Uganda recycles $2 billion in sovereign debt as high borrowing costs loom

By BERNARD BUSUULWA

The government’s total refinanced securities exceeded half of the total amount of treasury bills and bonds issued in the 2023/24 fiscal year, in a development that heralds higher borrowing costs amid growing concerns about the debt problems surrounding the Ugandan economy. East African learned.

Refinancing government debt securities refers to the renewal of maturing Treasury bills and bonds by extending the maturity period of the securities, paying arrears of interest, and applying new pricing terms to those securities.

The latest figures released by the Ministry of Finance show that government treasury bills and bonds were valued at Ush15,021.3 billion ($4 billion) in the 2023/24 fiscal year, while the total value of refinanced securities was estimated at Ush8,358.5 billion ($2.2 billion) in the same period. The remaining amount of Ush6,662.8 billion ($1.78 billion) was earmarked to finance key budgetary measures.

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Treasury bonds worth Ush599.7 billion ($160 million) were refinanced in May 2024 compared to Ush893.4 billion ($238.5 million) of treasury bonds that were refinanced in June 2024, according to the data. A total of Ush1,576.3 billion ($420.9 million) was raised from the domestic debt market in July 2024.

The data revealed that an amount of US$1,048.6 billion ($279.9 million) has been earmarked to finance budget expenditure in the first quarter of 2024/25, while the remaining amount of US$527.7 billion ($140.9 million) has been earmarked for debt refinancing.

As indicated by financial market sources, refinancing transactions mainly concern treasury bonds with maturities ranging from 5 to 15 years and high interest rates.

“Whenever the government announces a refinancing of some government securities, interest rates on Treasury bills and bonds tend to rise because investors sense that the government desperately needs the money. But the increase in government debt service costs associated with the refinancing is not large. So far, it may be less than one percent.

Refinancing government securities is necessary at a time when the stock of expiring T-bills and bonds plus the final interest due to investors is much larger than the available tax revenues. The settlement of debt redemption bills and interest due in such a situation can leave the government with nothing to spend on other budget priorities.

On the other hand, refinancing minimizes the debt burden by settling interest obligations owed to investors and shifting redemption costs. While local investors are interested in inflation movements and their impact on investment returns, foreign investors are very cautious about inflation and exchange rate movements in the local economy,” explained Dr. Kenneth Egesa, Director of Communications at Bank of Uganda (BoU).

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“Refinancing involves shifting the maturities of government debt securities to a longer period on the domestic debt market. Through refinancing, the government can borrow old money and take care of current needs.

For example, the Ministry of Health’s recent funding request of 35 billion shillings ($9.3 million) for the deployment of medical trainees remains unmet due to drastic budget cuts experienced by many sectors.

“This has paralyzed government operations because liquidity is tight. Some investors are only looking at short-term loans to the government, no longer than three years,” noted Dr. Fred Muhumuza, a local economist.