Money goes through a money counting machine. In a rare move BOU conducted a conversion of bonds that were due to mature in January 2021. Photo/ File
The Bank of Uganda’s move to reschedule Treasury bonds worth more
than Shs1 trillion which was due for maturity this month has raised some
eyebrows.
The government’s intriguing action is coming at a time
that the electoral exercise, traditionally associated with heavy and
reckless spending, is making its last lap.
The timing has not been helped by the massive toll the Covid-19 pandemic is taking on the economy.
The
government is adamant that this move has nothing to do with its
inability to honour its debt obligation, which is quickly getting out of
control.
In an interview earlier in the week with Mr Stephen
Kaboyo, a veteran financial market analyst, the rescheduling of bonds is
not a common move.
He said: “Rescheduling of bonds can be used by
issuers and the aim is normally to provide the borrower breathing space
or some relief when required, due to perhaps an economic shock that has
implication on government finances.
Market shock
The
proprietor of Alpha Capital Partners Uganda Ltd says: “In my view, the
issuer was trying to avoid a market shock by rolling over huge amounts
with implications of distorting the interest structure, but also at same
time dealing with huge interest payments and of course in the grand
scheme of things carefully taking a look at the government current
fiscal situation.”
In another interview with economist Fred Muhumuza,
the rare move by the Central Bank reschedule to bonds that were due to
mature in January 2021 is an indication of an economy that is struggling
to become productive.
“… it affirms the fact that the money we borrow is not being translated into economic activities that would ensure jobs, production, productivity and incomes that can be taxed to repay the debts,” Dr Muhumuza said, before, adding, “Corruption is a big factor and inadequate focus of public servants who prioritise non-strategic aspects besides failing to implement them.”
Increasing risk profile
Regretfully,
he warned: “Such acts of rescheduling bonds will eventually increase
risk and make Uganda get fewer creditors or only expensive credit.”
Economic
Policy Research Centre (EPRC) research fellow, Corti Paul Lakuma, the
rescheduling of the due bond is a tell-tale sign, projecting the
government’s ability to meet its debts obligation.
He said: “This
hurts the perception on ability to honour debt obligation. However, we
are living in a strange time with the COVID-19 pandemic which demand
strange measures. Debt payment rescheduling is one of those strange
measures.”
Debt position
He continued: “We
should not forget much of components in Uganda’s debt basket, including
external debt, have been rescheduled.”
When contacted, Mr Kelvin
Kizito Kiyingi, the deputy director, communications at the Bank of
Uganda, said not all investors have been affected, except those who have
been contacted over the matter. All those that have been contacted,
implying those whose bonds were due to mature this month but
rescheduled, will be paid both interest and principal owed, stressing
that government never fails to honour its obligations as it is the
practice all over the world.
SIGNS OF FINANCIAL STRESS
Financial difficulty
Signs
of financial stress affecting Uganda’s Treasury amid the Covid-19
pandemic and the coming elections have been evident in correspondence
from the Finance ministry to officers since last year. For example, a
memo issued by the Finance ministry in November 2020 cautioned
accounting officers about the reduced number of funding priorities
considered by the government, which included defence spending, election
expenditure and Ministry of Health emergency requirements related to the
pandemic, in addition to salaries and wages even with scarce resources.
Experts
say that central banks enjoy discretion over adjustment of maturity
dates for the bonds during times of financial difficulty.
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