trillion for infrastructure projects from the domestic by issuing treasury bills and bonds.

Finance Minister Maria Kiwanuka
Finance Minister Maria Kiwanuka

This was an unprecedented move. Bank of Uganda (BOU) has already borrowed in excess Shs200bn on behalf of government since the start of the financial year.

However, the International Monetary Fund (IMF), and various economists are of the view that Uganda not go beyond the Shs1trillion it intends to borrow this financial year as it would be considered unsustainable in the long run. Ana Lucia Coronel is the IMF Resident Representative in Uganda.

She also added that for domestic borrowing to be sustainable, revenues must also increase if paying back is going to be less tasking.

Currently, Uganda has low revenue collections – 13pecent of GDP -, which many economists agree needs to increase. In the 2013/14 National Budget, at least Shs785bn was earmarked for paying off domestic debt, which is about 6.6percent of the revenues.

In the 2012/13 Budget Framework Paper, total domestic debt was at about Shs 6.3trillion.

Dr Fred Muhumuza, an economist and advisor to the finance minister said that domestic borrowing may have other unintended consequences.

When government issues treasury bills and bonds, often they are oversubscribed – as seen in 2013 – and their interest rate ranges from 10percent to 15percent. As Dr Muhumuza points out, if the government is borrowing at this rate, the private sector ends up borrowing at a much higher rate because they’re considered too risky yet they also need the money.

Additionally, banks that are supposed to lend to the private sector are some of the companies that line-up to lend to government, sometimes starving the private sector of much needed funds.

Dr Muhumuza points out that government needs to borrow as and when need arises for specific investments, if it is to avoid crowding out the private sector.

BOU, which on behalf of government sources for the debt, is more optimistic about the debt situation.

Dr Louis Kasekende, is the deputy governor, BOU says that both external and domestic debt are still in line with the government projections.

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