The government of Uganda in Q4 of FY2022/23 borrowed €500 million (UGX2 trillion) from Stanbic Bank Uganda and its parent, Standard Bank South Africa, to plug holes in its budget, CEO East Africa Magazine can exclusively reveal.
The Ministry of Finance, in a mailed response to inquiries from this magazine, confirmed to this publication that the money was “to finance the government budget for the FY 2022/23”.
CEO East Africa Magazine understands that the money would among others be used to finance interventions in the agriculture sector, mainly irrigation, post-harvest storage and marketing programmes, as well as deepening market access by improving the transport infrastructure, especially the road and rail network, as investments in industrialisation.
Apollo Benon Munghinda, the Principal Communications Officer, Ministry of Finance, Planning and Economic Development however declined to divulge the loan terms such as interest rate and tenure, saying that “government is bound by confidentiality clauses in the financing agreement for the loan and is therefore not able to disclose the financing terms for this loan”.
Growing concerns over commercial bank credit
The latest development comes as the government’s appetite for private sector capital is fast growing, something that is causing concern since private sector commercial credit is far more expensive compared to the usual multilateral lenders such as IMF and World Bank, whose loans come with lots of concessions and grace periods.
For example, while the share of external debt owed to commercial creditors increased from 8.9% in FY2020/21 to 10.4% in FY2021/22, the share of debt owed to multilateral lenders reduced from 62.5% in FY2020/21 to 61.7% in FY2021/22. Particularly, the share of public debt owed to IDA, the concessional lending arm of the World Bank, reduced to 34.5% in FY 2021/22 from 35.3% the previous year. Bilateral creditors accounted for 27.9% of the total external disbursed and outstanding debt stock in FY2021/22, of which 20.7% was owed to China.
Even amidst calls to tame public borrowing, especially commercial bank credit, on November 7th 2022, the government put out a public call to any lenders seeking to lend to the government. However, according to Mughinda, this call was “overtaken by events, so the Government issued another call for expression of interest to finance the government budget on 3rd March 2023”.
In November 2022, Members of Parliament approved a request by the government to borrow USD million (about UGX1.7 trillion) to finance the infrastructure and development needs of the budget despite objections from the opposition. The loan was to be sourced from Standard Chartered Bank, which will serve as “the lead arranger and agent” for Nippon Export and Investment Insurance (NEXI), a Japanese insurance firm, and the Islamic Corporation for the Insurance of Investment & Export Credit (ICIEC).
This loan however did not materialise due to what the ministry says were unnamed “changes in the financial market which resulted in the increase in financial terms of the loan which were not acceptable to Government”. The government then moved to substitute this loan with another EUR 500 million loan from Amarog Capital and Sovereign Infrastructure Group (SOVINFRA).
However government in May 2023, the government withdrew this request from parliament after MPs expressed sovereignty concerns and the lenders’ seeming inexperience. MPs among others picked out Clause 17 of the financing agreement that stipulated that the borrower, Uganda, would waive its immunity from proceedings in any jurisdiction regarding the agreement or related transactions. MPs also expressed concerns about the growing number of commercial loan agreements where Uganda waived immunity over its assets within and outside the country. They recommended that the government negotiate to safeguard sovereign immunity in all agreements to protect Uganda’s assets and property.
However, in its statement, the MoFPED spokesperson said that the Stanbic/Standard Bank loan was not a replacement for the withdrawn Amarog Capital/SOVINFRA load, saying this was “a separate borrowing altogether”.
Asked if the Stanbic/Standard Bank facility addressed sovereign immunity fears by the MPs, Mr. Mughinda said that “the waiver of immunity clauses were addressed by the Bank and the Attorney General’s chambers”.
He declined to go into the details.
Debt-to-GDP ratio is sustainable
We asked the ministry whether it was worried that in the 5 years to June 2022, the share of the more expensive commercial bank credit to total borrowing has risen from less than 1% to over 10% in FY2021/22 and that with the fresh facility this would go even higher, the finance ministry said that “the EUR 500 million loan from Standard Bank of South Africa was already part of our programmed financing of the budget for the FY 2022/23 and therefore did not increase the debt to GDP ratio given that it was a replacement of already appropriated debt that was included in our projections for FY 2022/23”.
The government also said that it had “assessed the impact of the commercial borrowings on our debt levels and the results” “show that whereas the commercial loans will lead to some increase in the Debt to GDP ratio over the medium term, the ratio will continue to decline over the period” and that the “charter target of being below the 50% by FY 2025/26 will be achieved”.
According to a 5-year Debt Sustainability Analysis (DSA) shared by the Ministry, Uganda’s Debt to GDP Ratio without commercial bank borrowing was 47.6% in FY2022/23 and is expected to reduce to 46.1%, 45.2% and 43.7% in FY2023/24, FY2024/25, FY2025/26 and FY 2026/27 respectively. Revised DSA with commercial borrowing shows that as of the end of August 2023 Debt-to-GDP ratio stood at 48.6% and would gradually reduce to 47%, 46.3%, 44.8% and 43.3% in FY2023/24, FY2024/25, FY2025/26 and FY 2026/27 respectively.
“This is still lower than other countries’ current debt to GDP levels within the region,” Mr. Mughinda reiterated.
Commercial borrowing could increase in the face of World Bank free on lending
Just this month, in the August 23rd plenary sitting, Parliament gave the government the green light to obtain a loan of up to US$566 million (UGX2.1 trillion) from the International Development Association (IDA) of the World Bank Group. Of the amount, US$518 million will be availed as a loan whereas US$48 million will be given as a grant. The loan will finance the Greater Kampala Metropolitan Area Urban Development Programme (GKMA-UDP). The programme will support infrastructure development including roads, in Kampala, Entebbe, Kira, Makindye-Ssabagabo, Mukono and Nansana municipalities as well as Mukono, Mpigi and Wakiso district local governments.
The government also got another go-ahead to borrow up to €40 million (USD42.66 million) from Agence Francaise De Development (AFD) to finance the same Greater Kampala Metropolitan Area Urban Development Program (GKMA-UDP).
On the same day, parliament also adopted and approved another proposal to borrow up to €147.69 million from the African Development Fund and €25.9841 million from the Corporate Internationalisation Fund of Spain for the refurbishment of the railway line.
However, a report by the Parliament Committee on the National Economy noted with concern that “as of December 2022, the total public debt stock stood at US$ 21.74 billion (UGX 80.78 trillion) having increased increasing from USD 20.99 Billion (UGX78.83 trillion) as at end June 2022⏤ an increase of 3.6% in just 6 months.
Of the total public debt stock as of December 2022, external debt constituted 59.2% (USD12.85 billion/UGX47,76 trillion) while domestic debt constituted 40.9% (USD 8.89 billion/UGX 33.02 trillion). The nominal value of public debt as a percentage of GDP stood at 48.4% as of June 2022 compared to 49.6% in December 2022.
The National Economy Committee however warned that “with the growing level of Public Debt due to its significance in meeting the country’s huge financing development needs, there is a need to pay close attention to the cost of debt and the economic rate of return of projects financed through debt”.
Amidst World Bank freezes on new lending over the recently passed Anti-Homosexuality Act 2023, it wouldn’t be surprising that the government will turn more to commercial borrowing which will not increase the share of expensive credit but will also further crowd out the private sector from an already tight credit market.