Central Bank warns of rising cost of debt repayment

Monday October 7 2019

Bank of Uganda governor Prof Emmanuel Tumusiime-Mutebile. At the

Bank of Uganda governor Prof Emmanuel Tumusiime-Mutebile. FILE PHOTO 

By MARTIN LUTHER OKETCH

Kampala. The Central Bank has warned government to slow down acquisition of foreign debt, saying Bank of Uganda is under a lot of pressure to obtain foreign exchange to repay loans.

Speaking during an IMF and AfDB-organised conference in Kampala at the weekend, Bank of Uganda Governor Emmanuel Tumusiime Mutebile, said the rising cost of servicing public debt is putting pressure on the Central Bank to accumulate foreign exchange reserves for future imports.

The biggest challenge for Bank of Uganda, Mr Mutebile said, is how to accumulate foreign exchange reserves to service external debt.

“The forex reserves have to be purchased from the domestic market, without causing sharp exchange rate depreciation pressures that would ultimately [feed into] domestic inflation,” he said, warning that this would result into tightening of monetary policy that would subsequently impact economic growth.

In the 2019/20 financial year, Mr Mutebile noted, the Central Bank has to purchase about $1b to service external debt, debt repayment, and other government imports of goods and services if it is to maintain the 4.1 months imports cover.

The Central Bank estimates that required foreign currency purchases will rise in the next five years.

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However, Mr Mutebile noted that buying increasing amounts of dollars without causing sharp exchange rate depreciation pressures in a shallow foreign currency market, will be a serious challenge.

The governor also noted that whereas Uganda’s total debt remains at a low risk, public debt has risen sharply since the 2009/10 financial year, with nominal debt to GDP ratio increasing from 19.2 per cent in the 2009/10 financial year to 42.2 per cent in 2018/19 financial year.

The figure, he said, will subsequently increase given that government has already made a number of commitments.

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