Dollar dilemma: How Capital Markets missed Umeme moment

Local bonds could do more than just bail out the government in a pinch. They would not only strengthen Uganda’s underdeveloped financial ecosystem but, over time, attract the foreign investors the country so desperately courts abroad.
Think of it as a long-term play for stability, rather than the short-term hustle.
Take March, for example. Uganda found itself scrambling to fund a liability it had seen coming for decades: the Umeme buyout after a 20-year concession.

When the curtain fell, the Finance and Energy officials were caught flat-footed, scrambling to estimate asset values of the company they contracted to distribute electric power to the population.

This was mired with navigating a $116 million (Shs426.5 billion) valuation gap—one that quickly turned into a tug-of-war between the state and Umeme’s investors. Umeme invoiced $234 million (Shs860 billion) but the government was willing to pay it $118 million (Shs433.7 billion).

The outcome? Predictable, yet baffling. Parliament gave the green light to a $191 million (Shs703.1 billion) loan from Stanbic Bank—disguised as an ‘emergency’ measure and slipped into a last-minute supplementary budget.

So while Parliament treated the loan like a fire drill, it now turns out this was just another expensive routine expenditure, dm Money has established.

This matters because Uganda’s national debt is becoming less manageable and more like a game of "How much can we borrow today?"
Since 2018, domestic debt has shot up by 157 percent—from Shs15.2 trillion to Shs39.1 trillion—while external debt soared to Shs54.4 trillion in 2023. And let’s not forget the Shs469.7 billion spent on commitment fees for idle projects.

There is that growing pile of commercial loans. The ‘Umeme loan’ is a prime example of the price Uganda is paying for such fiscal improvisation.

“Without a smarter, forward-looking debt strategy—one that taps into capital markets and leverages tailored instruments—Uganda risks paying more in interest than it gets in outcomes,” warns Eric Odong, an economist at Civil Society Budget Advocacy Group (CSBAG).

Here are the missed opportunities. Uganda could have structured local bonds, tapping into collective investment schemes or even issuing dollar-denominated bond instruments domestically—an approach Nigeria successfully employed in 2024.
Instead, the Ugandan government opted for a $191 million commercial loan to cover the Umeme buyout and another $50 million commercial loan to kickstart the Uganda Electricity Distribution Company Limited (UEDCL). Fast, easy cash? Sure. Sustainable? Not so much.

A buyout poorly bought
The $191 million (Shs703.1 billion) loan to finance Umeme’s buyout is already signed, but that doesn’t mean we shouldn’t ask important questions. There were more affordable and sensible options available—if only the government had taken a moment to look beyond the latest crisis.

One easy option? Issue a bond to the National Social Security Fund (NSSF)—which already owns nearly a quarter of Umeme (23.4 percent)—and to other shareholders willing to swap equity for debt.

That move could have kept borrowing costs low and spared taxpayers the full brunt of the financial burden.

Then there is the bonus: Offer those investors a slice of the soon-to-be government-run UEDCL. That way, the government could have deferred the payout, kept the cash in the vault, and still made investors feel like they had a stake in the future.

Even if a loan was truly unavoidable, syndicating it across multiple banks could have spread the risk, shielded private sector credit access, and softened the inevitable impact on domestic interest rates.

But the National Treasury went for the fastest fix, one that carries a heavy, expensive tail.
So, the question remains: Was this a well-thought-out strategy, or just another panicked stumble in Uganda’s fiscal dance?

A high-cost short-term fix
On paper, Uganda’s $191 million (Shs703.1 billion) loan to finance the Umeme exit might look like a neat solution. But dig a little deeper, and the numbers start to sting.

The loan stretches over five years, with a six-month grace period followed by 4.5 years of repayments. It is pegged to the six-month Euribor rate (forecast at 2.39 percent by March 2025) plus a 4.7 percent margin, which leads to an effective interest rate of around 7.27 percent. Not exactly a steal.

But there is more: a 1.2 percent arrangement fee, a 2 percent annual default penalty, and the need to prepay the insurance premium.

Borrowers can cancel undrawn amounts (in €10 million chunks), but that flexibility feels less like a victory and more like a consolation prize.

The loan’s present value of $213.37 million (Shs785.9 billion) far exceeds its nominal value of $190.99 million (Shs702 billion). When all is said and done, Uganda will pay a total of $235.41 million (Shs866 billion) over five years. That is an expensive price tag.

With a grant element of -11.7 percent, this loan is a commercial one, missing the concession mark by a wide margin.
“Moving forward, the government must take a more proactive approach,” Civil Society Budget Advocacy Group (CSBAG) urges in an expert analysis. “Identifying and managing transition risks long before contracts expire is crucial. Otherwise, taxpayers will keep footing the bill for preventable mistakes.”

Denis Kizito, the director of market supervision at Uganda’s Capital Markets Authority (CMA), warns that borrowing from local commercial banks—while regulating the same —risks blurring the lines between referee and player.

"In finance, there is an unwritten rule: whoever lends you money becomes your boss," he says.
"It is risky when the government negotiates with commercial banks in bilateral deals instead of submitting itself to the discipline of the open market," Kizito says.

The government might argue it needed dollars, but it also borrowed $50 million (Shs184.2 billion) to finance UEDCL’s start-up capital and operations that did not necessarily require dollars, something that could have necessitated a public bond, where the price is determined by supply and demand.

