Governments in struggling economies could start paying higher interest for money borrowed from domestic markets due to the new accounting rules.
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.
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.According to experts, Kenya is more likely to pay high interest, as global rating agency Moody’s recently downgraded the country’s credit score to B2 from B1.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.
