Uganda’s Rising Debt and Its Impact on Public Finances

Uganda is experiencing a concerning increase in its debt portfolio, leading to worries about the sustainability of its financial situation and its effects on public services. The State of the Economy report released by the Bank of Uganda in December 2023 highlights the growing pressure of debts on tax revenues.

The report reveals that interest payments and external debt principal repayments are straining tax revenues. For every 100 shillings collected in tax revenues, 32 shillings are allocated to debt service, reducing the resources available for crucial public services.

Recently, Parliament approved loans exceeding Shs 6.868 trillion to fund a supplementary budget, e-government infrastructure construction, and climate smart agriculture projects. Uganda has been relying on accumulating debt to finance various infrastructure projects, with expectations of oil revenue contributing to debt repayment.

As of August 2023, official data from the Bank of Uganda indicates that Uganda’s total debt stock reached UGX 88.807tn, showing a 2.8% increase compared to June 2023, primarily driven by a 19.1% increase in domestic debt.

Researcher Paul Lakuma highlights the growing burden of debt servicing costs, suggesting increased pressure on taxes to finance debt liabilities at the expense of crucial budgetary items like education and health. The rise in domestic debt has also led to increased interest rates, limiting private sector access to credit.

Despite not being at immediate risk of debt distress, Uganda faces the risk of losing development gains due to debt pressure, exacerbated by the pandemic and climate change-related challenges impacting production. The pandemic coincides with increased insecurity in the region, particularly in the Democratic Republic of Congo.

The World Bank notes that half of Uganda’s external debt portfolio consists of highly concessional loans from organizations like the IMF, IDA, and ADF. Semi-concessional and non-concessional debt components have been on the rise in recent years. The increase in semi-concessional loans is driven by official loans from the Export-Import Bank of China, constituting 20% of external public debt outstanding at the end of FY 2020/21.

In response to COVID-19, Uganda has also turned to commercial loans, constituting around 8% of external public debt. Notable lenders include the Trade Development Bank, Standard Bank of South Africa, and Standard Chartered. Additionally, the stock of local-currency government securities held by offshore investors has doubled its share in external public debt to 6% in FY2020/21.