Uganda rules out use of ‘risky’ Eurobonds

Uganda will stay out of the sovereign bond market that has recently proven popular with its neighbours and other African countries, for fear of a debt crisis just two decades after it got relief from international lenders under the Highly Indebted Poor Countries Initiative.

Bank of Uganda governor Emmanuel Mutebile said Uganda will use concessional loans for its development because the lending rates are lower and the loans are usually accompanied by grants of up to a quarter of the borrowed amount. He said the money will be invested in areas of high return to justify the debt service obligations.

“We should not be complacent about the dangers of big projects built on sovereign debt because it would be unwise for African countries, which will never again get debt relief. From what we are seeing in Ghana, we are not yet ready to issue sovereign bonds,” Mr Mutebile said on the sidelines of a meeting of economists and debt experts in Entebbe last week.

Participants warned that Africa, which has enormous resources but lacks money to invest, risks being mortgaged like Argentina to specialist debt merchants referred to as vulture funds through commercial debt.

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“It is no longer a financial or economic consideration to issue a bond,” Finance Minister Maria Kiwanuka said.

She said African governments are under pressure to take on debt at market rates despite the risk of public debt rising to unsustainable levels during currency depreciation, increasing bond yields.

“At meetings of the World Bank, any minister of finance will have at least six to eight meetings on the sidelines with financial institutions,” Ms Kiwanuka said.

Ghana’s first Eurobond in 2007, worth $750 million and intended to finance investment in railways, electricity generation, gas pipeline and roads, was oversubscribed to $3.2 billion.

But Ghana has issued a second domestic bond of $133 million, and plans to issue another Eurobond of $1.5 billion this month.

“Ghana runs the risk of getting into double digit interest rates for the Eurobond,” said Yaw Osafo-Maafo, Ghana’s former finance minister. “The country’s debt is currently at $23.38 billion, which is 55.4 per cent of GDP — a result of gross fiscal indiscipline within government,” Mr Osafo-Maafo added.

A former Bank of Ghana governor, Paul Acquah, said commercial banks promote bonds to earn money as commission agents.

Last year, an International Monetary Fund review of debt sustainability of 76 low-income countries concluded that a number of them faced moderate to high risks of renewed debt distress. 

Vulture funds buy out distressed debt on the secondary markets and trade it below market value. If the issuer fails to compensate them, they can attach a country’s assets as is happening to Argentina.

IMF managing director Christine Lagarde has cautioned African countries about endangering their debt ratios by issuing sovereign bonds.

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In 2002, the High Court ordered Uganda to pay $10 million to the Iraq Fund for International Development, against a $6.4 million original debt, while in Zambia, a vulture fund bought a $3 million debt and sued the government for $55 million; the court awarded $15 million to the fund in 2007.

Vulture funds can also attach government assets abroad as is the case with the DRC; from an original $18 million claim in 2007, the amount rose to $105 million.

In 2010, a court sitting in Hong Kong authorised the fund to seize $350 million that the China Railway Company was supposed to pay to the DRC. 
EAC partner states signed a Monetary Union Protocol in 2013, that restricts debt levels to below 50 per cent of GDP.

The protocol also stipulates fiscal deficits of not more than 3 per cent of GDP.