What BoU’s Shs1 trillion bond rescheduling means

The Bank of Uganda’s move to reschedule Treasury bonds worth more than Shs1 trillion which was due for maturity this month has raised some eyebrows.
The government’s intriguing action is coming at a time that the electoral exercise, traditionally associated with heavy and reckless spending, is making its last lap.
The timing has not been helped by the massive toll the Covid-19 pandemic is taking on the economy.         
The government is adamant that this move has nothing to do with its inability to honour its debt obligation, which is quickly getting out of control.  
In an interview earlier in the week with Mr Stephen Kaboyo, a veteran financial market analyst, the rescheduling of bonds is not a common move.  
He said: “Rescheduling of bonds can be used by issuers and the aim is normally to provide the borrower breathing space or some relief when required, due to perhaps an economic shock that has implication on government finances.

Market shock 
The proprietor of Alpha Capital Partners Uganda Ltd says: “In my view, the issuer was trying to avoid a market shock by rolling over huge amounts with implications of distorting the interest structure, but also at same time dealing with huge interest payments and of course in the grand scheme of things carefully taking a look at the government current fiscal situation.”
In another interview with economist Fred Muhumuza, the rare move by the Central Bank reschedule to bonds that were due to mature in January 2021 is an indication of an economy that is struggling to become productive.

“… it affirms the fact that the money we borrow is not being translated into economic activities that would ensure jobs, production, productivity and incomes that can be taxed to repay the debts,” Dr Muhumuza said, before, adding, “Corruption is a big factor and inadequate focus of public servants who prioritise non-strategic aspects besides failing to implement them.” 

Increasing risk profile
 Regretfully, he warned: “Such acts of rescheduling bonds will eventually increase risk and make Uganda get fewer creditors or only expensive credit.”
Economic Policy Research Centre (EPRC) research fellow, Corti Paul Lakuma, the rescheduling of the due bond is a tell-tale sign, projecting the government’s ability to meet its debts obligation.   
He said: “This hurts the perception on ability to honour debt obligation. However, we are living in a strange time with the COVID-19 pandemic which demand strange measures. Debt payment rescheduling is one of those strange measures.” 

Debt position
He continued: “We should not forget much of components in Uganda’s debt basket, including external debt, have been rescheduled.” 
When contacted, Mr Kelvin Kizito Kiyingi, the deputy director, communications at the Bank of Uganda, said not all investors have been affected, except those who have been contacted over the matter. All those that have been contacted, implying those whose bonds were due to mature this month but rescheduled, will be paid both interest and principal owed, stressing that government never fails to honour its obligations as it is the practice all over the world.  

SIGNS OF FINANCIAL STRESS                              
Financial difficulty 
 Signs of financial stress affecting Uganda’s Treasury amid the Covid-19 pandemic and the coming elections have been evident in correspondence from the Finance ministry to officers since last year. For example, a memo issued by the Finance ministry in November 2020 cautioned accounting officers about the reduced number of funding priorities considered by the government, which included defence spending, election expenditure and Ministry of Health emergency requirements related to the pandemic, in addition to salaries and wages even with scarce resources.
Experts say that central banks enjoy discretion over adjustment of maturity dates for the bonds during times of financial difficulty.