Kampala – The Ministry of Finance has defended their proposal to borrow 1.73 trillion Shillings saying that the funds are part of the current financial year quarter two cash limits urgently required by the government.
Henry Musasizi, the Minister of State for Finance made the statement on Monday while appearing before Parliament’s National Economy Committee.
The committee was last week tasked by the Speaker of Parliament, Anita Among to urgently consider a request by the government to borrow up to 455.03 million Euro from Standard Chartered Bank and other financial institutions to finance the development and infrastructure budget for the financial year 2022/2023.
In his statement to the committee, Minister Musasizi said that the funds are part of the already approved budget for the current financial year under Budget Support borrowing totaling 2.53 trillion Shillings representing 6.3 percent of the financial year budget.
He says that the proposed borrowing of 1.73 trillion will cover part of the already appropriated 2.53 trillion support loans budget and that it will be channeled to only infrastructure and other development activities.
“The money will not be misdirected because it is for activities that are already passed by Parliament. We shall spend it as per the Appropriation Act. The funds are part of quarter two cash limits and will be disbursed to Government once the loan is approved by parliament,” said Musasizi.
Recently, the Ministry released a total of 7.3 trillion Shillings for the second quarter amidst reports that the government was broke and was hard pressed to meet its obligations since the financial year started on 1st July 2022.
According to Musasizi, the loan will be used to pay outstanding infrastructure certificates among others to avoid accumulating arrears during the financial year. He also noted that due to funding constraints, the government funded only 7 percent of the financial year Quarter one development budget.
Documents before the National Economy Committee indicate that the loan will be provided by a consortium of Financing Institutions arranged by Standard Chartered Bank.
The other financing institutions are Nippon Export and Investment Insurance (NEXI) and Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC).
The 455.03 million Euro loan comprises a 60 percent contribution from NEXI totaling to Euros 272.33 million (1.02 trillion Shillings) while ICIEC is contributing the remaining 40 percent totaling Euros 182.7 million (690.7 billion Shillings).
According to Minister Musasizi, Standard Chartered Bank was chosen following a call for expression of interest made on 23rd September 2021 to various financial institutions to provide the loan.
The financial institutions that responded to government’s call for expression of interest are: Africa Finance Corporation, Citi Bank Uganda Limited, Stanbic Bank Uganda Limited, Standard Chartered Bank Uganda Limited, United Bank of Africa Uganda, MUFG and Trade Development Bank, African Trade Insurance Agency, First Rand Bank, Africa Finance Corporation (AFC) and Absa Bank.
Musasizi told MPs that after a review of the financing proposals by these financial institutions, Standard Chartered Bank UK, emerged the best bidder with the lowest financing terms.
He explained that during the negotiations, the bank proposed to syndicate and raise the funds with Nippon Export and Investment Insurance (NEXI) and Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) and other financial institutions to be identified to join in the transaction given that the financing is a syndicated loan.
However, the committee learned that NEXI has since been replaced by Abu Dhabi Fund for Economic Development (AFED) to provide the financing.
“Following the submission of this loan to parliament, Standard Chartered Bank (SCB) informed us that Abu Dhabi Fund for Economic Development has agreed to support SCB in providing the loan on NEXI terms and that they will be able to quickly disburse the funds to government unlike NEXI whose internal approval process is very slow and likely to delay disbursement of the funds to government,” Musasizi explained.
This commercial loan maturity period is 10 years including a grace period of 4 years. The interest rate according to documents presented by the Minister is a margin of 1.90 percent plus 6-months Euro Interbank Offer Rate (Euribor). The Euro Interbank Offer Rate is the interest rate at which banks in the European Union (EU) lend money to one another. The offer is for unsecured short-term lending.
“The terms were the cheapest that we obtained from the market. Given the increase in lending rates worldwide and particularly for Uganda, the Ministry recommends that we take this loan offer instead of going back to the market which will only yield much more expensive financing terms for the government given the effects of the ongoing global crisis on the financial market arising from th Ukraine – Russian war,” Musasizi appealed to MPs.
The Minister told the committee that the money cannot be raised from the domestic market because it will be very expensive.
The loan proposal was supported by a section of MPs sitting on the National Economy Committee but Tonny Ayo, the Kwania County MP and Isingiro South MP, Alex Byarugaba asked that the Finance Ministry avails them with the list of infrastructure projects to be financed by the loan.
In response, Minister Musasizi said that he had not prepared to present the list of projects to the committee with the assumption that parliament already knows what it approved during the budget process.
By the end of June 2022, the total public debt stood at 78.79 trillion Shillings, an increase by 13 percent from 69.51 trillion in June 2021. This constitutes of 48.13 trillion in external debt and 30.66 trillion in domestic debt.
The National Economy committee is expected to present a report on the proposed loan to parliament on Wednesday. This financial year, parliament approved a total national budget of 48.13 trillion Shillings.
Source: URN
