We Will not Borrow to Settle Bank of Uganda Debt, PSST

Government of Uganda Opts Out of Borrowing Shs 7.8 Trillion to Settle Bank of Uganda Debt

By John Kusolo

In a recent announcement on a TV show, Ramathan Ggoobi, Ministry of Finance, Planning, and Economic Development Permanent Secretary and Secretary to the Treasury (PSST), clarified that the Government of Uganda will not borrow Shs 7.8 trillion to settle its debt with the Bank of Uganda. This statement, delivered during a public appearance, aims to quell market speculations about the government's borrowing plans for the upcoming fiscal year 2024/25.

The initial appropriated budget for the next fiscal year was Shs 58 trillion. However, this figure has been revised to Shs 72 trillion, marking an increment of Shs 13.8 trillion. Part of this increase, amounting to Shs 7.8 trillion, is earmarked for the Bank of Uganda. The decision to address this debt during the budget finalization process underscores the government's commitment to bolstering the central bank and ensuring macroeconomic stability.

Strategic Approach to Debt Management

Ggoobi elaborated on the government's strategic approach to managing this debt. Instead of outright borrowing, the government has issued various tenors of treasury bonds to the Bank of Uganda. These bonds will be retained by the central bank and only released into the market when necessary to control excess liquidity. This mechanism allows the government to manage the debt more effectively while maintaining market stability.

The treasury bonds serve a dual purpose. They provide a means for the government to fulfill its debt obligations without immediate borrowing and act as a tool for the central bank to regulate liquidity. Commercial banks will play a crucial role in this process by exchanging money for these bonds, effectively transferring liquidity to the central bank, which will hold onto the funds to prevent inflationary pressures.

Historical Context of the Debt

The accumulation of this debt has historical roots, particularly exacerbated during the COVID-19 pandemic. During this period, the government faced significant challenges in mobilizing the necessary revenue to fund the national budget. The economic slowdown induced by the pandemic necessitated increased borrowing to sustain government operations and public services.

This decision to use treasury bonds rather than direct borrowing reflects a strategic pivot in debt management. It indicates an effort to mitigate the risk of further debt accumulation and highlights the government's dedication to maintaining fiscal responsibility and economic stability.

Implications for the Financial Markets

The PSST's announcement is likely to have immediate implications for Uganda's financial markets. By clarifying that there will be no new borrowing to cover the Bank of Uganda's debt, the government aims to reduce market volatility and maintain investor confidence. The issuance of treasury bonds provides a clear plan for managing liquidity and debt, which could reassure investors about the stability of Uganda's financial system.

Furthermore, the use of treasury bonds as a tool for liquidity management by the Bank of Uganda is a well-established practice. It allows for a flexible response to economic conditions, providing a buffer against potential economic shocks and helping to control inflation.

The Government of Uganda's decision to not borrow Shs 7.8 trillion for the Bank of Uganda debt represents a significant step in its fiscal strategy. By leveraging treasury bonds, the government aims to manage its debt more sustainably while ensuring macroeconomic stability. This approach, developed in response to past challenges and current economic conditions, underscores the government's commitment to prudent financial management and market stability.