The ministry of finance will not go ahead with plans to issue what would have been East Africa’s first sovereign bond, a top official of the ministry has revealed. “We have suspended that operation. When the need arises, we shall consider it. At what time we shall do that, I don’t know,” said Keith Muhakanizi, the Deputy Secretary to the Treasury, breaking the silence over
The suspension of the sovereign bond - an instrument used to borrow money from developed capital markets of the West - follows doubts by a top donor over
“… [there needs to be] clear justification (economic and financial) … with evidence through a debt sustainability analysis that the borrower’s risk of debt distress is largely unaffected by the non-concessional financing,” David Farley, the Vice President DCM Ratings Advisory Global Markets Standard Bank, quotes the IDA in his paper presented at the just concluded African Securities Exchange Association conference.
The ministry of finance had kept a tight seal over the country’s grand plan to issue a sovereign bond, which was supposed to fetch funds to solve the country’s dilapidated infrastructure – the biggest contributor to the high cost of doing business in
Muhakanizi said he “didn’t know” about IDA’s queries. He said that the ministry suspended the plans to list the bond after cabinet directed it to tap the foreign reserves at the central bank to solve the country’s pressing needs. “The government’s position is that we use our reserves since we have more than enough.”
The shift from issuing the bond to exploiting the country’s foreign reserves, which total about $2.5 Billion, is bound to evoke another debate of its own. Bank of Uganda uses reserves to intervene into the foreign exchange market to ensure the stability of the shilling. Also, the reserves are used to import goods and services in a time of crisis. Using foreign reserves to tackle the country’s other problems puts in jeopardy the central bank’s preparation measures in case a calamity strikes.
The ministry of finance’s policy to turn to its foreign reserves after the failure to list the sovereign bond is one of the latest moves by the government of
If Uganda issues a sovereign bond, experts, some of whom didn’t know about this latest development, argued at the African Securities Exchange Association conference in
The ministry of finance was expected to present its credit rating of ‘B’ that was recommended by the famous international firm, Fitch, as part of its marketing strategy to lure buyers of the bond. However, the rating of ‘B’ – a measure of the performance of the economy in offering a good return on investment - means that investors willing to invest in the bond should do so with caution. A special report by Fitch released in May noted that “none of the four ‘B’-rated Highly Indebted Poor Countries –Benin,
But the growing debt burden and a weak tax base had created uncertainty over the country’s ability to service the loan.
A huge debt eats into funds needed to tackle poverty and puts the public under more pressure to pay higher taxes. The cautionary remark, coming from one of
Over the years, investments in infrastructure have courted controversy in the manner in which funds have been used. Investments in the country’s infrastructure have either fallen short of adhering to procurement procedures, thus the country bearing an unfair price, or fallen victim to shoddy work.
The paper, titled Financing the Future, quotes the IDA saying: “There needs to be clear benefits of the financing on accelerating growth, reducing poverty, improving the provision of key infrastructure services. Economic and financial returns to the intended investments need to be strongly demonstrated.”
The call by the IDA for more homework came at a time when
Participants at last week’s conference in Kampala, however, called on
“We recommend that Uganda should proceed with a debut bond offering now…(and) benefit from the current lack of supply of African sovereign credit before other issuers come to the market” noted Farley’s paper. It adds that “Despite more difficult market conditions investor sentiment for Sovereign issues and in particular African credit is strong.”
However, the paper set a lower amount of funds that
By Jeff Mbanga.
Jeff Mbanga firstname.lastname@example.org writes for The Weekly Observer