Government seeks 1.7 trillion shillings from private lenders

The government will, from tomorrow, seek urgent parliamentary approval for a loan of 1.7 trillion shillings to fund the country’s development and infrastructure budget for the current fiscal year, amid worries about skyrocketing public debt, shortages and spending limits.

The Department of Finance, in a missive to lawmakers from the National Economy Committee, seen by Sunday Monitor, acknowledges “the growth of public debt”.

“The nominal value of public debt as a percentage of GDP stood at 48.58% at the end of June 2022, compared to 46.70% recorded in June 2021,” reads part of the missive, adding: “Similarly , the present value (PV) of total debt to GDP fell from 37.60% at the end of June 2021 to 40.17% in June 2022.”

Lawmakers will have a strict deadline of less than 72 hours, or three days, to assess and approve the government’s request. A report from the National Economy Committee is expected to be tabled in the House on November 2.

The loan of 1.7 trillion shillings, according to the Ministry of Finance, is part of the cash limits for the second quarter (Q2). The funds, he adds, will be ready for disbursement once the loan is approved by parliament.

“The funds will help pay for ongoing infrastructure certificates, among other things, to avoid accumulating arrears during the financial year. Due to funding constraints, the government has only funded 7% of the budget for development of the first quarter of the fiscal year (first quarter),” the ministry said.

While announcing the second quarter releases earlier this month, Mr. Ggoobi said the Ministry of Finance had provided 33% of the budget to MDAs with the following key releases: 503 billion shillings to Unra for setting implementation of projects; 205 billion shillings for the contractual obligations of the Ministry of Energy and Mineral Development.

Mr. Ggoobi went on to say: “142 billion shillings for certificates and contractual obligations under the Ministry of Public Works and Transport, and 45 billion shillings for National Airlines requirements; 111 billion shillings for certificates from the Ministry of Water and Environment.

The loan will go through a number of stages, including approval by Parliament, a legal opinion from the Attorney General on the loan documentation, a letter to the banks authorizing people to sign withdrawal requests accompanied by specimen signatures and submission to the lenders of the list of projects financed by the loan.

The ruling National Resistance Movement (NRM) enjoys an overwhelming majority in the House and the decision should easily be approved. On October 13, President Museveni thwarted MPs’ plans to raise their salaries and pension contributions.

Lawmakers had, on September 7, passed the House Pensions (Amendment) Bill 2022, in which they voted to increase membership dues from 15 to 20 percent.

In an interview with the Sunday Monitor, Mr. Ramathan Ggoobi, Permanent Secretary/Secretary to the Treasury (PSST), said that all borrowing is “already scheduled and falls within our Fiscal Responsibility Charter”.

“The debt-to-GDP ratio stood at 48.6% in June 2022. Our intention is to keep it below 50% over the medium term,” Mr. Ggoobi revealed, adding, “That is why we limit external borrowing primarily to development. projects.

Most other expenditures are financed by domestic revenues, mainly tax and non-tax revenues.

Details seen by Sunday Monitor show Standard Chartered under the ‘Nexi’ facility has offered the government the cheapest credit of five lenders who have expressed interest in lending money.

Mr Ggoobi sought to allay fears and reports that the government, which struggled to fund much of its development budget in the first quarter of the current financial year, is cash-strapped and has summoned lawmakers for a temporary solution to a bad situation.

“The loan, whose terms are among the best in the market (as they were agreed before the current global interest rate hike), is part of the financing already approved by Cabinet and Parliament for the financial year 2022/2023. “, did he declare.

An Oct. 27 memo summoning lawmakers to a meeting in House Conference Room A reads: “Notice is hereby given that the Committee on National Economy will meet with the Department of Finance to consider the urgent mission to consider the government’s request to borrow up to €455.03 million from Standard Chartered Bank and other financial institutions to finance the development and infrastructure budget for the financial year 2022/2023 and report to the House.

In the first quarter of the current financial year, only Shs 10.25 trillion out of the expected Shs 14.57 trillion was released by the Ministry of Finance, creating a deficit of Shs 4.3 trillion.

The government has also briefed lawmakers on “shrinking external financing windows” to explain Uganda’s increased domestic debt growth relative to external debt, which it says is shrinking. reduce.

The Ministry of Finance explains that it is turning to local sources to fill in the gaps in its budget.

To justify the loan request, the Ministry of Finance claims that the rates offered are low (NEXI facility with an effective interest rate of 2.98% and ICIEC facility with an effective interest rate of 3.55%) by compared to the rates in force on the international markets which are higher than five. percent.

The loan has a term of 10 years, with a grace period of 4 years.

On September 21, 2021, the government launched a call for interested financiers to grant the loan.

Several banks including Africa Finance Corporation, Citi Bank Uganda Limited, Stanbic Bank Uganda Limited, Standard Chartered Bank Uganda Ltd, 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, answered the call.

A review of their funding proposals followed and Standard Chartered Bank UK emerged as the top bidder, with the lowest funding terms.

Negotiations with Standard Chartered Bank began in February 2022.

“In consultation with the Central Bank, as part of debt management strategies, the government has chosen to contract the loan in euros rather than US dollars. This was to take advantage of the negative Euribor floating rate at -0.453% on the financial markets compared to the positive LIBOR rate at 0.979% in force at that time. This would automatically save the government approx. 28.59 million dollars (25.76 million euros)”, notes the Ministry of Finance.

The two comparable base rates, Euribor and LIBOR have a telling difference. Simply put, Euribor is the average interbank interest rate at which European banks are willing to lend to each other. Elsewhere, LIBOR is the average interbank interest rate at which a selection of London money market banks are willing to lend to each other. In other words, unlike Euribor, LIBOR rates are denominated in different currencies.

During negotiations, according to the Ministry of Finance, Standard Chartered Bank offered to syndicate and raise funds with Nippon Export and Investment Insurance (NEXI) – the Japanese government’s trade and investment insurance program established in 1950 as part of its export promotion policy – and the Islamic Corporation for Insurance of Investments and Export Credits (ICIEC). The latter is the branch or insurance organization of the Islamic Development Bank (IDB) group of which Uganda is a member.

The proposed loan of up to 455.03 million euros or 1.7 trillion shillings will be provided by Standard Chartered Bank (UK) as mandated agent and lead arranger for the loan.

NEXI will provide €272.3 million (1 trillion Shs) while ICIEC will provide €182.7 million (0.7 trillion Shs).

Other financial institutions to be identified by Standard Chartered Bank may provide funding.

To finance the current budget of 48.1 trillion shillings, Parliament approved external borrowing of 2.5 trillion shillings.

The government says the proposed borrowing facilitated by Standard Chartered Bank will cover part of the approved external lending, with the remainder, totaling Sh804 billion, to be mobilized through additional external borrowing.

Once the loan is obtained, it will be placed in the Consolidated Fund and used to finance the appropriate national development budget for all programs.

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