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Archive for the tag “FY 2019/2020”

Deficit Financing: The art of fresh loans for the FY2019/20!

Deficit financing, however, may also result from government inefficiency, reflecting widespread tax evasion or wasteful spending rather than the operation of a planned countercyclical policy. Where capital markets are undeveloped, deficit financing may place the government in debt to foreign creditors. In addition, in many less-developed countries, budget surpluses may be desirable in themselves as a way of encouraging private saving” (Encyclopaedia Britannica – ‘Deficit financing’ (25.08.2015).

Just as it is soon a new Financial Year and also another budget. This time its for the FY 2019/20, the last one before campaigning. Therefore, the added strain on the economy will come, as the state funds are used for campaigns for the ruling regime. This is a steady act of the National Resistance Movement (NRM) and President Yoweri Kaguta Museveni. We can expect more of it. That is the reason why the lack of fiscal responsibility is evident. As the state is within a year going from spending 32 trillion shilling into 40 trillion shillings. This without substantial rate or even more revenue to cover the added expenses. That means the state is more addicted to loans and grants.

Surely, the people should be aware, as the state has already gotten more loans and has to pay more in interests than before. With the new infrastructure loans and other development projects will hit the costs in future budgets. Even with Petro-Dollar, the state still has a lot of old debt to get revenue to cover. Especially, in the short-term window, as the grace periods of old loans will hit the budgets too. It seems like the state is only considering the debt-rate, but not the actual cost of the loans in itself.

That is why I will take one quote from the IMF, before showing what reports there was from Parliament, As they have voted for a new budget, which has escalating spending further without the revenue. That should be a worry. Take a look!

IMF May 2019:

Rising debt puts more strain on the budget as more resources need to be allocated for interest payments. One shilling paid for debt service is one shilling less going to a school or a health clinic. The current ratio of interest payments to revenue is comparable to what countries with high risk or in debt distress typically face” (IMF – ‘Uganda’s Economic Outlook in Six Charts’ 09.05.2019).

Rising debt:

The Committee noted that , the total public debt stock increased by 12.5 percent to USD 11.52 billion as at end December 2018 from USD 10.24 billion as at end December, 2Ol7 out of which domestic and external debt accounted for 33.5 percent (USD 3.86 billion) and 66.5 percent (USD 7.66 billion) respectively. The external debt stock increased by USD 0.78 billion to USD 7.66 billion by end December 2018 from USD 6.88 billion at end December 2017. The increase was mainly from China (25 percent) and World Bank (40 percent)” (REPORT OF THE BUDGET COMMITTEE ON THE ANNUAL BUDGET ESTIMATES FOR FY 2O19/20, P: 7, 2019).

Minority report on growing debt:

Worrying to note is the fact that huge portion of the budget resource is to be financed through borrowing. Out of the projected by domestic revenue of UGX 20.59 trillion (51%) while the budget of UGX 40.48 trillion, 9.44 trillion (48%) will be sourced from both domestic or external borrowing” (…) “It should be noted with concern that projected are almost debt expenditures in FY2019/20 equal to tax revenue (URA tax collection) of UGX 20.59 trillion” (A MINORITY REPORT ON ANNUAL BUDGET ESTIMATES TY 2019/20, P: 4-5, 2019).

It should be worrying how easily this budget was passed. How between last FY 2018/19 to FY 2019/20 the state could add 8 trillion shillings on the budgets. This without counting or even having the added revenue needed. This meaning the state has a giant deficit, which is about half of the budget. Where they have to get funding from outside sources, either by loans or grants. Lots will be loaned for and has to be paid for later with interests.

Certainly, this is a way of ensuring that for every shilling paid in loans, the state could have delivered state services to the public. That is even something the IMF was pointing out. This should be a worry for Ugandans, as the state is misusing the funds, loaning and borrowing on their future, without certainty of being able to repay these loans. That is what is shocking as the oil revenue has been postponed again and the lack of progression on the matter. This means the state is not hitting its targets, while taking up more loans on future revenue. Anyone should be worried about this, because who knows tomorrow and what if the economy totally tanks before the industry takes off. They are clearly living large on Deficits Financing and hoping the golden goose soon lays eggs. Since, they are continuing to fund their operations and the state with loans.

Than, the oil will be sold wholesale, as the state cannot manage to gain revenue and has to trade off everything. The risks it is taking is reckless. The spending is bonkers. That the state is initially a year before an Election Year is creating this huge deficit. Isn’t a sign of strength, but of weakness. As well, as having a blind faith, hoping for a narrow escape in the realm of Deficit financing. Peace.

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Uganda’s Medium Term Debt Management Strategy for FY 2015/2015 – FY 2019/2020: What is it all about?

UGX Pic

Here you will see what strategies and plans the Government of Uganda has made for their loans and debts. This is about how the Government will deal with it and how it can be done. The numbers tell what they can expect if they pick the certain ways of dealing with it. It shows what can happen and the shock scenarios are important.

