Uganda: Staff Report for the 2024 Article IV Consultation—Debt Sustainability Analysis
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International Monetary Fund. African Dept.
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Publication Date:
11 Sep 2024
eISBN:
9798400288821
Language:
English
Keywords:
GDP deflator; localcurrency government securities; Ugandan authorities; authorities transition; short-term debt; Contingent liabilities; Debt sustainability analysis; Global
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UGANDA

Title page

UGANDA

STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS

August 16, 2024

Approved By

Catherine Pattillo (IMF), Jay Peiris (IMF), Manuela Francisco (IDA), and Hassan Zaman (IDA).

Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA).

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1 Uganda’s Composite Indicator, which is estimated at 2.93, signals a medium debt-carrying capacity based on the April 2024 WEO and CPIA 2023.

The economy has rebounded from external shocks induced by the pandemic, Russia’s war in Ukraine, and conflicts in the Middle East, although downside risks, related to a complicated external financing landscape, remain. Given the ongoing fiscal consolidation, Uganda’s public debt continues to be sustainable in the medium term. In line with the previous DSA prepared in June 2023, Uganda has a moderate risk of external and overall public debt distress. All external PPG debt and total public debt burden trajectories remain below their respective indicative thresholds and benchmarks over the medium term under the baseline scenario. However, stress tests highlight breaches of external debt burden thresholds and the public debt benchmark. Specifically, given that a median shock could lead to a breach for the external and total debt service indicators, Uganda has limited space to absorb shocks. Key risks include slower growth, environmental shocks, continued prevalence of tight global financial conditions, delayed reform implementation, delays in oil exports, possible spillovers to trade stemming from the conflict in Gaza and Israel, and repercussions on donor financing, FDI, and tourism deriving from the parliamentary approval of the ‘Anti-Homosexuality Act’ (AHA) in May of 2023. Going forward, Uganda’s fundamental development challenge is to replace a growth model based on debt-financed public spending that has emphasized infrastructure, with one where the private sector leads economic growth, supported by the state through investments in human capital and targeted regulations to promote green and inclusive growth that reduces inequality and ensures sustainability. Such a shift requires maintaining macroeconomic stability, implementing structural reforms to improve governance and the business environment, mobilizing domestic revenues, scaling-up investments in human capital, better supporting the vulnerable, farmers and MSMEs, and using public resources more effectively to maximize returns on investment.

Public Debt Coverage

1. Public and publicly guaranteed (PPG) external and domestic debt covers debt contracted and guaranteed by the central government, state and local government, social security fund, and central bank (Text Table 1). Uganda’s Public Debt and Other Financial Liabilities Management Framework (2023) gives the Ministry of Finance, Planning and Economic Development the mandate to prepare and publish quarterly Debt Statistical Bulletins. The published data covers PPG debt with information on a residency-based definition of domestic and external debt. In addition, the Bank of Uganda (BoU) provides data on locally issued government debt held by non-residents, which allows a residencybased analysis. Due to data limitations, debt data does not cover extra budgetary units (EBUs) and debt issued by state-owned enterprise (SOE).1 The contingent liability stress test includes the disputed arrears to Tanzania (US$58 million or 0.1 percent of GDP),2 the default PPP shock (i.e., 35 percent of PPP stock, implying 1.7 percent of GDP), and the default financial market shock (5 percent of GDP).3

Text Table 1.

Uganda: Coverage of Public and Publicly Guaranteed Debt and Parameters for Contingent Liability Shock

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Sources: Ugandan authorities and IMF staff calculations.

Background and Recent Developments

2. The public debt ratio has effectively remained unchanged in FY22/23 at just above 50 percent of GDP (Text Figure 1 and Table 1). This dynamic stands in contrast with an increase in debt-to-GDP ratio between FY18/19 and FY20/21, which was mainly driven by increased borrowing to finance the country’s development needs as well as extra spending needs during the COVID pandemic. The composition of debt has slightly changed with external debt coming down from 31.3 percent of GDP to 29.9 and domestic debt increasing from 19.3 to 20.8. In nominal terms, the external debt amount to US$14.9 billion while domestic debt to about US$10.4 billion. In present value terms, total public sector debt stood at 45.0 percent of GDP at the end of FY22/23. This is below the East African Community’s debt target of 50 percent of GDP.

Text Figure 1.
Text Figure 1.

Public and Publicly Guaranteed Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

Sources: Ugandan authorities and IMF staff calculations.

