Uganda Resumes Borrowing from Commercial Banks Amid Limited Credit Options

Uganda is resorting to borrowing from commercial banks due to limited financing options, nearing $2 billion in debt. A recent $190 million loan request aims to cover claims from Umeme Ltd, with additional funds needed for key projects. The country’s external debt has increased significantly, highlighting the dependence on commercial lending for infrastructure financing.

Uganda has resumed borrowing from commercial banks, as alternative financing options have diminished. The nation’s debt to commercial banks is approaching $2 billion, driven by needs to fund energy and transport projects. Notably, Uganda is seeking a $190 million loan from local banks to address claims from Umeme Ltd related to a long-standing power distribution concession set to expire this month.

Stanbic Bank Uganda Ltd is leading this loan initiative; however, details regarding other banks involved and interest rates remain unclear. Parliament approved the loan last week, alongside an additional need for $50 million to recapitalize the Uganda Electricity Distribution Company Ltd, Umeme’s successor. Government sources indicate this funding, along with over $1 billion for the standard gauge railway project, will come from commercial lenders.

According to the September 2024 debt sustainability analysis report, commercial banks possess a 12 percent stake ($1.73 billion) in Uganda’s external debt portfolio. In contrast, bilateral creditors, such as China, hold 23 percent ($3.41 billion), and multilateral creditors, including the World Bank and International Monetary Fund, account for 65 percent ($9.77 billion). Patrick Ocailap, Deputy Secretary to the Treasury, remarked that increasing commercial borrowing is essential for executing significant projects and fulfilling spending commitments.

The anticipated influx of new commercial loans is projected to elevate Uganda’s debt-to-GDP ratio to 46.8 percent temporarily. Uganda’s total external debt rose from $14.59 billion in June to $14.91 billion by the end of September 2024. By then, Stanbic Bank Uganda had issued the largest share of commercial debt to the government, encompassing $760 million, with many loans associated with floating interest rates.

Additionally, Uganda previously secured a $400 million loan from Standard Chartered Bank for the installation of security surveillance systems nationwide. The bank also lent $2 million in 2021 for procuring essential medicines through National Medical Stores. Total external debt servicing costs surged to $363.8 million from $240.5 million between specified quarters, largely due to repayment obligations linked to the Karuma and Isimba hydropower projects.

In conclusion, Uganda’s increasing reliance on commercial banks for financing reflects its pressing need to support infrastructure projects amidst dwindling alternatives. The government is actively pursuing loans to satisfy both immediate project needs and service existing debt obligations, resulting in a significant rise in the country’s debt-to-GDP ratio. This situation underscores the critical role commercial lenders play in Uganda’s economic landscape, particularly in energy and transport sectors.

Original Source: www.zawya.com