Uganda’s Treasury decision to secure a Ush3.5 trillion ($919.5 million) loan from commercial banks for a supplementary budget could lead to an approximate two percent increase in interest rates on treasury bonds. This move is prompted by challenges such as poor tax revenue performance, sluggish business activity, and a weakened exchange rate. The loan aims to fund various infrastructure projects and additional expenditures linked to state house and security agencies.
The financial year 2023/24 witnessed lower tax revenue collections, with a projected shortfall of Ush1 trillion ($262.7 million) by June 2024. The Finance ministry has sought administrative interventions from the Uganda Revenue Authority to address the revenue deficits. The Uganda shilling faced depreciation against the dollar due to dividend payments by foreign multinationals and rising policy interest rates in developed economies.
Financial analysts anticipate the loan may elevate interest rates on specific treasury bonds by two percent as increased government borrowing impacts yields on government securities. The 10-year treasury bond, currently trading at 15-15.5 percent, could rise to 17 percent under the new borrowing program. The increased debt financing, primarily for infrastructure projects, may affect social service delivery, with approximately 35 percent of the current year’s budget allocated to debt servicing.
Economist Dr. Fred Muhumuza warns that the debt servicing ratio might rise further in the next financial year, potentially impacting social services negatively. The high liquidity ratios imposed on commercial banks by the Bank of Uganda, along with a delicate balance between government securities and hard cash, may limit some banks’ participation in the new government borrowing program.
Despite the potential challenges, some suggest that engaging with the World Bank, with its favorable terms, could be a positive alternative for financing long-term infrastructure projects.