IMF Urges Uganda to Rein In Debt and Boost Budget Discipline Amidst Strong Growth

Uganda’s public debt is projected to rise to 55.5% of its Gross Domestic Product (GDP) in the current financial year, an increase from 52.3% in FY 2024/25. This escalation is driven by increased government borrowing to cover a widening budget deficit, which was anticipated to reach 7.1% by the end of FY 2025/26.

This fiscal tightening occurs even as Uganda’s economy demonstrates strong growth, achieving 6.3% in FY 2025/26. The IMF’s latest Article IV consultation report noted that while the economic outlook is positive, a weak fiscal position poses the primary risk. The report emphasized that enhancing revenue collection and curbing public expenditure are crucial for rebuilding financial buffers.

The IMF also called for strengthening governance, anti-corruption measures, and the judiciary. Improving the business environment and reducing trade barriers were highlighted as key to ensuring that Uganda’s growth translates into more jobs and widespread prosperity. The Fund suggested that future oil revenues should be used to bolster reserves, support growth, and fund social development while safeguarding resources for future generations.

Concerns were raised by the IMF Executive Board regarding Uganda’s declining fiscal health. Directors pointed out that a high debt burden is hindering the private sector, exacerbated by lower tax revenues and significant domestic borrowing at high interest rates. They urged for stricter budgetary discipline, better control over supplementary spending, and enhanced public financial management.

A particular area of concern is Uganda’s foreign reserves, which currently stand at $6.1 billion, covering only 2.7 months of imports. This level is considered low compared to regional peers and could put downward pressure on the currency, increase the risk of imported inflation, and damage the country’s credit rating. The IMF recommends a reserve coverage of at least 3.5 months of expected imports for countries facing financing constraints and commodity price volatility.

Experts suggest a dual approach to address the fiscal challenges: increasing revenue through measures like rationalizing tax exemptions and improving compliance, while simultaneously reducing non-essential expenditures and curbing expensive domestic borrowing. The IMF’s findings underscore the need for comprehensive economic, governance, and judicial reforms to sustain Uganda’s growth trajectory and mitigate financial risks.

Source: https://observer.ug/news/imf-warns-uganda-on-debt-budget-discipline