3. While most of the existing stock of external public debt is on concessional terms, the semi-concessional component has been on the rise in recent years. Highly concessional loans from the IMF, the International Development Association (IDA) and the African Development Fund (ADF) account for half of the external debt portfolio, which mainly drives the difference between the nominal value of public debt and its present value (Text Table 2). Other concessional creditors include the International Fund for Agricultural Development (IFAD), the Arab Bank for Economic Development in Africa (BADEA), the Organization of the Petroleum Exporting Countries (OPEC) fund, and some bilateral Paris and non-Paris club creditors. In response to COVID-19, Uganda also resorted to commercial loans that constitute now around 13 percent of external public debt, mostly owed to Standard Bank of South Africa (SBSA), the Trade Development Bank (TDB), Standard Chartered, and African Export–Import Bank. Finally, the stock of localcurrency government securities held by offshore investors was 4 percent of external public debt.

Table 1.

Uganda: Decomposition of Public Debt and Debt Service by Creditor, FY2022/23-FY2024/251

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Sources: Ugandan authorities and IMF staff calculations. 1/As reported by Country authorities according to their classification of creditors, including by official and commercial. Debt coverage is the same as the DSA. 2/Some public debt is not shown in the table due to data limitations. 3/Multilateral creditors” are simply institutions with more than one official shareholder and may not necessarily align with creditor classification under other IMF policies (e.g. Lending Into Arrears) 4/Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. Collateral is “unrelated” when it has no relationship to a project financed by the loan. An example would be borrowing to finance the budget deficit, collateralized by oil revenue receipts. See the joint IMF-World Bank note for the G20 5/Includes other-one off guarantees not included in publicly guaranteed debt (e.g. credit lines) and other explicit contingent liabilities not elsewhere classified (e.g. potential legal claims, payments resulting from PPP arrangements).
Text Table 2.

Uganda: Decomposition of External Public and Publicly Guaranteed Debt, FY2022/23, Millions of US$

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Sources: Ugandan authorities and IMF staff calculations.

4. Public domestic debt (residency based) is dominated by medium-to long-term securities. T-bonds constituted almost three-fourths of Treasury securities at the end of FY22/23 (Text Figure 2). T-bonds are mostly held by non-banks (around 70 percent), while T-bills are predominantly held by banks (close to 90 percent). As banks’ holdings of government debt have significantly risen since the pandemic (from 21 percent of their total assets in 2019 to 29 percent in 2023), this growing sovereign-bank nexus is starting to pose concerns. It also results in elevated interest rates and contributed to subdued private sector credit growth. The share of outstanding advances from the Bank of Uganda continued to increase and at the end of FY22/23 constituted 3.1 percent of GDP (Text Figure 2).

Text Figure 2.
Text Figure 2.

Public Domestic Debt

(Cost Value, Percent of GDP, as of end-FY2022/23)

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

Sources: Ugandan authorities and IMF staff calculation.
Text Table 3.

Uganda: Holdings of Government Debt,

(Percent, as of October 31, 2023)

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Source: Ugandan authorities and IMF staff calculations.

5. Borrowing costs have increased recently. Total interest payments continued to increase reaching 3.2 percent of GDP in FY22/23 (2.1 percent of GDP in FY19/20), largely due to the increased stock of domestic debt, interest rates on which remain elevated, and increases in the interest rates on external debt (Text Figure 3). While the terms of external loans became more costly, some 85 percent of interest payments in FY22/23 were on domestic debt, given high share of past external borrowing on concessional terms.

Text Figure 3.
Text Figure 3.

Borrowing costs

(Percent)

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

Source: Ugandan authorities.

Macro Forecasts

6. The medium-and long-term macroeconomic framework underlying this DSA is consistent with the scenario presented in the Staff Report for the 2024 Article IV (Text Table 4). The baseline scenario assumes the following:

  • Real GDP growth. The economy has recovered from external shocks induced by Russia’s invasion of Ukraine and higher inflation, and the outlook has improved. Growth accelerated supported by strong performance in agriculture and services sectors. High frequency indicators point to continued robust sentiment buoyed by low inflation. The real GDP growth outlook for FY23/24 and FY24/25 is at 6.0 and 6.2 percent (6.0 and 6.6 percent in the previous DSA).

Text Figure 4.
Text Figure 4.

Real GDP growth projections

(Percent)

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

Source: IMF staff calculations.

