Government cuts domestic borrowing as interest rates increase
Bank of Uganda governor Emmanuel Tumusiime Mutebile. FILE photo
What you need to know:
Target. Banks prefer to lend to government than the risky private sector.
Kampala. Government will be slowing down domestic borrowing in the next financial year in order to avoid depriving the private sector of access to loans.
Domestic borrowing is where the government issues treasury bills and bonds through Bank of Uganda (BoU) throughout the financial year.
By the time this financial year ends, the government will have borrowed about Shs1.6 trillion.
That amount is expected to reduce in the next financial year to about Shs1 trillion.
In the latest State of the Economy Report by BoU, the government will mostly borrow funds from the external market.
“Since a large part of the deficit is expected to be financed from external sources to avoid crowding out the private sector from the domestic credit market, borrowing needs in the domestic market are expected to fall not least because of the cost of borrowing,” the report reads.
Domestic borrowing costs have been surging since the start of 2015.
A week ago, the government borrowed Shs195.6b through two-year and five-year bonds at rates of 23.59 per cent and 21.20 per cent, respectively.
In June 2015, interest on the two-year bond was 16.9 per cent whereas the five-year bond averaged 16.8 per cent.
Among other reasons, BoU attributes this surge in rates to speculative behaviour.
“Interest rates have remained elevated, in part reflecting expectations about increased domestic financing and heightened inflation expectations but also due to the tighter monetary policy stance. Yields on bonds issued by government spiked close to historical highs,” the report adds.
Often, as rates rise, commercial bankers opt to lend money to a less risky government than the private sector.
This manifests itself in the higher interest rates charged by commercial banks to the private sector.
However, the private sector credit uptake is yet to slow down.
BoU indicates that as of October 2015, credit to the private sector had grown by 23.8 per cent compared to 20.2 per cent.
Uganda’s rising debt
Uganda’s debt levels continue to rise mostly due to the depreciation of the Shilling.
Public external debt, which is mostly borrowed in foreign currency, increased by 14.4 per cent to Shs16.5 trillion, whereas domestic public debt declined by 2.4 per cent to Shs9.6 trillion.
Recently, Ms Razia Khan, the chief economist, Africa at Standard Chartered Bank, said Uganda still had room to grow external debt but cautioned that the government will have to raise more tax collections to pay back the loans.
