East Africa government debt to cost more in new accounting rules
Governments in struggling economies could start paying higher interest for money borrowed from domestic markets due to the new accounting rules. FOTOSEARCH
The IFRS 9, which became effective in January, requires corporations to include a provision for T-bills and bonds to guard against the collapse of business in case the borrowing government fails to pay.
For Uganda and Kenya, the cost of holding Treasury-bills and bonds is expected to rise as corporations will require high capital reserves to make provisioning for their debt.
Sector players say if they are forced to apply the new rules to the letter, they would have to find coping mechanisms.
Governments in struggling economies could start paying higher interest for money borrowed from domestic markets due to the new accounting standards.
The IFRS 9, which became effective in January, requires corporations to include a provision for Treasury-bills and bonds to guard against the collapse of business in case the borrowing government fails to pay.
According to Wilson Kaindi, a senior manager at audit firm KPMG, among the factors to consider when provisioning for government debt are indicators of the state of the economy like credit rating, unemployment, poverty and inflation rates, revenue collection as well as tax- and debt-to-GDP ratio, and a country’s repayment history.
“Previously, there was no need for provisioning, since government debt was considered risk-free,” he said.
This changed with the 2008 financial crisis, and the realisation that companies can collapse over keeping debt that was previously considered secure.
T-bills
For Uganda and Kenya for example, the cost of holding Treasury-bills and bonds is expected to rise as corporations will require high capital reserves to make provisioning for their debt. The two countries have been struggling to pay their debt, which has been on the rise.
Uganda’s auditor general said the nominal interest payments to total government revenue increased to 16 per cent in 2016, exceeding the 15 per cent cap agreed in the public debt management framework.
For the 2018/2019 financial year, Uganda will pay Ush2.7 trillion ($732.3 million) on debt, compared with projected government revenue of Ush15.1 trillion ($4.1 billion).
This puts interest payments as a ratio of government revenue at 18 per cent. Besides, for the fourth year running, Uganda is set to borrow Ush5 trillion ($1.4 billion) from the domestic market to refinance a debt.
The executive director at Uganda Bankers Association Wilbrod Owor said they would seek guidance on applying the new rules.
“We shall ask BoU how to apply these rules, as they could affect the capital of commercial banks,” he said.
Coping mechanisms
Meanwhile, sector players said if they are forced to apply the new rules to the letter, they would have to find coping mechanisms.
Azim Tharani, the managing director of Goldstar Insurance said they will seek tax incentives to guard against the sector’s falling profits.
For the commercial banks, Mr Owor said they would consider reducing the availability of unsecured micro and small loans. But Central Bank Governor Emmanuel Tumusiime Mutebile warned that high interest rates have kept private sector growth low, which could affect Uganda’s economic growth — which is projected to average 6.3 per cent over the next five years.
