Uganda’s debt has surged to $25.59 billion, with economic growth and oil revenues set to enhance debt sustainability (DSA FY 2023/24)

Uganda’s Debt Sustainability Analysis (DSA) for the financial year 2023/24 provides a thorough assessment of the country’s public debt situation, evaluating its sustainability over the medium to long term. This report serves as an essential tool for informed decision-making, guiding the government’s fiscal policies regarding borrowing, spending, and revenue collection while ensuring fiscal and debt sustainability. By analyzing key economic indicators, fiscal policies, and global trends, the DSA assesses the sustainability of Uganda’s existing debt, identifies potential risks, and informs strategic policy interventions.

The report indicates that Uganda’s total public debt rose from USD 23.66 billion in 2022/23 to USD 25.59 billion in 2023/24, primarily due to an increase in both external and domestic borrowing. Despite this growth, the public debt-to-GDP ratio slightly declined from 47.41% in June 2023 to 46.8% in June 2024, a change attributed to strong economic growth. However, this ratio is projected to increase to 52.7% by June 2025, reaching a peak of 53.0% in 2026 before gradually declining. This anticipated reduction is driven by improved revenue performance, which includes the effective implementation of the Domestic Revenue Mobilization Strategy (DRMS) and the realization of oil revenues.

The analysis concludes that Uganda’s public debt is sustainable in the medium to long term, supported by expected GDP growth, oil production, and improved revenue performance. However, the country faces a moderate risk of debt distress, primarily due to slow export growth and an increasing debt service burden. The debt service-to-revenue ratio, which was 31.5% in June 2024, is expected to remain above 20% throughout the medium term, driven by the high cost of domestic debt. This underscores the necessity of reducing domestic borrowing to mitigate the debt service burden and adhere to fiscal responsibility targets.

A closer examination of Uganda’s debt portfolio shows a changing composition between external and domestic debt. By June 2024, external debt comprised 57.2% of total public debt, down from 60.2% the previous year, while domestic debt increased to 42.8% from 39.8%. This shift indicates a growing reliance on domestic borrowing, partially due to the government’s strategic choice to minimize exposure to foreign currency risks. However, this decision also leads to increased domestic interest payments, which heighten the debt service burden on the national budget.

The cost of debt reduced slightly, with the weighted average interest rate falling from 8.1% in June 2023 to 7.5% in June 2024. This decline is attributed to lower variable rates on external loans and a higher proportion of long-term treasury bonds in domestic debt. Nevertheless, the share of debt maturing within one year rose from 10.3% to 14.8%, indicating heightened refinancing risks. To manage this risk, the government continues to prioritize long-term domestic borrowing, aiming to extend the average time to maturity and ease refinancing pressures.

The DSA is based on a set of macroeconomic assumptions that project a positive growth trajectory for Uganda’s economy. Real GDP growth reached 6.1% in 2023/24 and is expected to accelerate to 6.4% in 2024/25 and 7.0% in 2025/26. This growth is driven by increased activity in the oil and gas sector, ongoing public infrastructure investments, and improved agricultural productivity. Additionally, the government’s continued implementation of growth-enhancing initiatives, such as the Parish Development Model, is anticipated to support higher economic output. However, the growth outlook is exposed to risks from unpredictable weather patterns, global geopolitical tensions, and fluctuating commodity prices.

Fiscal assumptions in the report indicate steady growth in domestic revenue, bolstered by the effective implementation of the DRMS and anticipated oil revenues. Public expenditure is projected to rise, peaking at 22.3% of GDP in 2024/25, driven by ongoing investments in infrastructure and social services. The government also plans to balance concessional external borrowing with domestic financing to meet budgetary needs, especially in high-growth sectors.

The DSA utilizes the Low-Income Countries Debt Sustainability Framework (LIC-DSF) developed by the World Bank and IMF, which assesses debt risks using a Composite Indicator (CI). Uganda’s CI score of 2.84 classifies it as a medium performer, establishing specific debt burden thresholds that guide the sustainability analysis. The findings reveal that while most external debt indicators remain within acceptable thresholds under the baseline scenario, they exceed these limits under extreme shock scenarios. This emphasizes Uganda’s vulnerability to external economic shocks, particularly those affecting export performance, which is the primary source of foreign currency for debt servicing.

Despite these vulnerabilities, the DSA concludes that Uganda’s external debt remains sustainable over the medium to long term. However, the report warns of increased risks associated with commercial external debt, which typically has short maturities.