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The East African : January 13th 2014
36 PUBLIC DEBT MANAGEMENT Uganda rules out borrowing against oil revenues as lenders dangle carrot T≥easu≥y favou≥s t≥aditional sou≥ces of funding fo≥ inf≥ast≥uctu≥e p≥ojects to manage public debt to the ≥equi≥ed levels By HALIMA ABDALLAH Special Correspondent development against future oil revenues as it emerged that the country is being offered deals by various lenders. According to the Ministry of U Finance officials, the government is under growing pressure from lenders, who are dangling financing options in anticipation that the money would be paid back when oil production begins. Although government acknowledges that it needs money for infrastructure development, it is wary that further borrowing could plunge the country into unsustainable debt levels. “We are not borrowing any money against oil. So many guys are running up and down telling us to borrow against oil but we shall never mortgage the oil, we shall try to manage our debt and borrow against conventional cash flows,” said Treasury Deputy Secretary Patrick Ocailap. The 2012/2013 Ministry of Finance report tabled before parliament last June shows that Uganda’s current debt has escalated to $5.8 billion, from $2.4 billion in the financial year 2006/ 2007. Mr Ocailap said the country is still within the International Monetary Fund’s (IMF) ceiling and the East African Monetary Union limits, which is a total debt to GDP of 40 per cent. The seemingly manageable debt is a result of a debt cancellation under the Heavily Indebted Poor Countries (HPC) in the early 2000s. This initiative gave Uganda a debt relief amounting to $2 billion in net present value. In 2006, the country again benefitted from the Multilateral Debt Relief Initiative. However, required infrastructure development in the oil and gas sector — a refinery, pipeline, roads, railways and airports — will inevitably increase external financial borrowing before production begins. This will expose the country to increased debt. “For example, we have two huge projects: Karuma and Isimba dams in which have used our resources. We hope to repay the ganda has ruled out proposals to fund infrastructure The EastAfrican BUSINESS JANUARY 11-17,2014 Rwanda g≥apples with low-cost housing c≥isis By BERNA NAMATA The EastAfrican RWANDA IS facing a housing shortage with developers blaming high cost of land, building materials and mortgages for a fall in the number of low-cost houses coming up in the market. The country requires at least 25,000 housing units every year, but developers say the cost of land, mortgages and building materials have made it difficult for more investment in the sector. However, supply of houses targeting the upper class have surpassed the demand leading to decline in prices. For instance, rent for high-end residential housing have dropped to approximately $1,300 since last year, from about $2,000 a few years ago. “Because prices of high- end housing are reducing, now most landlords prefer to occupy their houses or turn them into guesthouses,” said Charles Haba, a real estate dealer in Kigali. Rwanda imports almost 80 per loans through tariffs and revenues realised from the general economy when it performs better because of availability of electricity. We have not yet borrowed money for any projects against oil revenues,” said Mr Ocailap. To avoid the temptation, Mr Ocailap said, Ministry of Finance will redouble efforts to increase domestic revenue collection. He said in case of a need for additional funding, the government will opt for grants and traditional sources that offer favourable terms like those from the World Bank, African Development Bank and the Islamic Development Bank. The government’s decision comes at a time when opinion is divided, with economists opposing politicians’ and donors’ preferences for borrowing against expected oil revenues. Some politicians support donors proposals that the country should frontload these projects by borrowing today in anticipation of revenues from oil and gas. Donors argue that doing so will enable the government to spend on core areas, which it has always budgeted for, but often diverted the funds to non-core areas. In 2012, European Union Director-General for Development Co-operation Francesca Mosca, said that in its next round of aid disbursement expected to be launched this year under the 11th European Development Fund (EDF), Brussels will release $5.8b Workers undertake first flaring test at Waraga 1 well in Kaiso-Tonya in Hoima District in western Uganda. Picture: File REFINERY PROJECT Last month Uganda shortlisted a consortium led by the China Petroleum Pipeline Bureau; Marubeni Corporation (Japan); and another consortium led by the UK-registered Petrofac to build an oil refinery. The other consortia include one led by the Russian RT — Global Resources; South Korean-based SK Energy; and Vitol, a Dutch company. The government is expected to award the tender mid this year for the successful company to begin work ahead of oil production expected to begin in 2017. loans, grants to the private sector, dubbed “blending,” all at once. The 11th EDF runs from 2014 to 2020. Ms Mosca was in Uganda then to explain the EU’s strategies of frontloading aid needed for infrastructure development. At the back of the new move are donors’ growing discomfort with corruption in many government projects, which affect service delivery. The EU is the lead donor in road infrastructure. The government has so far Uganda’s current public debt, which increased from $2.4 billion in 2007 paid the price of donor aid cut amounting to $263 million in direct budget support this financial year owing to corruption involving projects under the prime minister’s office. The country’s coverage of electricity is only at 10 per cent, which has implications for building a sustainable and competitive industrial base. Electricity Regulatory Authority (ERA) estimates that industrialists lose up to 156 days a year due to electricity interruptions. This has seen some leaders call a review of the Production Sharing Agreements (PSA) it signed with oil companies to make infrastructure development part of the recoverable costs. Mr Ocailap said government will only go for commercial loans after exhausting all other avenues. The commercial loans will be secured for only ready-to-go projects so as to maximise benefits and reduce the chances of getting heavily indebted. While the oil and gas revenues are expected to ease the country’s financial challenges, economists are opposed to borrowing secured on the basis of expected revenues. The proposed Finance Bill which was tabled in parliament last year prohibits mortgaging the oil and gas resources. “Oil production could trigger an increase in public debt to unsustainable levels as future public revenues may not be sufficient to service the debt. There could be a total mismatch between what you expect and what you are realising,” said David Kihangire, chief executive BERF International Consult. Oil and gas production is associated with volatility on four fronts: Fluctuations in production, international prices, exchange rate, fraud and money laundering. Mr Kihangire said if not well managed, it will pose great risks to accurate forecast of government oil revenues and overall macroeconomic management. cent of construction materials from neighbouring countries and overseas. “As long as these issues are not addressed, it is not going to be possible to attract real estate developers into low-cost housing,” Mr Haba said. While Rwanda’s construction sector continues to thrive, growing on average over 10 per cent in recent years, most of the construction is of commercial buildings due to the rapid economic growth. The few real estate developers who have ventured into residential housing have focused on the upper end of the market, creating a chronic shortage for low and middle-income earners. “The demand is huge. What is killing this huge demand for lowcost housing and high interest rates on mortgages,” said Shane Dale, the chief executive officer, a property consultant in Kigali. While commercial banks recently repackaged their home and mortgage products to make them attractive to buyers, they remain too expensive for ordinary Rwandans. On average a house, which is considered affordable costs Rwf40 million ($57,662) but attracts an interest rate of at least 18 per cent for 20 years. While this is relatively lower compared with those in Kenya and Uganda, it is still too high considering the size of Rwanda’s economy. “If the mortgage rates can be lowered, we feel the demand is there, and this will drive massive construction because with the free flow of labour in the region it is easier to get the skilled people to get the work done,” Mr Dale said. But the financiers cite limited access to long-term finance locally for such projects yet external borrowing comes with a lot of risks.
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