Uganda’s public finances are coming under increasing pressure as government spending continues to outpace revenue growth, widening the fiscal deficit and forcing the state to rely more heavily on borrowing to sustain its expenditure commitments.
The latest State of the Economy report released by the Bank of Uganda paints the picture of a fiscal system straining under competing demands: rising recurrent costs, ambitious infrastructure spending, growing debt obligations, and revenue collections that are no longer expanding fast enough to keep pace.
According to the report, total inflows from taxes and grants during the first seven months of the 2025/26 financial year amounted to Shs20.33 trillion, falling short of projections by Shs1.84 trillion.
The shortfall was attributed to weaker-than-expected external financing as well as subdued performance in both tax and non-tax revenues.
Yet even as revenues softened, government expenditure maintained a strong upward trajectory.
Recurrent expenditure rose to Shs24.13 trillion, exceeding planned levels by more than Shs300 billion. The increase was driven by higher transfers to local governments, growing medical supply requirements, election-related costs, and sustained wage and administrative expenditures.
The figures reflect the growing rigidity of Uganda’s operating budget, where a significant share of government spending is tied to obligations that are difficult to reduce in the short term.
At the same time, development expenditure continued to expand aggressively. Capital spending surged to Shs4.48 trillion, representing a 71.3 percent increase compared to the same period last year.
The growth underscores government’s continued commitment to infrastructure-led development, particularly in transport networks, energy investments, and public works projects seen as central to long-term economic transformation.
However, despite the sharp annual increase, capital expenditure still fell slightly below target, highlighting persistent implementation delays and financing constraints that continue to affect major projects.
The widening disconnect between revenue inflows and expenditure demands pushed the fiscal deficit to Shs8.29 trillion, significantly above earlier projections.
To bridge the financing gap, government increasingly turned to domestic borrowing, expanding its presence in the local financial market.
According to the Bank of Uganda, this borrowing pattern is beginning to reshape macroeconomic conditions in ways that could affect broader economic activity.
Higher domestic borrowing tends to absorb liquidity from the banking system, placing upward pressure on interest rates and potentially crowding out private sector access to credit.
Where the alarm bell comes in
Economists warn that this could weaken private investment at a time when business expansion remains crucial for job creation and economic growth.
The central bank further warned that sustained demand-side pressure from government expenditure could intensify inflation risks if domestic production and supply-side capacity fail to expand at the same pace.
More fundamentally, the report suggests Uganda’s fiscal pressures are becoming increasingly structural rather than temporary.
Despite ongoing reforms by the Uganda Revenue Authority aimed at widening the tax base and improving compliance, revenue growth continues to lag behind the pace of expenditure expansion.
This imbalance is steadily eroding government’s ability to finance its budget sustainably without accumulating additional debt.
As a result, Uganda’s fiscal deficit is now projected at 7.9 percent of GDP, far above the East African Community convergence target of 3 percent.
Although authorities project the deficit will gradually narrow to around 3.5 percent of GDP by the 2029/30 financial year, analysts say achieving that target will require far stronger revenue mobilization efforts and tighter control of public spending.
Meanwhile, the country’s debt burden continues to rise alongside the widening fiscal gap.
Uganda’s public debt stock climbed to Shs130.22 trillion by January 2026, marking a 21.2 percent increase year-on-year.
While the country remains within internationally accepted debt sustainability thresholds, emerging stress points are becoming harder to ignore—particularly in relation to domestic revenue capacity and the growing competition for credit between government and the private sector.
More concerning is the rising cost of servicing the debt itself.
Interest payments are projected to increase to 4.7 percent of GDP, up from 3.7 percent previously, while total debt servicing is expected to consume 45.3 percent of domestic revenue.
In practical terms, nearly half of all tax revenue collected by government could soon be directed toward debt repayment obligations, significantly reducing the fiscal space available for healthcare, education, infrastructure maintenance, and other public services.
Despite these mounting pressures, Uganda is still classified as being at a moderate risk of debt distress.
However, the Bank of Uganda warns that the country’s fiscal policy buffer is narrowing, meaning future economic stability will increasingly depend on achieving a more balanced fiscal path.
That balance, the report argues, will require stronger domestic revenue mobilization, greater expenditure discipline, and careful management of expected oil revenues once commercial production begins.
Ultimately, the emerging picture is of an economy where government spending ambitions continue to expand faster than the country’s revenue engine can sustainably support—forcing borrowing to fill the gap and steadily tightening the room for fiscal manoeuvre in the years ahead.