Uganda rules out borrowing against oil revenues as lenders dangle carrot

Workers undertake the first flaring test at a well in western Uganda. The country says it is on tract to start production in 2018. Photo/File 

By HALIMA ABDALLAH Special Correspondent

In Summary

• According to the Ministry of Finance officials, the government is under growing pressure from lenders, who are dangling financing options in anticipation that the money would be paid back when oil production begins.
• The government’s decision comes at a time when opinion is divided, with economists opposing politicians’ and donors’ preferences for borrowing against expected oil revenues.
• While the oil and gas revenues are expected to ease the country’s financial challenges, economists are opposed to borrowing secured on the basis of expected revenues. The proposed Finance Bill which was tabled in parliament last year prohibits mortgaging the oil and gas resources.

Uganda has ruled out proposals to fund infrastructure development against future oil revenues as it emerged that the country is being offered deals by various lenders.

According to the Ministry of Finance officials, the government is under growing pressure from lenders, who are dangling financing options in anticipation that the money would be paid back when oil production begins.

Although government acknowledges that it needs money for infrastructure development, it is wary that further borrowing could plunge the country into unsustainable debt levels.

“We are not borrowing any money against oil. So many guys are running up and down telling us to borrow against oil but we shall never mortgage the oil, we shall try to manage our debt and borrow against conventional cash flows,” said Treasury Deputy Secretary Patrick Ocailap.

The 2012/2013 Ministry of Finance report tabled before parliament last June shows that Uganda’s current debt has escalated to $5.8 billion, from $2.4 billion in the financial year 2006/2007.

READ: Go slow on spending, borrowing IMF tells Uganda and Rwanda

Mr Ocailap said the country is still within the International Monetary Fund’s (IMF) ceiling and the East African Monetary Union limits, which is a total debt to GDP of 40 per cent.

The seemingly manageable debt is a result of a debt cancellation under the Heavily Indebted Poor Countries (HPC) in the early 2000s. This initiative gave Uganda a debt relief amounting to $2 billion in net present value. In 2006, the country again benefitted from the Multilateral Debt Relief Initiative.

However, required infrastructure development in the oil and gas sector — a refinery, pipeline, roads, railways and airports — will inevitably increase external financial borrowing before production begins. This will expose the country to increased debt.

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“For example, we have two huge projects: Karuma and Isimba dams which have used our resources. We hope to repay the loans through tariffs and revenues realised from the general economy when it performs better because of availability of electricity. We have not yet borrowed money for any projects against oil revenues,” said Mr Ocailap.

 

To avoid the temptation, Mr Ocailap said, Ministry of Finance will redouble efforts to increase domestic revenue collection. He said in case of a need for additional funding, the government will opt for grants and traditional sources that offer favourable terms like those from the World Bank, African Development Bank and the Islamic Development Bank.

The government’s decision comes at a time when opinion is divided, with economists opposing politicians’ and donors’ preferences for borrowing against expected oil revenues.

Some politicians support donors proposals that the country should frontload these projects by borrowing today in anticipation of revenues from oil and gas.

Donors argue that doing so will enable the government to spend on core areas, which it has always budgeted for, but often diverted the funds to non-core areas.