On May 29, the Ministry of Finance pulled off one of the biggest bond sales in recent times, raising Shs3.19 trillion in a single day. Photo / File
With the clock ticking down to the close of the financial year on June 30, Uganda’s finance managers are in high-gear panic mode.
A pile of unpaid bills - mostly owed to road contractors and pending items under the supplementary budget - is breathing down the government’s neck.
To plug the gap, the Finance Ministry has gone into overdrive - tapping local and international lenders for emergency cash - as tax collections fall short of second-half targets and donor funding continues to dry up.
At home, government is squeezing the domestic market dry. Earlier in the year, it went on a borrowing spree, so aggressive that interest rates in the primary bond market soared to 17 percent, prompting government to reject most offers to control costs.
But with bills piling, government is now back on the borrowing table - this time knocking on foreign doors.
The urgency is crystal clear with the Finance Ministry quietly sealing loan deals totaling €500m (Shs2 trillion) from three foreign lenders: €270m (Shs1.11 trillion) from African Export-Import Bank (Afreximbank) and €230m (Shs942b) from Eco Bank and the Development Bank of Southern Africa.
The money isn’t for next year. It’s for the current budget, which ends in just weeks.
Parliament already approved a Shs72.1 trillion budget for the 2024/2025 fiscal year.
Of that, Shs34.3 trillion is for government programmes, and Shs37.8 trillion for statutory payments such as salaries and debt and Shs1.39 trillion for budget support.
What is particularly striking is that the approved commercial loans are higher than what government initially planned to borrow for budget support.
Finance Ministry knows this - but explaining why seems to be where things fall apart.
That much was clear in Parliament last Thursday. MPs pressed for details: Why now? Where exactly is the money going? The only explanation was that negotiations took long. Beyond that? Radio silence.
Still, the Speaker was keen to get the loans approved - ushering Parliament into a fast-track mode that left little room for debate. It was more like a rubber-stamping exercise.
Behind the loans
The combined amount behind the two major loans is Shs2 trillion. The Afreximbank loan, which totals €270m (Shs1.11 trillion) is structured over 10 years with a three-year grace period.
This means government won’t pay the principal on the loan until 2028, but interest payments start immediately.
The interest rate is pegged to the six-month Euribor, a European benchmark (currently at 2.151 percent), plus a steep 5 percent margin, which puts the total interest at roughly 7.15 percent. Add in a 1.75 percent placement fee, a 1.2 percent annual commitment fee (if the money isn’t fully used), and the effective cost shoots up.
That’s not cheap money by any standard.
The second loan - €230m (Shs 950.8b) - is split between €130m (Shs537.41b) in commercial financing and €100m (Shs413.3b) in development financing.
Both come with a three-year grace period, offering some breathing space before repaying the principal.
Interest is again based on the Euribor (2.151 percent) plus margins: 5 percent for the development portion and 4.85 percent for the commercial portion - bringing effective interest rates to around 7.2 percent and 7.18 percent, respectively.
There is a 1.25 percent arrangement fee up front, a €30,000 (Shs Shs124m) annual agency fee, a 0.5 percent commitment fee on unused funds and a 1.5 percent penalty default or delayed payments.
Even though this deal is slightly cheaper than the Afreximbank loan, it’s still high-cost borrowing for short-term spending - not long-term development.
So, why take these loans now?
According to Ministry of Finance, negotiations simply took long - and the deals only closed now because lenders were slow to come to the table.
But that explanation doesn’t fully hold water. Uganda is already sitting on Shs16 trillion worth of undisbursed loans - money that has been approved but not used.
In addition, Shs222b is just sitting idle in special accounts at Bank of Uganda, earmarked for projects that haven’t moved forward.
But with just two weeks left in the financial year, Ministry of Finance officials are avoiding a crisis - doing whatever they can to avoid a cash crunch, even if it means bending own rules and paying premium interest rates for quick cash. It’s even worse in the domestic bond market.
The domestic dash
On May 29, the Ministry of Finance, through Bank of Uganda quietly pulled off one of the biggest bond sales in recent time, raising a whopping Shs3.19 trillion in a single day.
For comparison, the last big one in October 2023 raised Shs1.8 trillion - this new one nearly doubled that.
And this wasn’t a regular public auction where everyone gets a shot. It was more like a VIP poker game - invite-only - with just primary dealer banks and NSSF in the room.
The price was steep. 18.25 percent for the 20-year bond and 17.73 percent for the 15-year bond (from 17.1 percent last month). Basically, government was offering fat returns just to get cash fast. And banks couldn’t resist.
What is wild is how quickly things flipped. Just a month ago, government rejected bids that asked for more than 17 percent. Now? It’s accepting nearly every offer - even at higher rates.
So, what changed?
Market analysts say it all points to one thing: desperation. Government urgently needs cash, and investors are smelling the panic.
With fiscal pressure mounting, investors are pegging their money on a risk profile - and in return, demanding higher yields.
Government, pushed into a corner, has very little legroom to maneuver – it is biting the bullet.
Finance Minister Matia Kasaija has this time not had the luxury and patience to chorus the usual government sugarcoating.
Last Thursday, he told Parliament “there are expenditures now in the Treasury, which we need to pay like unpaid road contractors” – on the Mityana–Mubende road who had resumed even though the contractor hadn’t been paid.
“I failed to pay him,” he admitted, “because I did not have the resources.”
High stakes, high interest
These are some of the most expensive loans Uganda has taken in years.
Even short-term bonds are yielding above 18 percent, and banks are likely to flip them on the secondary market for quick profits.
The coverage ratio for the latest private placement - a measure of how much demand there was for the bonds - was just 1.14, meaning almost every shilling offered was taken.
Some analysts say government is raising a massive war chest before the fiscal year closes to ease pressure on upcoming auctions.
Others believe it’s bumping up against the constitutional borrowing ceiling and wanted to cash in one last time.
Either way, one thing is clear: government is low of cash, and the public debt clock is ticking louder.
As of June 2024, Uganda’s public debt stood at $25.55b, up from $23.6b just six months earlier.
Nearly $11b of that is owed domestically. So while the latest loans may keep the lights on - literally and figuratively - the cost of this last-minute financial rescue could come back to haunt taxpayers.
Government has another scheduled bond auction this month. It will be interesting to see what it pick.
Government has borrowed over Shs6 trillion - from both international and domestic markets.
Still, Kasaija insists there is no cause for alarm, because debt-to-GDP ratio is just 46.86 percent, a slight dip from last year’s 47.4 percent.
But with yields shooting up, borrowing costs soaring, and investor confidence now delicately tied to government’s next move, it’s getting jittery.