  • Over the medium-term, growth is projected to significantly accelerate in FY25/26 and FY26/27 as oil production starts4 (Text Figure 4) and then to return to around 6 percent as the oil production plateaus; non-oil GDP is projected to grow at 6-7 percent level observed prior to the COVID-19 crisis. This sustained growth will be driven by a more productive composition of government spending, spending and tax collection efficiency gains, governance and product market reforms boosting agri-business/trade and private investments (this is supported by reforms under the World Bank’s investment for industrial transformation and employment (INVITE) and the climate smart agriculture and agribusiness development projects),5 a recovery in tourism, and the developments in the oil sector that is attracting foreign and domestic private investment in related infrastructure ahead of the start of oil production in 2025 (some of these initiatives have been directly supported by the recent ECF-supported program). The latter will be supported by the construction of the oil pipeline, a joint project of the French oil company Total Energies, the Chinese oil company CNOOC, and the governments of Uganda and Tanzania.

  • While negatively affected by climate shocks, especially in agriculture,6 long-term growth could be supported by addressing infrastructure constraints (such as major investments to improve transport connectivity, expand access to power, and enhance digital connectivity7), improvements to agricultural productivity, and development of agro-processing trade and industries. Finally, Uganda is entering a demographic transition, which has the potential for accelerating growth in per capita income and reducing poverty. Although fertility rates and the dependency ratio are still high, Uganda’s declining fertility rate and growing working-age population are gradually increasing the share of the working-age population and reducing the child dependency ratio.

  • Inflation. Headline inflation decelerated rapidly, driven by declining food prices, monetary policy tightening, and relative stability in the exchange rate. It bottomed out at 2.4 percent in October 2023 and then increased to 3.9 percent by June 2024, reflecting rising energy prices and core inflation. It is expected to have peaked at 8.8 percent in FY22/23, to bottom out at 3.2 percent in FY23/24 and to return to the 5-percent target in FY25/26. The correlation between the CPI and the GDP deflator is expected to decline due to oil-related investment and net exports increasing their weight in the GDP deflator at the expense of consumption starting in FY25/26.8

  • Oil revenue projections. Budget revenues from oil, net of oil-related expenditures, are expected to start in FY25/26 (one year later than in the previous DSA) and peak at 3.2 percent of GDP in FY31/32 before gradually declining over the long term. Legislation and institutions that have now been established, including the Uganda Petroleum Fund, the Consolidated Fund, and the Petroleum Revenue Investment Fund (PRIR) to ensure fiscal sustainability over the longer run – these should help manage Dutch disease crowding out effects. Continued EITI reporting is expected to help enhance the transparency of the extractive sector. Ongoing IMF TA aims to help the authorities transition to a rules-based framework for oil revenue management, including through the adoption of the Income Tax Amendment Bill, the Public Finance Management Bill, and the East African Crude Oil Pipeline Bill. Under the current plans, up to 0.8 percent of the previous year’s non-oil GDP would be used to finance infrastructure spending with the rest saved for the benefit of the future generations of the Ugandan citizens.

  • Primary fiscal deficit. The primary fiscal deficit is projected to narrow in FY23/24, though by less than expected earlier, at 1.5 percent of GDP versus 0.6 expected at the time of the 5th review under the ECF,9 mainly because of elevated current spending and underperforming domestic revenue. Going forward, the medium-term fiscal framework of the government envisions further improvement in the primary balance driven by implementation of various tax policy and revenue administration measures under the DRMS;10 however, the baseline scenario assumed by staff is conservative and envisions lower annual revenue gains than the DRMS target. The baseline also incorporates a gradual increase in social spending (health and education) and in domestically-financed development spending. As part of the IDA Sustainable Development Finance Policy (SDFP), the authorities aim at passing a VAT reform bill and a Public Investment Policy to advance the implementation of the Domestic Revenue Mobilization Strategy (DRMS) and strengthen the institutions implementing projects.

  • Interest payments, in line with the recent developments, are projected to increase further and peak at 4.3 percent of GDP in FY24/25 (30.9 percent of revenue against 22.8 percent in FY21/22), before reverting back to some 3 percent of GDP in FY28/29 and declining further to 1½ percent over the long run.

  • Current account deficit. The current account deficit is expected to remain elevated in the nearterm reflecting capital imports for oil production, and to improve substantially over the medium term once oil exports coming on-stream and the oil refinery becomes operational. Export growth will also be supported by better trade logistics, rural access to infrastructure and information, and credit availability, and the rollout of reforms envisaged under the African Continental Free Trade Agreement (AfCFTA).11 The recent removal of Uganda from the African Growth and Opportunity Act (AGOA) is not expected to have a large impact on trade flows though it may adversely affect external funding.12 Relative to the previous DSA, the more favorable outlook of the external balance mainly reflects downward revision of FDI inflows and related imports, as well as an upward revision in oil exports. The exchange rate has been under depreciation pressure since August 2023, partly reflecting the World Bank announcement to pause new project financing and tight external financing conditions, but has recovered in recent months. The nominal effective exchange rate (NEER) and the real effective exchange rate (REER) depreciated by 2.9 percent and 1.4 percent y-o-y as of May 2024, respectively. Despite the moderate downward adjustment, the exchange rate remains overvalued and weighs on the economy’s competitiveness.

