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Treasury issues Shs7.8t in bonds to offset BoU debt

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Bank of Uganda headquarters in Kampala, Uganda. PHOTO/FILE

The Treasury’s move to settle a long-standing debt with the Bank of Uganda (BoU) will be a syndicate expected to improve the country’s macroeconomic conditions through levering the cash the populace holds to curb any material inflation.

Rather than receiving funds in the form of advances or direct government securities, the central bank will receive bonds of varying maturities from the Finance ministry. 

Sunday Monitor also understands that it will only issue them when absolutely necessary, mainly when the economy is flush with cash and some needs to be wiped out.

“So, the market shouldn’t get excited that we are going to borrow that money next year. What we have done is that we have issued government papers to the Bank of Uganda of different tenors. These are bonds, mainly,” Mr Ramathan Ggoobi, the Secretary to the Treasury, disclosed in a recent televised interview. 

“We have issued them to BoU. They are going to keep them and issue them whenever there is a need to mop out money from the market. Whenever they see that there is excess cash or liquidity in the economy which needs to mop up, they use them so that the banks can give them the money and they give the banks the papers and then they keep the money. That means the money has been taken out of the market.”

The secretary to the Treasury (PS/ST) Ramathan Ggoobi. PHOTO/FILE

Just two weeks ago, as Parliament was drafting the national budget for the 2024/2025 fiscal year, the debt that the Finance ministry owed the apex bank had reached record highs of Shs7.8 trillion.

And just as it has been accruing since 2020, during the height of the Covid-19 pandemic, its repayment would have been postponed. 

But, revealed Julius Mukunda of CSBAG, “there was an agreement between Uganda and the International Monetary Fund (IMF) that we should be able to pay off this debt with the Bank of Uganda as part of fiscal discipline, and I think in the last minute the government had to budge in and be able to pay the Bank of Uganda.”

Timely action?
Mr Mukunda adds that if Uganda had not taken that action, the $250 million (Shs943.8 billion) final instalment of funds from the IMF to the Ugandan government would not have been disbursed. 

Under the Extended Credit Facility (ECF) programme, which began in 2021, Uganda is expected to receive up to $1 billion (Shs3.8 trillion) from the IMF board.

The purpose of this funding is to assist Kampala in speeding up its recovery from the Covid-19 slump and reducing inflation, even though there are still a number of risks in the outlook that could undo the gains and necessitate ongoing reforms and consolidation efforts.

Uganda has already received $750 million (Shs2.8 trillion) under this arrangement, according to IMF data. 

The $120 million (Shs453 billion) was approved in March and is awaiting payment; the remaining $130 million (Shs490.8 billion) has not yet received approval.

During a slow economic run, particularly during the Covid lockdown, Uganda ran out of money. To keep the government afloat, the central bank had to step in and make advances while paying off maturing government debt. 

This was necessary because Uganda needed the money to buy large quantities of medicine, vaccines, and incentives for its citizens.

Stalled payment
However, until a supplementary budget worth Shs13 trillion was approved by Parliament recently, the government’s repayment of this money had been put on hold and excluded from the first draft of the fiscal budget for 2024/2025 period, increasing the national budget from Shs58 trillion to Shs72 trillion.

Mr Ggoobi stated that although the budget had been kept stagnant at the level of the current running budget in the budget framework paper, Parliament made some recommendations on significant unfunded areas after receiving the framework paper and engaging with ministries, departments, and agencies.

Michael Atingi-Ego, the deputy governor of the Bank of Uganda. PHOTO/FILE

Repaying the BoU was one of the issues that surfaced last month when the Finance ministry was completing the budget to submit it to the corrigenda so that Parliament could finalise the appropriation.

“This is intended to strengthen our central bank to continue maintaining macroeconomic stability. The bank had a debt that had accumulated to Shs7.8 trillion with the government over the years; mainly, they funded us to continue funding the budget when there was no revenue during the lockdown,” the Secretary to the Treasury said.

“So, a decision was taken by the government to fully pay the Bank of Uganda. The beauty with this is that as much as this goes to the government’s balance sheet as debt, we actually don’t pay that money,” he added.

This makes up more than half of the Shs13.8 trillion corrigenda increase. Of that, Shs7.8 trillion was for paying the BoU.

Lender of last resort
Because the government occasionally lacks cash on hand, the BoU makes sure that investors are paid on the day that their bonds mature and then makes claims from the government.

“We are in a much better position because we are the ones that manage treasury bonds on behalf of [the] government. This allows us to know what’s maturing on what date. So we pay and [the] government reimburses,” said Dr Michael Atingi-Ego, BoU’s deputy governor.

“But since the outbreak of Covid-19 and the need to mitigate or contain the spread of Covid-19, it became difficult for [the] government to pay back because the economy was locked and the revenues came down because there was no activity,” he explained.

This led to a rise in government spending despite low revenue, which increased the finance ministry’s deficit.

“That’s how we agreed with the government that since the economy is locked down and we need to start aggregate demand in the economy, one way to start aggregate demand is to increase the shillings,” the BoU deputy governor noted.

“We agreed not to repay the maturing securities and left that money to remain in the economy. We pay, but you don’t reimburse us. This was a way of triggering aggregate demand, and when you open up the economy and you begin getting the taxes, then you pay us back. It was a good arrangement as far as the Bank of Uganda was concerned because it was one way of triggering aggregate demand in a situation where there was no economic activity,” he added.

The apex bank is appreciative that the government pays, but it is concerned that these payments will not coincide with the maturing securities. 

The amount of government securities that the BoU is redeeming and which has not yet been reimbursed has increased from Shs2.5 trillion at the time of Covid to Shs6.1 trillion this month.

According to Mr Mukunda, failing to pay the BoU indicates that maturing bonds would then be settled with the central bank’s reserves. 

This, however, also implies that its ability to control monetary policy will undoubtedly be diminished due to small cash to wipe out a significant amount of cash in the economy by issuing treasury bills and bonds to investors like banks.

To account for the surplus or deficit realised during a fiscal year, the central bank uses revenue reserves. This allows it to move realised gains in foreign exchange from the revenue reserve to the general reserve. 

But the reserve recorded a deficit of Shs1.8 billion as of June 30, 2023, which is less than the Shs2.3 billion it did at the same time in 2022.

Cash from IMF

Uganda has already received $750 million (Shs2.8 trillion) under the Extended Credit Facility, according to IMF data. 

The $120 million (Shs453 billion) was approved in March and is awaiting payment; the remaining $130 million (Shs490.8 billion) has not yet received approval.