Govt nolonger guaranteeing loans for private entities, says Finance Ministry 

Government has been putting in place measures that seek to mitigate the risk of debt exposure. Photo / File 

What you need to know:

  • The Ministry of Finance says guaranteeing loans to private individuals presents challenges that might force government into unplanned expenditure 

This is one of the measures under the Public Debt and Other Financial Liabilities Management Framework 2023/28 that seek to mitigate the challenges of  the rising debt stock

The Ministry of Finance has said government will in the five years to 2028 not issue any loan guarantee to private individuals because they carry monetary risks that may result into unplanned expenditure by government. 

The move is among a raft of measures contained in Public Debt and Other Financial Liabilities Management Framework 2023/28 through which government is seeking to efficiently and sustainably manage public debt. 

The Framework noted that guarantees to private individuals carry risks related to accountability and transparency that usually present significant challenges regarding prudent usage of public resources.

“There shall be no provision of guarantees to private individuals since this may raise considerable risks relating to accountability, transparency, and prudent use of public resources,” the Public Debt and Other Financial Liabilities Management Framework, which also reviews an earlier edition that covers the five years to 2023, reads in part.

Mr Moses Kaggwa, the Ministry of Finance director of economic affairs, said the measure has been in place for some time now, noting most of the projects that seek government guarantees fail to convince financial institutions about the viability of a project. 

“Seeking government [a] guarantee is a sign that the bank is not convinced that the project is viable,” he said, noting that the private sector should borrow based on its credit history, relationship with the bank, business plan, expected cash flow and its security from financial institutions that believe and are convinced of the viability of a project after proper appraisal. 

In the previous Framework covering the five years 2023, the Ministry of Finance indicated that government had breached some of the set debt management targets, leading to a downgrade of the country’s credit risk rating from B+ Stable to a negative outlook. 

Therefore, the Ministry noted there was need to put in place comprehensive measures to manage public debt to ensure that debt remains sustainable and affordable. 

The new Framework also indicated that to manage risk from guarantees, government would only guarantee public entities with a healthy credit score, while at the same time, they have demonstrable capacity to service their debt.  

“To mitigate exposure from guarantees, [government] shall consider loan guarantees to public corporations [or] state-owned enterprises based on their creditworthiness. Only institutions that have the capacity to service their debt shall be considered for any borrowing,” the Public Debt and Other Financial Liabilities Management Framework, published last week, reads in part.

The Ministry of Finance also indicated that entities that fall under the non-guaranteed debt category wishing to borrow would have to seek permission from the Minister of Finance, before acquiring any loan, permission of which would be granted through issuance of a letter of support or a letter of comfort for an entity that must have existed for at least five years.

Development expenditure 

Entities seeking to access loans, the Ministry of Finance says must be public or publicly aided and, therefore, government should be a full or part controller of the institution and shall only be allowed to borrow after the performance of a credit risk analysis. At the same time, proceeds of the underlying loan shall be earmarked to fund development expenditure and not recurrent expenditure.

Government also noted that it will in the five years only issue guarantees for loans whose proceeds are earmarked to fund development expenditure. 

“Guarantees issuance will be accorded to priority sectors that have been identified in the National Development Framework [or] Plan as being of ‘national strategic importance’ and are expected to deliver a net positive broader economic benefit for the country,” the Framework reads in part.