The government of Uganda is set to borrow a total of Shs13 trillion from both external and domestic markets to finance various budgetary and project requirements in the forthcoming financial year. This borrowing target represents an increase of Shs1.5 trillion compared to the Shs11.5 trillion borrowed in the current financial year.
Outlined in the Budget Framework Paper for the 2024/2025 financial year, the Ministry of Finance delineated that out of the Shs13 trillion, approximately Shs8.9 trillion will be sourced externally, while Shs4.1 trillion will be obtained domestically. These figures show an increase from the Shs8.3 trillion and Shs3.2 trillion borrowed externally and domestically, respectively, in the ongoing financial year.
In recent times, the government has augmented its domestic borrowing efforts through the issuance of bills and bonds, and has also resorted to direct borrowing from commercial banks. However, financial experts have cautioned against this practice, citing potential risks of crowding out private sector lending.
Despite intentions to limit domestic borrowing to not more than 1 percent of gross domestic product (GDP) in the medium term to prevent crowding out of the private sector, current levels remain above the targeted thresholds, standing above 2 percent.
The escalating debt, projected to reach Shs109 trillion in the next fiscal year, poses a significant challenge to the government due to burgeoning servicing costs and interest payments amidst a decline in tax revenue. The Ministry of Finance anticipates that interest payments will surge to Shs7.6 trillion, equivalent to 3.5 percent of GDP, primarily driven by increased commercial loans in recent years.
Of the projected Shs7.6 trillion interest payments, Shs5.6 trillion will be allocated to domestic debt interest payments, while Shs1.9 trillion will cover foreign interest payments and commitment fees. However, over the medium term, interest payments are expected to decrease to an average of 3 percent of GDP.
Aligned with the Charter for Fiscal Responsibility, aimed at maintaining public debt within sustainable levels, the government’s focus will primarily revolve around reducing public debt to below 50 percent in the 2024/25 financial year. Nonetheless, the Budget Framework Paper also underscores existing risks to economic recovery emanating from both domestic and global environments, potentially affecting growth projections and revenue collections.
The Ministry of Finance highlighted concerns regarding monetary policy tightening in developed economies, which could lead to a significant depreciation of the Ugandan shilling against the dollar. This depreciation could impact the cost of external debt servicing and imports, in addition to potentially increasing domestic interest rates due to the exit of offshore investors to perceived safer markets in developed economies.
