Commodities

Government reduces domestic borrowing over high interest, low demand

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By Mark Keith Muhumuza

Posted  Thursday, February 25  2016 at  02:00

In Summary

The regime has also committed to borrow less next financial year.

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Kampala. The high-interest environment and low demand for some government debt instruments have forced the Ministry of Finance to cut back on borrowing in this financial year.
In the 2015/16 Budget speech, government was expected to borrow Shs1.4 trillion; however it t made the decision to slash the figure to Shs900 billion.

“We are on track on the domestic borrowing front. However, there was a revision from Shs1.4trillion to Shs900b. This was a decision that was made at the start of 2016 due to market developments,” Ms Jennifer Muhuruzi, the commissioner debt management ministry of Finance, told reporters at the award ceremony of the Best Primary Dealer 2015 at Bank of Uganda (BoU) in Kampala on Monday.
Interest rates on debt issued for two years, five years and 15 years have all gone up and are hovering above the 20 per cent mark.
So far, according to Ms Muhuruzi the government has raised Shs500b from the market.

Government to borrow less
In the next financial year, government already revealed it will also borrow less.
The Finance ministry officials are concerned that there was lower demand for short term debt like the 1 year treasury bill because of the perceived risk.

“Reducing the size we wanted to borrow had to happen because we were going to risk paying higher interest. Also, we had to make the decision because, for some tenures, the demand was low,” said Mr Isaac David Mpoza, the acting director debt and cash management of the Ministry of Finance.
The just concluded elections and perceived risk by investors have been one of the causes for the rise in interest.
Already, government is spending more in paying interest than it is planning to borrow.

Interest payments as at January 2016 were Shs900 billion for both foreign and domestic debt.
BoU has already expressed concern on the current market developments.
“…the subscription levels in the primary market are high but we occasionally observe under-subscriptions in some tenors at auctions, and the spread in pricing at some auctions is significantly wide and out of prevailing quoted market price ranges,” said BoU Governor Emmanuel Tumusiime-Mutebile.

mmuhumuza@ug.nationmedia.com