What you need to know:
- Legislators will have a strict deadline of less than 72 hours—or three days—to evaluate and approve the request by the government.
The government will, starting tomorrow, seek urgent Parliament approval of a Shs1.7 trillion loan to finance the country’s development and infrastructure budget for the current financial year amid concerns of soaring public debt, expenditure shortages and limitations.
The Finance ministry in a missive to legislators on the Committee on National Economy, seen by Sunday Monitor, acknowledges the “the growth of public debt.”
“The nominal value of public debt as a percentage of GDP stood at 48.58 percent as at end June 2022, increasing from 46.70 percent registered in June 2021,” the missive reads in part, adding, “Similarly, the Present Value (PV) of total debt to GDP increased from 37.60 percent as at end June 2021 to 40.17 percent in June 2022.”
Legislators will have a strict deadline of less than 72 hours—or three days—to evaluate and approve the request by the government. A report from the Committee on National Economy is expected to be tabled before the House on November 2.
The Shs1.7 trillion loan, the Finance ministry says, is part of Quarter Two (Q2) cash limits. The funds, it adds, will be ready for disbursement once the loan is approved by Parliament.
“The funds will help pay outstanding infrastructure certificates, among others, to avoid accumulating arrears during the financial year. Due to funding constraints, government funded only seven percent of the FY Q1 (Quarter One) development budget,” the ministry says.
While announcing Q2 releases earlier this month, Mr Ggoobi said the finance ministry had provided 33 of the budget for MDAs with the following major releases: Shs503 billion to Unra for implementation of projects; Shs205 billion for contractual obligations under the Ministry of Energy and Mineral Development.
Mr Ggoobi went on to state: “Shs142 billion for certificates and contractual obligations under the Ministry of Works and Transport, and Shs45 billion for the requirements of the National Airlines; Shs111 billion for certificates under Ministry of Water and Environment.”
Hurdles to jump
The loan will go through a number of stages, including approval by Parliament, a legal opinion of the Attorney General on the loan documentation, letter to the Banks authorising persons to sign withdrawal applications together with specimen signatures and submission to the lenders of the list of projects to be funded from the loan.
The ruling National Resistance Movement (NRM) enjoys an overwhelming majority in the House and the decision is expected to easily get a nod of approval. President Museveni on October 13 scuttled plans by Members of Parliament to have their salary and pension contribution increased.
The lawmakers had, on September 7, passed the Parliamentary Pensions (Amendment) Bill, 2022, in which they voted to increase the member’s contribution from 15 to 20 percent.
In an interview with Sunday Monitor, Mr Ramathan Ggoobi, the Permanent Secretary/Secretary to the Treasury (PSST), said all the borrowing is “already programmed and are within our Charter for Fiscal Responsibility.”
“The debt-to-GDP ratio stood at 48.6 percent as at June 2022. Our intention is to keep it within 50 percent in the medium term,” Mr Ggoobi revealed, adding, “That’s why we are restricting the external borrowing mainly to development projects.
Most other expenditures are funded using domestic revenue, mainly tax and non-tax revenue.”
Details seen by Sunday Monitor show that Standard Chartered under the “Nexi” facility offered the government the cheapest credit of the five lenders who expressed interest to lend money.
‘No need to worry’
Mr Ggoobi sought to allay fears and reports that the government, which struggled to finance much of its development budget in Q1 of the current financial year, is cash-strapped and was summoning the legislators for a temporary fix to a bad situation.
“The loan whose terms are among the best in the market (since they were agreed on before the current global increase in interest rates), is part of the financing already approved by Cabinet and Parliament for the FY2022/2023,” he said.
An October 27 memo summoning legislators for a meeting at Conference Hall A of the House reads: “Notice is hereby given that the Committee on National Economy will have a meeting with the Ministry of Finance to consider the urgent assignment of scrutinising the request by the government to borrow up to €455.03m from Standard Chartered Bank and other financial institutions to finance the development and infrastructure budget for the FY2022/2023 and report to the House.”
In Q1 of the current financial year, only Shs10.25 trillion out of the expected Shs14.57 trillion was released by the Finance ministry, creating a deficit of Shs4.3 trillion.
The government has also notified legislators about “dwindling windows of external financing” to explain the increase in the growth of Uganda’s domestic debt compared to the external debt, which it says is reducing.
The Finance ministry explains that it is turning to local sources to plug the gaps in its budget.
In justifying the loan request, the Finance ministry says the offered rates are low (NEXI facility with effective interest rate of 2.98 percent and ICIEC facility with effective interest rate of 3.55 percent) compared to the prevailing market rates in the international markets that are above five percent.
The loan has a maturity period of 10 years, with a grace period of four years.
On September 21, 2021, the government made a call for interested financiers to provide the loan.
Several banks, including Africa Finance Corporation, Citi Bank Uganda Limited, Stanbic Bank Uganda Limited, Standard Chartered Bank Uganda Ltd, the United Bank of Africa Uganda Ltd, MUFG, Trade Development Bank, African Trade Insurance Agency, First Rand Bank, Africa Finance Corporation and Absa Bank, among others, responded to the call.
A review of their financing proposals followed and Standard Chartered Bank United Kingdom emerged as the best bidder, with the lowest financing terms.
Negotiations with Standard Chartered Bank commenced in February 2022.
“In consultation with the Central Bank, as part of debt management strategies, the government opted to take the loan in Euro currency rather than the United States dollars. This was to take advantage of the negative Euribor floating rate at -0.453 percent on the financial markets compared to the LIBOR rate at positive 0.979 percent prevailing at that time. This automatically would save government approx. USD 28.59m (EUR 25.76m),” the Finance ministry notes.
Both comparable base rates, Euribor and LIBOR have a telling difference. Put simply, Euribor is the average interbank interest rate at which European banks are prepared to lend to one another. Elsewhere, LIBOR is the average interbank interest rate at which a selection of banks on the London money market are prepared to lend to one another. Which is to say, unlike Euribor, LIBOR rates come in different currencies.
During the negotiations, the Finance ministry says, Standard Chartered Bank proposed to syndicate and raise the funds with Nippon Export and Investment Insurance (NEXI)—the Japanese government trade and investment insurance programme established in 1950 as part of its export promotion policy—and the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC). The latter is the insurance arm or body of the Islamic Development Bank (IsDB) Group of which Uganda is a member.
The proposed loan of up to €455.03m or Shs1.7 trillion will be provided by Standard Chartered Bank (UK) as the agent and mandated lead arranger for the loan.
NEXI will provide €272.3m (Shs1 trillion) while the ICIEC will provide €182.7m (Shs0.7 trillion).
Other financial institutions to be identified by Standard Chartered Bank might provide funding.
To finance the Shs48.1 trillion current budget, Parliament approved external borrowing of Shs2.5 trillion.
The government says the proposed borrowing facilitated by Standard Chartered Bank will cover part of the approved external lending with the rest—totalling Shs804 billion—to be mobilised through additional external borrowing.
Once the loan is secured it will be put in the Consolidated Fund and utilised to finance the appropriated Domestic Development budget across all programmes.