Breaking News: Firms begin to receive government bailout money

In Summary

KAMPALA, AUGUST17 – Despite opposition from the Bank of Uganda and statements to the contrary by […]

KAMPALA, AUGUST17 – Despite opposition from the Bank of Uganda and statements to the contrary by officials from Treasury, the government has started paying out the bailout money it promised to a select distressed firms.

256 Business News has it on good authority that at least one firm that has interests in the hospitality and energy sectors has received $14 million in bailout in recent days. Efforts to get comment from the firm were unsuccessful with our messages still unanswered at the time of making this post.  But multiple sources confirmed the development and that the proprietor of the group indeed cashed the bailout pledge by President Museveni.

While it had been speculated that the payments could have been for outstanding dues for power supplies to Uganda Electricity Transmission Company Limited, 256 Business News discounts this possibility on two grounds. First it would have been UETCL to pay the money, not treasury and second, the amounts involved are way above any money UETCL could have owed the firm. On average, UETCL pays out Ushs 7 billion ($2,055,350) per month to help operators of thermal power plants supplying the grid to cover their operating costs and financial obligations to lenders.

It is not immediately possible to establish if any other firms on the list of 66 distressed businesses and individuals that were lined up for the bailout could have collected any money or how much for that matter but the development comes at a politically sensitive time for the government which is unable to meet salary arrears and enhancements for several groups of civil servants, some of whom have gone on strike.

Just yesterday, President Museveni held a meeting with representatives of non-teaching staff at public universities who have downed tools protesting a pay disparity with their academic colleagues and scuttled the scheduled opening for the first semester at all the six public universities. It will be difficult to convince these workers that the government cannot find Ushs 28 billion ($8.2million) when it can casually dish out $14 million to a single business group.

The Bank of Uganda has been opposed to the proposed bailout of firms that include a night-club reasoning that there were always bound to be people who misjudge the economic environment and this would set a bad precedent. The central banker also warns that raising the Ushs 1.3 trillion required to bail out the firms’ could only be done through government going back on the public debt market which would undermine its earlier pledge to reduce public borrowing to Ushs 0.7 trillion this financial year, ostensibly to help drive down lending rates that were chocking the private sectors access to credit.

The central bank reasons that whichever approach – public borrowing, or printing money- the government chooses to finance the bailout, the result would be a spike in the CBR and a subsequent rise in lending rates which are yet to abate despite a 300 basis reduction in the CBR since April.

Explaining the likely impact of either scenario, a source at the Bank of Uganda said printing money would lead to a surge in inflation which would prompt mop-up action by the central bank and subsequent high interest rates. On the other hand going back to the debt market would push government borrowing to Ushs2 trillion in fiscal 2016/17, an amount significant enough to shift commercial bank resources from risky lending to the private sector to safer government paper. “The attendant scarcity of credit would push up interest rates, the very issue the distressed firms are blaming for their woes,” he said.

But just as he concluded, the Bank of Uganda’s hands are tied. It cannot stop the government from getting money from the treasury under the guise of domestic arrears which were running at Ushs 1.3 trillion at the close of fiscal 2015/16.

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