The Ugandan government is expected to increasingly rely on domestic borrowing to finance budget shortfalls as international financing options decline further, according to an analysis of fiscal performance at the beginning of the financial year.
In the initial three months leading up to October 2023, the current account deficit showed a 15.2% improvement from the same period the previous year. Foreign Direct Investment (FDI) inflows largely financed the current account deficit, as loan disbursements weakened with a notable outflow of portfolio investment.
Foreign portfolio investors selling their assets in Uganda moved out up to $88.7 million on a net basis. However, this was an improvement from the previous year, attributed to a better investment environment in Uganda.
The government anticipates a decline in official loan disbursements, with FDIs expected to remain a major source of financing. Hopes are particularly high for the oil and gas sector, where during the commercial production phase, the current account deficit is projected to narrow as oil-related imports decrease and exports rise.
However, uncertainties prevail, dependent on global factors such as geopolitical tensions and the duration of higher interest rates in advanced economies. A more extended period of high-interest rates may tighten global financial conditions, restricting financing availability for the government and domestic private sector.
In the period from July to October 2023, government expenditure was less than planned, amounting to UGX 11.48 trillion. Shortfalls were observed in development expenditure, net lending, and recurrent expenditure. Interest payments surpassed the budget due to higher interest rates.
Interest payments and principal repayments are placing significant pressure on tax revenues, with 32 shillings out of every 100 collected being used for debt repayments.
Despite an increase in total revenue, including grants, by 11.2% over four months relative to the same period in 2022, it fell short of the program by UGX 1.17 trillion. The fiscal deficit, including grants, amounted to UGX 3.21 trillion, primarily financed through domestic borrowing.
The Uganda Revenue Authority (URA) recorded a total cumulative revenue of UGX 8.01 trillion, with tax revenue falling short by UGX 320.3 billion and non-tax revenue by UGX 126.3 billion. Lower collections in taxes on international trade and indirect domestic taxes, particularly VAT and international trade taxes, contributed to the revenue underperformance.
The overall fiscal operations were in a deficit, including grants, of UGX 3.21 trillion, primarily financed through domestic borrowing, leading to limited expansion in government operations compared to the initial plan.
