BoU worried about government borrowing for Covid-19

Bank of Uganda Governor Emmanuel Tumusiime-Mutebile says the central bank is concerned over the increase in the government indebtedness, warning that the decline in tax revenues due to Covid-19 may cause more distress.
Mr Mutebile said this while appearing before the Parliamentary Committee on National Economy to make a presentation on how the central bank views the effects of Covid-19 on the economy.

In his presentation, Mr Mutebile said while Uganda remains at a low risk of debt distress, there are evident significant vulnerabilities.
“Given the rise in debt levels, there is a growing concern of risk to debt distress,” the Governor said, before warning that the country’s debt service has surpassed the threshold in 2019/2020 and is expected to remain high in the 2020/2021 financial year.

Mr Mutebile, who said such levels of indebtedness is an early indication for fiscal risk that could lead to high levels of debt distress, warned that payment of interests would drain resources that should have been spent on other services.
“Although the multilateral creditors have put in place facilities to dampened the adverse effects of the Covid-19 pandemic, uncertainties relating to the ensuing expenditure pressures, subdued economic activity and declining tax revenues, and a possible further decline in grants could lead to further borrowing on non-concessional terms,” he stated.

MPs who attended the meeting chaired by Mr Laurence Bategeka (Hoima Municipality), accused the Central Bank of not advising government against continuous borrowing even when the different sectors of the economy have been hit hard by Covid-19.
The MPs said with the country’s debt amounting to about Shs54 trillion and standing at 44 per cent of the debt to GDP ratio, the country is likely to plunge into a situation of no return in terms of absorbing the ever accumulating loans.
“This country has borrowed and borrowed. Bank of Uganda you are part of this debt burden because we have also borrowed to capitalise the Central Bank. But we are borrowing up to the bone marrow. Bank of Uganda should advise government to seek debt relief or postponement of payment for at least two years,” says Mr Aston Kajara (Mwenge South, NRM).

However, the governor left the meeting before responding to the issues raised by the MPs. Bamk of Uganda’s Director Research, Dr Jacob Opolot told the committee that the Governor can only do an advisory role to the Minister of Finance in regard to the loans.
“The last time we were here, the Minister of Finance said the Governor is his advisor on issues of borrowing, so you ask the Minister of Finance,” he said.

Decline in exports
Meanwhile, the central bank reported that Covid-19 pandemic has caused quite a lot of challenges to the fiscal operations, private sector credits and assets quality, exchange rate development, balance of payments, and inflation rate. Mr Mutebile said in the months of March and April, the country has registered a decline in exports by 29.6 per cent, imports by 27.4 per cent, worker’ remittances by 41.5 per cent, tourism receipts by 85.4 per cent. He said the same trend is expected to persist into the second half of 2020.