This should be seen as important to follow especially with the growing debt and the rates that come with that. Therefore it will be something that should be monitored. From the sustainability of the ratio according the GDP should be something that also brings fear. Especially since this will have general effect on how the general economy will be hit with the down payments and strain the basic budgets of the government. There its a viable thing that should be well known by people, because this will have big importance until FY 2019/2020

“The Uganda Vision 2040 aspires to transform Uganda into a modern and prosperous society within 30 years through provision of adequate infrastructure, development of agriculture, human resources and services sectors, enlargement of markets, strengthening of the private sector and through industrialization” (…) “Implementation of the Uganda 2040 Vision will require substantial resources that will partly be garnered through the domestic and international borrowing. To ensure that our debt remain sustainable, such borrowing has to be carried out through a properly formulated Medium Term Debt Management Strategy (MTDS)” (MTDS, P: 4, 2015).

“The key aim for the MTDS2015 is to ascertain the cost and risk trade-off of financing the medium term fiscal deficit through borrowing while remaining mindful of our debt sustainability” (…) “To meet Government’s financing requirements at the minimum cost, subject to a prudent degree of risk; (ii) to ensure that the level of public debt remains sustainable, both in the medium and long term horizon while being mindful of future generations; and (iii) to promote the development of the domestic financial market (MTDS, P: 6, 2015).

Strategies:

  1. Traditional post debt relief approach of prioritizing concessional financing.
  2. A debut Euro-Bond: The Sovereign Bond Issuance which risks the cost and the trade-off of the International-Market and financing alternative.
  3. Non-Concessional borrowing and meeting with bilateral with commercial creditors negotiations.
  4. Reliance on Domestic-Financing establishing the cost and risk trade-offs, which risk less since it’s from the Domestic-Financial-Market.

(MTDS, P: 6-7, 2015).

Cost & Risk Debt Uganda

External Debt Stock:

From FY2006/2007 it was Domestic Debt and Outstanding(DoD) was US$1.47 billion. And in FY 2013/2014 had risen to US$4.3 billion (MTDS, P: 13, 2015).

External Debt Stock Uganda

Domestic Debt Stock:

Domestic Debt Stock

Refinancing:

External debt maturity for the ATM (Average Time for Maturity) was 18.9 Years. The plan is setting that the in 2.3 years will the ATM be 11.8 years.

Public Debt Maturity Profile under REFINANCING

Currencies:

Currency Distribution P17

Aggregrate Medium Term Debt Strategy:

The outlook for the 5.3% in FY 2014/2015 and is looking to reach 5.8% in FY 2015/2016. The plan forward is to attain an average 6.3% for the fiscal framework (MTDS, P: 17, 2015).

Selected Medium Term P18

Government expenditure is on an average to be 20.9% of the GDP for the FY 2014/2015. In the 2015/2016 it is 21.7% of the GDP. The main expenditure for the budget is the infrastructure projects like the upgrading of Entebbe International Airport, Hydro Power projects and Albertine Regional Airport. The total cost for the projects is US$7.0 Billion. There is set to be 5% target for the inflation rate and the exchange rate is set for 12.1% in FY 2015/2016 and average for 2.4% the rest of the years for the medium term (MTDS P: 17-18).

Stylized Financing Instruments:

Two instruments:

i: International Development Association (IDA) has the interest 0.75% for the maturity of 38 years.

ii: African Development Fund (ADF) has the interest 0.75% with a maturity of 40 years.

iv: The concessional is with fixed rate loans with 23 years maturity and 6 year grace period. These terms comes from IDA-Blend, Kuwait Fund, Abu Dhabi Fund, UK-Export Credit Guarantee.

v: The fixed rate instrument on the Euro Bond which is priced on a ten-years US-Treasury interest rate.

vii: With Pure commercial loans is a instruments with a 7 years of maturity and with a 3 years grace period.

viii: One T-Bills is a domestic market debt instrument that has a maturity of 91 days, 181 days,  and 364 days.

ix: Four T-Bonds is a domestic market debt instrument that has a maturity of 2, 5, 10 and 15 years.

(MTDS, P: 18-21, 2015).

Stylized Financing Strategy P22

Four scenarios for the Market:

First Scenario: The first thing is possible currency depreciation – is that in the FY 2015/2016 can end up with 30% depreciation and will have to work to sustain that through to 2019/2020.

Second Scenario: A sharp off increase in domestic rates for 2015/2016 and at the Interest Rate will follow the baseline of the Foreign Currency.

Third Scenario: Domestic Interest Rate still set to be baseline assumption that we’re set. And that the denomination on the Foreign Currency following the instruments set for it.

Fourth Scenario: That the Decapitation of the UGX towards the US Dollar in the amount of 15%, that can lead to a shock in the domestic yield a curve for the 2015/2016.

(MTDS, P: 23, 2015).

Analysis of the strategies:

That the total debt-to-GDP from the current level of 28.6% by the end of June 2014, if the end of the time it might end up with 50% level by 2020. This is because of substantial projected increases the fiscal deficit. With the worst strategy the interest rate can go from 1.4% in June 2014 to become 4% in 2020 (MTDS, P: 24, 2015).

MTDS P25

 

MTDS P29

 

MTDS P30

Hope you have found it interesting and learn something of the Government of Uganda planning of dealing with their debt. And how they see the future for their economy. Then what kind of strategies and scenario’s that could appear and how they will appear together. The Financial Years that are ahead and how the Ministry of Finance, Planning and Economic Development thinks of their economy. Hope it give you something and also a little feeling about how the economy might progress.

Peace.

Reference:

Republic of Uganda/Directorate of Debt & Cash Management – Ministry of Financing, Planning & Economic Development: ‘Medium Term Debt  Management Strategy’ (MTDS): 2015/2016 -2019/2020 (April 2015).

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