Uganda turns to green bond to bridge Shs86 trillion climate funding gap

KAMPALA. Uganda is facing a Shs85.8 trillion shortfall in funding needed to meet its climate commitments by 2030, prompting government to turn to private investors through its first sovereign green bond.

The planned bond, which could raise up to $500 million (about Shs1.87 trillion), is expected to finance projects that help the country cope with increasingly unpredictable rainfall, prolonged dry spells, flooding and other effects of climate change.

Uganda requires an estimated $28.1 billion (about Shs104.8 trillion) to implement its Nationally Determined Contributions (NDCs) by 2030. However, only $5.1 billion (about Shs19 trillion) has so far been mobilised, according to the Ministry of Water and Environment.

This leaves a funding gap of about $23 billion (Shs85.8 trillion), a deficit that government says cannot be closed through public resources alone.

Dennis Muggaga, the head of the Climate Finance Unit at the Ministry of Finance, Planning and Economic Development, said the financing gap was one of the reasons government was exploring innovative ways of raising money for climate-related investments.

“We are not doing very well. That is why we are coming into these innovative financing instruments, where you can bring in a lot of money at the same time,” Mr Muggaga said.

The government expects to issue the bond early next year after finalising a Green Bond Framework by the end of this month.

The framework will set out the types of projects eligible for financing and the environmental and social safeguards that will govern the use of the proceeds.

Unlike conventional Treasury bonds, whose proceeds are channelled into the Consolidated Fund for different government priorities, money raised through a green bond must be ring-fenced for projects with defined environmental benefits.

These could include clean energy, climate-resilient agriculture, water systems and infrastructure designed to withstand floods and heavy rainfall.

Government will also be required to report to investors on how the money is spent and the performance of projects financed through the bond.

Mr Muggaga said the bond could be divided between local and foreign currencies to attract domestic financial institutions as well as international investors.

The plan would give Ugandan banks an additional investment instrument while allowing international investors to participate in projects linked to the country’s climate transition.

“As a Ugandan, I’m not interested in holding a US dollar. I want it in my own currency,” Mr Muggaga said, explaining the case for offering a shilling-denominated option alongside a dollar tranche.

The bond would also be tradable on the secondary market, allowing investors to sell their holdings before maturity.

However, experts warn that raising the money is only part of the challenge. Government must have enough well-prepared projects capable of absorbing the funds once they are raised.

Lamin Trawally, the Sustainable Finance Lead for Africa at the Global Green Growth Institute, said Uganda needed a credible pipeline of projects in sectors such as energy, roads, water, environment and land.

Mr Muggaga said several projects had already gone through government vetting, although officials were assessing whether they met the higher project-readiness requirements expected by international investors.

The European Union is supporting Uganda’s preparations through its Global Green Bond Initiative.

The EU has committed nearly €20 million (about Shs87 billion) to support issuance costs and help reduce the interest rate paid to investors. The subsidy, commonly referred to in green finance as a “greenium”, is intended to make the bond more attractive.

Christina Banuta, an EU delegation programme manager, said the support was aimed at helping Uganda establish the credibility needed to enter the green bond market.

“These building blocks are a prerequisite to Uganda accessing the international and domestic green bond market,” she said at a validation workshop on the framework on Tuesday.

The EU also plans to buy part of Uganda’s first green bond, alongside providing technical support and the interest-rate subsidy, to encourage other investors to participate.

The planned issuance follows other measures government has introduced to develop the country’s sustainable finance market, including the National Green Taxonomy and Climate Finance Strategy.

These instruments are intended to provide common standards for identifying green investments and give investors greater confidence in projects seeking climate finance.

The proposed bond also comes as African countries struggle to attract a larger share of the rapidly expanding global sustainable finance market.

Africa accounts for less than one per cent of global sustainable bond issuances, with much of the financing that reaches the continent coming through development finance institutions rather than commercial private investors.

If Uganda proceeds with the planned issuance, it will join a growing group of African countries using green bonds to finance climate-related investments.

For Uganda, however, the test will extend beyond successfully raising the targeted $500 million. Government will have to demonstrate that the money reaches projects capable of reducing climate vulnerability and generating measurable benefits for communities.

With the country facing longer dry seasons, unpredictable rainfall and growing pressure on food and energy systems, officials say mobilising climate finance is becoming increasingly urgent.