Uganda’s deficit swells as borrowing and spending surge

Government is facing mounting fiscal pressure after expenditure outpaced revenue collections in the first seven months of the 2025/26 financial year, widening the budget deficit and accelerating the country’s debt burden.

According to the latest State of the Economy report released by the Bank of Uganda, the country’s fiscal position deteriorated as government spending continued to rise despite weaker-than-expected revenue collections and declining external grants.

The report shows that total government revenue and grants amounted to Shs20.33 trillion during the review period, falling short of target by Shs1.84 trillion. The shortfall was mainly attributed to lower inflows from development partners and underperformance in both tax and non-tax revenue collections.

At the same time, recurrent expenditure—including wages, salaries, and operational costs—rose to Shs24.13 trillion, surpassing planned spending by more than Shs300 billion.

The increase was largely driven by higher transfers to local governments, increased expenditure on medical supplies, and election-related activities. Government spending on goods and services also remained elevated amid growing administrative and social demands.

Meanwhile, capital expenditure on infrastructure projects reached Shs4.48 trillion, representing a sharp 71.3 percent increase compared to the same period last financial year, although still slightly below target.

The spending surge was linked to ongoing investments in transport, energy, and public works projects, as government continued to rely on public infrastructure spending to stimulate economic growth and industrialisation.

However, economists warn that the pace of expenditure growth is placing additional strain on the country’s fiscal sustainability at a time when domestic revenues remain weak.

Deficit widens

As a result, the fiscal deficit expanded to Shs8.29 trillion, exceeding the planned level by Shs2.07 trillion.

Most of the deficit financing came through domestic borrowing, increasing pressure on the local financial market and raising concerns over crowding out private sector access to credit.

The central bank warned that sustained expansionary fiscal policy could fuel inflationary pressures by increasing aggregate demand faster than domestic supply can respond.

It also cautioned that increased domestic borrowing could tighten liquidity conditions, influence exchange rate movements, and raise borrowing costs for businesses.

Uganda has struggled for years to widen its tax base despite reforms by the Uganda Revenue Authority aimed at improving compliance and increasing collections from the informal sector.

The report notes that persistent revenue shortfalls are becoming a structural challenge as public expenditure commitments continue to expand.

The fiscal deficit is now projected to rise further to 7.9 percent of GDP this financial year, significantly above the 3 percent convergence benchmark agreed upon by member states of the East African Community.

Although government projects the deficit will narrow gradually to 3.5 percent of GDP by the 2029/30 financial year, this will depend on stronger domestic revenue mobilisation, tighter expenditure controls, and broader fiscal consolidation measures.

Public debt rises

Uganda’s public debt stock also continued to rise sharply. Bank of Uganda data shows total public debt stood at Shs130.22 trillion as of January 2026, representing a 21.2 percent increase.

While debt sustainability indicators remain largely within acceptable thresholds under Uganda’s Public Debt Management Framework, some ratios linked to domestic revenue mobilisation and private sector credit have already exceeded recommended limits.

One of the biggest concerns highlighted in the report is the rising cost of servicing debt.

Interest payments are projected to increase to 4.7 percent of GDP this financial year, up from 3.7 percent previously. Debt servicing is also expected to consume 45.3 percent of domestic revenue, significantly reducing government’s fiscal space.

This means nearly half of all domestically collected revenue will go towards servicing debt obligations rather than financing essential sectors such as health, education, agriculture, and infrastructure.

Despite the growing pressures, Uganda remains classified at moderate risk of debt distress under the latest Debt Sustainability Analysis.

However, the central bank warned that maintaining debt sustainability will require stronger revenue growth, disciplined fiscal management, and prudent use of future oil revenues once commercial oil production begins.

Bank of Uganda also cautioned that delays in oil production or weaker-than-expected oil revenues could further complicate the country’s fiscal outlook and weaken long-term macroeconomic stability.