Kampala. The depreciating Shilling and rise in yields on government debt are piling pressure on Uganda’s debt obligations.
The National Budget Framework Paper 2016/17 approved by Cabinet indicates that government will pay interest on debt worth Shs2 trillion up from Shs1.65 trillion in the current financial year.
This represents a rise of Shs350b, which will be funded from tax collections.
According to the framework paper, the rise in interest payments was due to exchange rate depreciation.
“Interest rates have increased on all tenors of Treasury instruments over the last year which increases the costs of domestic borrowing,” the framework paper reads.
Domestic borrowing costs have been rising since the start of 2015, with government paying interest as high as 20 per cent on some tenures from about 14 per cent in 2014.
Additionally, the rising public debt also leads to a rise in interest rate payments.
“With the current interests rates in the range of 20-24 on one-year treasury bills, plus the external debt interest payment of about Shs500b per annum this would result in the interest payment of about Shs2 trillion plus,” Dr Adam Mugume, the Bank of Uganda (BoU) director of research told Daily Monitor on Monday.
The strengthening of the US dollar saw the Ugandan Shilling depreciate by 17.5 per cent in 2015.
This is on top of the 10.8 per cent depreciation experienced in 2014.
A depreciating Shilling, according to Dr Mugume, “increases debt obligations since government revenue is in Shillings.” Uganda’s external debt is estimated at $4.5b as of November 2015.
Going by the current exchange rate, that is an equivalent of Shs15.5trillion. “If the exchange rate was to depreciate to say Shs4000 per dollar, the same external debt would rise to Shs18.5 trillion,” Dr Mugume said.
Even with the pressure on interest payments, Parliament in a space of two days, approved loans worth $350.77m (Shs1.2trillion) from international lenders for various project.
Additionally, government is expected to finalise plans to borrow trillions for the construction of the Standard Gauge Railway and Kampala – Jinja expressway.
Mr Stephen Kaboyo, managing partner Alpha Capital Partners, said: “The depreciation of the Shilling affects the external debt stock, external debt service and the nation’s economic growth. The cost of debt service rises and this could potentially erode the country’s ability to service its foreign debt.”
He added: “The repayment of foreign denominated debt also increases the demand of foreign currency and this puts more pressure on the shilling.”
Last week, Standard and Poor’s (S&P) affirmed outlook for Uganda’s ability to borrow at a rating of B/B, noting that; “The stable outlook on Uganda, over the next six months, reflects our view that these public works will boost Uganda’s growth and improve the country’s fiscal and external metrics over time.”
Uganda’s public debt is projected to rise to 33 percent of GDP in 2016 from 27 percent in 2015 to finance infrastructure. These increments, according to S&P will be as a result of borrowing from external sources like China Eximbank. “On the downside, the World Bank Group has cancelled funding for road works, due to inadequate oversight of subcontractors,” S&P says.