Museveni tells bankers: we will stop internal borrowing

President Museveni has said Uganda must stop borrowing, especially internally, because it is unnecessary, reports the Chimp Corps.

“Uganda is devising ways to reduce or stop borrowing, especially internally,” Museveni told Uganda Bankers Association representatives at State House Entebbe on Wednesday.

In 2021, the Bank of Uganda revealed that a significant reduction in net domestic financing would free up loanable funds in the banking sector for lending to the private sector.

This is the second time in a year that Museveni has warned against domestic borrowing.

In January, Museveni observed: “High commercial bank interest rates are due to two actors: commercial banks who want high profits and don’t care about wanainchi and the government (finance) gives treasury bills to high price to the world in order to borrow from the public”.

Museveni said the government discussed this distortion and realized endless borrowing is among the causes.

“We should minimize government borrowing,” he said.

Domestic financing is executed primarily through the issuance of longer-term securities with fixed interest rates, while external financing comes from concessional sources of financing, using the currently large undisbursed balances of multilateral and bilateral creditors in the external debt portfolio.

At the State House meeting, Finance Ministry Permanent Secretary Dr. Ramathan Ggoobi backed the president’s idea, saying the ministry had already used several measures to stop internal borrowing.

Gobi said the measures included “fiscal consolidation, restoring fiscal discipline, clearing domestic debt and disciplining accounting bids, among other measures.”

The development comes amid public outcry over government plans to borrow 1.7 trillion shillings as part of a wider plan to raise 2.5 trillion shillings of external borrowing to fill the revenue collection gap caused by slower economic growth.

The private sector complains about the the high interest rates of commercial banks that prevent millions of people from having access to affordable credit.

Interest rates typically range between 22-25%, and depending on the term of the loan, consumers may end up paying more than double the value of the original amount.

The International Monetary Fund (IMF) recently stated that Uganda’s fiscal policy should seek to balance recovery support and sustainable public debt while reducing dependence on domestic financing to mitigate the crowding out of the private sector financing.

The Parliamentary National Economy Committee revealed that Uganda’s outstanding public debt rose by 22% from 50.9 trillion shillings in the financial year 2019/2020 to 69.5 trillion shillings at the end of the 2020/2021 financial year.

48.1 trillion shillings of the debt stock is classified as external debt, with domestic debt totaling 30.7 trillion shillings.

Experts have warned that amid low tax revenue and rising spending, Uganda’s public debt could reach around 53% of GDP by the end of the 2021/22 financial year, above the 52% target and alongside increased pressures on liquidity as debt service takes an increasing share of revenue.

Uganda’s debt has risen from Shs 29.6 trillion (34.6% of GDP) in 2015/16 to Shs 69.5 trillion (47% of GDP) in 2020/21.

The practice of implementing “supplementary budgets” has since signaled that the government can always reallocate money from other spending units or borrow to meet emerging spending needs, thereby increasing the country’s debt burden.

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