The Ugandan government is facing significant hurdles in raising funds to finance its budget, with commercial banks and offshore investors showing reluctance to participate in the bond market and high rates of loan rejection.
Despite efforts to attract foreign currency inflows by listing securities on the FTSE Frontier Emerging Markets Index in June 2023, Uganda has yet to see the desired impact.
The listing aimed to reduce reliance on high government bond holdings by commercial banks and encourage lending to other sectors.
However, offshore investors have remained cautious, leading to increased government bond holdings by banks and institutions like the National Social Security Fund (NSSF).
Ministry of Finance data reveals that banks and NSSF collectively hold 80 percent of government securities, limiting the government’s bargaining power for borrowing costs.
The concentration of government securities among a few institutional investors not only poses challenges for the government’s borrowing costs but also crowds out private sector credit.
Last month, over 41 percent of loan applications were rejected, indicating the impact of the dominance of government securities on the availability of credit for other sectors.
Financial experts attribute the high interest rates paid by the government to the concentration of the bond market, which leaves the bond issuer at a disadvantage.
With a deficit budget and diminishing donor funding, the government is paying over 15 percent interest on a 20-year tenor bond, significantly affecting its fiscal sustainability.
According to Dickson Ssembuya, director for Research and Market Development at Uganda’s Capital Markets Authority (CMA), a more diverse investor base would enable the government to raise capital at a lower cost.
However, until offshore investors show more confidence in the market, Uganda may continue to face challenges in financing its budget and stimulating economic growth… Continue Reading