But it did not. Why? The answer likely lies in Uganda’s regulatory setup. Government borrowing through the domestic primary market is exempt from CMA oversight, giving the central bank power to act as auctioneer without regulatory scrutiny when it borrows locally.
“Look at Kenya,” Kizito says. “There, the capital markets regulator must approve every bond auction in the primary market. This transparency leads to better pricing and greater confidence in the market.”

Uganda’s system, on the other hand, allows opaque deals that sidestep oversight—ultimately costing the state more in the long run.
"What we’re seeing," Kizito adds, "is a conservative and outdated approach to capital markets. If the government trusted the system, why would it exempt itself from regulation?"

In the end, while the Umeme loan may address a short-term need, it raises deeper questions about financial independence, market oversight, and whether Uganda is building a capital market—or merely bending it.

Ready capital markets?
After examining the financial decisions surrounding the Umeme buyout, one question stands out: Could Uganda’s domestic capital markets have stepped in to save the day?

The Finance Ministry needed dollars—lots of them because Umeme’s majority foreign institutional investors were demanding their payout in U.S. dollars, which was perfectly reasonable.
But here is the catch: Uganda’s capital markets have never issued a bond in dollars. All government securities are denominated in local currency, leaving the Finance Ministry with limited options.

So, why not raise the money domestically in shillings? It would be costly to borrow in shillings and then convert it into U.S. dollars.

The issue is the government’s need for hundreds of millions in dollars, while its own capital markets are ill-equipped to issue dollar-denominated instruments.

So, it turned to commercial banks, which have access to dollars through customer deposits, forex trading, and loan syndications. This approach made sense—up to a point.
Keith Kalyegira, former chief executive officer of Uganda’s Capital Markets Authority and current board chair at Absa Uganda, agrees—somewhat.

“In the short term, borrowing in dollars can make sense, especially if your interest expenses aren’t tied to those funds long-term,” he explains.

There was also optimism surrounding Uganda’s oil sector. Contracts for Tilenga, Kingfisher, and the East African Crude Oil Pipeline (EACOP)—worth $7 billion—had been awarded. Ugandans had a 40 percent share, while French and Chinese companies handled the rest, whose dollars would eventually flow into the country’s banks, helping meet the state’s greenback needs.
“The real risk lies in long-term financing. With interest rates tied to the Euribor rate, Uganda doesn’t control those. That’s where the danger lies,” Kalyegira says.

Eurobonds were a hard call
At first glance, a Eurobond would have seemed like the sleek, sophisticated choice for Uganda.
By raising hard currency in major financial hubs like London, the country could have secured cheaper rates than in the local market, where borrowing often carries higher costs due to inflation, political and currency risk.

With top-tier investment banks like Goldman Sachs, JPMorgan, and Deutsche Bank leading the charge, the global stage offers deep pockets and credibility. But the glitzy world of Eurobonds comes with baggage—credit ratings, roadshows, and heavy scrutiny.
That is where Uganda hits a wall.
As of April 6, 2025, Uganda’s credit ratings stand at B- from S&P Global Ratings, B3 from Moody’s, and B from Fitch—all with stable outlooks. Not disastrous, but certainly not premium.

With these ratings, courting global investors would mean higher yields and tighter terms. Factor in the months-long process required to structure and launch a Eurobond, and it becomes clear why this route was sidestepped. The government needed funds immediately, not in a quarter.

Domestic capital markets
So, the fallback was the domestic capital market. But that had limitations.
Uganda’s local capital markets don’t offer dollar-denominated instruments. All government securities are issued in Ugandan shillings, which ties the government’s hands when it comes to raising hard currency locally.
But the opportunities were there—if only the political will existed to pursue them, Kizito says.

“In markets, you can structure anything—as long as you’re intentional,” he notes.
One potential route could have been tapping into Collective Investment Schemes (CIS), such as UAP Old Mutual, Britam, and Sanlam, which run dollar trust funds. These firms currently manage over Shs160 billion ($42 million) in hard currency assets. While modest compared to the Shs3.8 trillion managed in shilling-dominated funds, it shows a growing market with potential.
It would have financed 84 percent of the financing the Finance Ministry borrowed commercially for UEDCL, which was at $50 million.

Another underutilised tool is ‘Okusevinga,’ a government initiative that mobilises funds from Ugandans to buy treasury instruments—though it only deals in shillings. Why not introduce a dollar-denominated version? Kizito asks. The challenge, he says, is that without a solid base of foreign currency—whether from exports or Foreign Direct Investment (FDI)—building a sustainable market for dollar instruments is difficult.

Andrew Mwiima, a financial markets consultant, agrees. “If there aren’t enough dollars in the economy, issuing dollar instruments will always be a struggle,” he says.

“But with the oil projects—Tilenga, Kingfisher, and EACOP—injecting billions of dollars, Uganda will be in a better position.”
However,  "A loan is a loan," Mwiima warns. "Repayment in dollars while revenues come in shillings creates serious currency risk unless the export base is strong or the net revenues of the borrower are in dollars."

Nigeria provides a cautionary tale. In September 2024, the country launched its first domestic dollar bond, raising $900 million—oversubscribed by 180 percent. But questions remain about Nigeria’s ability to manage foreign currency debt amid global economic uncertainty.

Uganda, for now, finds itself at a crossroads—caught between immediate needs and long-term strategy. The country had options: dollar bonds, investment schemes, or the global capital markets. 

Yet, it chose the quickest fix: commercial banks, something that highlighted an uncomfortable truth that Uganda’s capital markets are not yet ready to rise to the occasion.

Whether this decision proves pragmatic or short-sighted will depend on whether it sparks the reform needed or simply leads to another rinse-and-repeat borrowing cycle.