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Gov't Domestic Borrowing Still Within Limits

The government, in this years national budget promised to more than halve her domestic borrowing to 612 billion Shillings from 1.4 trillion Shillings in financial year 2015/16.

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The Bank of Uganda says government's domestic borrowing has not yet broken through the 612-billion-Shilling ceiling set for financial year 2016/17.

The government, in this year's national budget promised to more than halve her domestic borrowing to 612 billion Shillings from 1.4 trillion Shillings in financial year 2015/16.

The heavy government domestic borrowing is blamed for the high interest rates since commercial banks prefer lending to the government risk-free instead to the private sector.

Government borrows domestically through the Bank of Uganda by selling government papers - treasury bonds and treasury bills - which are snapped up by institutions like banks and National Social Security Fund as well as individuals. The government papers fetch high interest rates averaging about 17 percent.

By reducing its domestic borrowing, it is expected that banks would increase lending to the private sector resulting into a boost in private sector spending.

Since the financial year started, the government has been in the financial market frequently, raising concerns that she may overshoot the 612-billion Shilling market.

It is feared that the government may increase domestic borrowing after the World Bank, which lends Uganda 500 billion Shillings annually, froze further lending for new projects citing weak management of programmes, corruption and good governance challenges.

BoU's Executive Director for Research and Policy, Dr Adam Mugume says government borrowing is still within the 612-billion-shilling limit. He says what government is doing is to borrow the 612 billion Shillings early while forecasting there could be factors ahead like the festive season and tax payments that may subdue borrowing.

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On the perception that excessive borrowing is a sign of greed, Dr Mugume said the central bank borrows on behalf of government which is responsible for fiscal policy.

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The Secretary to the Treasury, Keith Muhakanizi, has repeatedly said government will live by its promise to reduce domestic borrowing.

In a recent interview with Uganda Radio Network, economist Dr Fred Muhumuza said government needs to watch its appetite for borrowing in order to stabilize the interest rates and reduce public debt.

Banks and other lenders like NSSF make enormous profits from government borrowing, which is risk-free since the money not only gets paid back after a period ranging from one to even 20 years, but with huge interests. A bank, therefore, can afford not to lend to the private sector as long as government is always in the market borrowing.

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