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Finance Ministry launches new five-year framework to manage public debt

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Simon Kabayo
Simon Kabayohttps://eagle.co.ug
Reporter whose work is detailed

The Ministry of Finance, Planning, and Economic Development has launched a five-year Public Debt Management Framework aimed at managing public debt and other financial liabilities.

Finance Minister Matia Kasaija revealed that the framework, which replaces the one drawn in 2018, lays down strategies that balance the need for borrowing with the need for sustainable debt levels.

“Over the next five years, the focus will be on ensuring that public debt is maintained at manageable levels, while also investing in critical infrastructure, social programs, and other important initiatives that will drive economic growth and development,” Kasaija said.

Government established a number of institutional, legal, and policy frameworks to direct responsible debt management and acquisition in Uganda. These include the Charter for Fiscal Responsibility, Public Debt Management Framework and the Public Finance Management Act.

However, debt servicing has in the past continued to exert pressure on domestic revenues breaching the 2018 Public Debt Management Framework threshold of 12.5 percent of domestic revenues. Official data shows that the debt stock has over the last three years fluctuated between 48 and 52 percent of the value of the country’s economy (GDP), with experts warning that anything beyond this level could be dangerous. Public debt includes money borrowed externally and domestically, as well as arrears or financial claims on the government through delayed payments for services supplies, and other obligations.

Kasaija admitted that the government has broken several public debt safety points, which he says they want to correct through the new five-year Public Debt Management Framework.

 The new framework also plans to build strong relationships with international lenders and investors for low-interest capital, enhance risk management practices to mitigate the impacts of potential shocks, strengthen debt reporting and monitoring systems for transparency, and explore innovative financing solutions, including the use of green and sustainable bonds, to support our environmental and social goals.

As of the end of June 2023, the stock of domestic arrears, excluding local governments, was validated at 2.714 trillion Shillings.

“Arrears have increased under each expenditure category; the key areas being court awards, pensions, salaries, general goods, services, and development expenditure,” he said.

Under PDMF 2023, the government commits to strive to maintain a ratio where the total amount of interest paid on both domestic and external debt should not exceed 20 percent of the government’s total revenue, excluding grants.

The total debt service to revenues threshold should aim at reducing from 32.9 percent as of the end of June 2023 to 2 percent by the end of the framework. At the end of each fiscal year, there will be a full year-end review of debt management performance, in line with best international practice, and thereafter, the results published.

Regarding domestic debt, the Domestic Debt to GDP ratio will not exceed 15 percent. This was a high 18.7 percent last financial year. The domestic interest payments as a ratio of total revenues excluding grants is set at a maximum of 15 percent in the Framework. The broader objective of this PDMF is to secure government financing needs while considering the cost-risk trade-off, ensuring debt sustainability over the medium to long term.

“The introduction of benchmarks and limits in the 2023 PDMF assesses the cost and risk of the external and domestic debt portfolio, as well as contingent liabilities,” said Ramathan Ggoobi, the Permanent Secretary and Secretary to the Treasury.

The Framework also gives the government specific principles and commitment to managing borrowed funds, some of them already laid out in other policies, regulations, and plans.

Among these, a ministry, department, or agency shall not be allowed to borrow from external financing for any project that requires government contribution if the funding is not earmarked or provided for in the Medium-Term Expenditure Framework. The PDMF also states that the government shall not take on pre-financing unless the funds are accommodated and committed in the multi-year budget for repayment and there are no encumbrances on site.

Also, the government will not consider an Alternative Financing Modality unless the contractor fulfills the financing modality guidelines. On external debt, the Framework provides that the government shall continue to pursue concessional and non-concessional borrowing under strict measures. “Social and Human Capital Development projects shall be financed at concessional terms with a grant element of at least 35 percent,” it says.

Non-concessional loans with a grant element of less than 35 percent shall be contracted on condition that the projects provide an economic rate of return greater than the interest rate charged, while the project’s economic net present value and the internal rate of return is greater than 12 percent. “The effective interest rate on the cost of financing at any given time should be less than or equal to the applicable benchmark rate plus 250 basis points,” it adds.

The Framework also limits the value of any non-concessional external borrowing to 10 million dollars. MDAs will not be allowed to access new external financing if more than half of the ongoing projects under its supervision have exceeded the initial project period.

Where additional financing for a project is sought, the MDA shall be required to have disbursed at least 70 percent of the same project. The external commercial financing for the general budget will not exceed 3 percent of the previous fiscal year’s domestic revenue collection. In the five years of this framework, the government shall not issue a Eurobond on the international financial market.

Eurobonds are a financial instrument issued by the borrowing country or company in another country, and in a currency other than the issuer’s domestic currency. While Eurobonds are an easy way to acquire debt, they are dreaded because of the likelihood of rising interest rates along the way. This is because the interest rates can be influenced by the macroeconomic changes in the country where it is issued, including rising foreign exchange and interest rates.

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