Debt servicing squeezing Uganda’s spending room, BoU warns

KAMPALA — Uganda’s rising debt-servicing bill is increasingly squeezing government spending on essential services, with the Bank of Uganda (BoU) calling for urgent measures to contain borrowing costs and widen the country’s revenue base.

BoU Governor Michael Atingi-Ego said the growing share of government resources going towards repayment of loans and interest was limiting the money available for sectors such as health, education and public-sector salaries.

He said Uganda’s debt level, by itself, does not pose an immediate threat to sustainability as long as borrowed money is invested in productive activities that expand the economy and generate the capacity to repay the loans.

However, the Governor cautioned that government must become more disciplined in borrowing and spending as debt-service obligations continue to rise.

“Of course, the [debt] service has an impact on other expenditures and investments,” Mr Atingi-Ego said.

His comments come at a time when debt repayment has become the single largest item in Uganda’s national budget.

For the 2026/27 financial year, government allocated Shs33.4 trillion to debt servicing, equivalent to about 40 per cent of the Shs84.3 trillion national budget.

Uganda’s total public debt stock stands at about Shs30.2 trillion, or approximately $34.9 billion.

The growing debt burden has raised concerns about the amount of fiscal space available to government to respond to social and economic needs without resorting to additional borrowing.

Mr Atingi-Ego said Uganda could not immediately stop borrowing because the country still requires substantial financing for infrastructure and other investments necessary to support economic growth.

The priority, he said, should instead be to ensure that borrowing is prudent, affordable and directed towards projects capable of generating economic returns.

“That can only [be achieved through] … debt service indicators,” he said.

Government is implementing a fiscal consolidation framework intended to slow the growth of expenditure, reduce the need for borrowing and eventually lower the amount of public resources committed to debt servicing.

Mr Atingi-Ego said fiscal consolidation would be critical in bringing the deficit under control and improving Uganda’s debt-service indicators.

Uganda’s public debt is projected to rise to about 60 per cent of GDP by 2030/31, from the current 53 per cent.

Although the International Monetary Fund (IMF) considers Uganda’s debt sustainable, it has classified the country as facing a moderate risk of debt distress.

The Fund’s latest assessment also points to vulnerabilities that could become more pronounced under adverse economic conditions, with several debt indicators breaching their thresholds.

The IMF has particularly raised concern over Uganda’s growing dependence on relatively expensive domestic borrowing.

“Vulnerabilities related to the heavy reliance on costly domestic financing have also intensified,” the IMF said, noting that domestic debt-to-GDP and domestic debt-service-to-revenue ratios are projected to remain above averages for low-income countries.

The Fund has consequently urged Uganda to accelerate implementation of its Domestic Revenue Mobilisation Strategy to broaden the tax base, improve tax administration and reduce costly tax expenditures.

Revenue pressure

The debt-service challenge is closely linked to Uganda’s relatively narrow revenue base.

Government is finalising the second Domestic Revenue Mobilisation Strategy, which is expected to increase collections through improvements in tax administration and other reforms.

However, the IMF has warned that some of the projected revenue gains depend heavily on administrative measures, including systems and data that are not entirely within the control of the Uganda Revenue Authority.

The Fund has also noted that a detailed implementation plan for some of the proposed reforms is yet to be developed.

Uganda’s fiscal deficit has also widened in recent years, increasing the pressure to borrow.

The deficit rose to 6 per cent of GDP in 2024/25, from 4.7 per cent in 2023/24, before reaching about 7 per cent in the subsequent period, according to the IMF.

The widening gap reflects, among other factors, increased recurrent expenditure and rising interest payments.

Government’s fiscal consolidation strategy seeks to reduce the deficit from about 7 per cent of GDP currently to slightly above 3 per cent by 2031, according to Mr Atingi-Ego.

The strategy involves expanding the tax base, reducing tax exemptions and improving tax administration while avoiding excessive dependence on consumption taxes.

On the expenditure side, government intends to improve efficiency in resource allocation, reduce non-essential recurrent expenditure and enforce leaner budgets.

It is also seeking cheaper sources of financing, including climate-related grants, concessional financing windows and diaspora instruments, to reduce reliance on expensive domestic borrowing.

Debt for development

Deputy BoU Governor Prof Augustus Nuwagaba defended Uganda’s borrowing, saying the increase in public debt has largely been driven by investments in infrastructure such as roads and electricity generation projects.

He said such investments were necessary to improve the business environment and support economic activity.

Prof Nuwagaba said Uganda had not borrowed primarily to finance consumption.

“Uganda has been [borrowing] for development and infrastructure, not for consumptive purposes,” he said.

He argued that the use of borrowed money for productive investments is what makes Uganda’s debt sustainable.

But economist Dr Fred Muhumuza said the debate should not focus solely on the ratio of public debt to GDP.

He said while officials could argue that Uganda’s debt remained sustainable, the more immediate concern was the pressure created by debt repayments on government’s ability to finance essential services.

According to Dr Muhumuza, the rapid expansion of the public debt stock has reached a level where debt servicing is directly competing with spending on healthcare, education and other public priorities.

His concern echoes growing scrutiny from civil society organisations and parliamentary committees over the effectiveness of government borrowing, particularly whether loans are generating sufficient economic returns to justify their costs.

The IMF Executive Board Directors have similarly called for stronger fiscal consolidation anchored in increased domestic revenue mobilisation and tighter expenditure discipline.

The measures, they said, would help reduce debt vulnerabilities, ease pressure on domestic financing and rebuild government’s policy space.

The challenge is becoming more urgent as Uganda prepares for increased oil production and continues to finance major infrastructure projects.

Government expects oil revenues and continued economic expansion to strengthen its capacity to manage the debt burden. However, in the short term, the country must balance the need for development financing against the rising cost of servicing existing obligations.

The central issue, therefore, is no longer simply how much Uganda can borrow, but how effectively it can raise domestic revenue, control expenditure and ensure every borrowed shilling contributes to economic activity capable of supporting future debt repayments.