The International Monetary Fund warned Uganda against rushing into a sale of Eurobonds before it develops the capacity to invest the money efficiently.
Interest rates on the borrowed funds would burden the East African nation if the money isn’t spent effectively, Thomas Richardson, the Washington-based lender’s representative in Uganda, said in an interview today in Kampala, the capital.
The government “needs to focus on building capacity to invest well,” he said. It is “having a difficult time investing in infrastructure effectively.”
Uganda plans to sell its first dollar-denominated Eurobond in the next two to three years to finance “massive” projects, Keith Muhakanizi, the deputy treasury secretary, said on May 29.
Donor funding at interest rates as low as 1 percent is a better alternative than the 7 to 8 percent interest likely to be paid on the Eurobonds, Richardson said.
Aid will finance at least 25 percent of Uganda’s budget in the 12 months through June next year, Finance Minister Maria Kiwanuka said on June 14. The U.S., U.K., European Union, Denmark, Sweden and Japan are some of the main donors.
Uganda, where Tullow Oil and partners say they have found 2.5 billion barrels of crude, has a sovereign credit rating of B+, four steps below investment grade, at Standard & Poor’s.
The government should also avoid the temptation of borrowing from the national pension fund at lower than market rates, Richardson said. President Yoweri Museveni announced plans this month to borrow 1.4 trillion shillings ($560 million) from the fund to finance road construction.
Uganda’s economy may expand 5.4 percent in the 2012-13 financial year and government revenue, currently 12 percent of gross domestic product, may increase by about a quarter of a percentage point after the abolition of tax incentives, Richardson said.
The economy grew 3.2 percent in the current financial year, the slowest pace for 25 years because of the European debt crisis and high oil prices, Museveni said on June 14.
To contact the reporter on this story: Fred Ojambo in Kampala at firstname.lastname@example.org