  • FDI inflows are similarly expected to remain strong, largely driven by investments in oil-related projects (Tilenga, Kingfisher and the pipeline between Uganda and Tanzania) and gradually decline to around 3 percent of GDP over the medium term as oil investment peters out reflecting the potential positive impact on FDI from the rollout of AfCFTA among all countries on the continent.

  • Gross official reserves are expected to gradually rise over the medium term on the back of an increase in FDI and the start of oil exports. The reserve coverage is expected to reach 4 months of imports in the medium-term with the help of an 18-month FX swap arrangement of US$400 million signed with two local banks in July 2024 and purchases of gold from local artisanal miners, though the amount and timing remains uncertain.

  • Financing mix. The government plans to securitize the outstanding advances from the BoU in FY24/25 by issuing government bonds worth 3.5 percent of GDP at market interest rates. Going forward, it is expected that the BoU will only provide advances up to the statutory limit of 10 percent of the recurrent revenue at times of temporary shortfalls in the latter. The composition of domestic borrowing is projected to remain unchanged with T-bonds accounting for two-thirds of the total. Over the long term, financing is assumed to shift gradually from domestic to external and less concessional debt. Project support assumptions have been scaled back in line with the recent trends (resulting in lower overall spending and thus, improved fiscal balances relative to the previous DSA).

Text Figure 5.
Text Figure 5.

Official External Financing, Net

(US$, Millions)

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

Sources: Ugandan authorities, IMF and World Bank estimates.

  • IDA financing13 is set to be largely delivered through project support over the medium term. The assumed average disbursement over the next five fiscal years is about US$250 million per year. Significant disbursements for projects will support municipal infrastructure and road developments, water management and development, and digital acceleration. No budget support operations are planned, with the remainder of IDA financing going through Program for Results (P4Rs), including support to enhancing intergovernmental fiscal transfers for better service delivery (Text Figure 5)

  • IDA financing14 is set to be largely delivered through project support over the medium term. The assumed average disbursement over the next five fiscal years is about US$250 million per year. Significant disbursements for projects will support municipal infrastructure and road developments, water management and development, and digital acceleration. No budget support operations are planned, with the remainder of IDA financing going through Program for Results (P4Rs), including support to enhancing intergovernmental fiscal transfers for better service delivery (Text Figure 5).

Text Table 4.

Uganda: Macroeconomic Assumptions

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Source: Uganda authorities, IMF staff projections.

7. The realism tool outputs compare the projections to cross-country experiences and to Uganda’s own historical experience (Figures 3 and 4):

  • There are differences between past and projected debt creating flows, which reflect changes to growth and current account trajectories given expected developments in the oil industry as explained earlier. Unexpected changes in external debt are below the median of the distribution across low-income countries and in the case of public debt above it, but in both cases they are well within the respective interquartile ranges.

  • The improvement in the primary balance over the next 3-years is in the top quartile of the distribution, reflecting the cyclical improvement in tax revenues, the adjustment following the fiscal policy response to COVID-19 and the implementation of the DRMS. The growth outlook is also supported by private investments as well as improved spending efficiency, including through stronger public investment management on the back of reforms to be implemented under the IMF-supported program.

  • Investment is expected to increase, with private investment offsetting a temporary decline in public investment.

Country Classification

Text Table 5.

Uganda: Composite Indicator, and Debt Thresholds and Benchmark

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Source: IMF staff projections.

8. Uganda’s debt-carrying capacity is classified as medium, unchanged from the previous DSA. Based on the April 2024 WEO (real GDP growth, import coverage of foreign exchange reserves, remittances, and growth of the world economy) and the World Bank’s 2023 CPIA (3.575), Uganda’s composite indicator (CI) score is 2.93. The CI also incorporates forward-looking elements with the calculation based on the 10-year average (5 years of historical data and 5 years of projection). Uganda’s score lies between the threshold values of 2.69 and 3.05 corresponding to medium and strong capacity, respectively, thereby categorizing the country as having “medium” debt-carrying capacity that determines the four external debt indicative thresholds and the total public debt benchmark (Text Table 5). The thresholds of the PV of external debt-to-exports ratio, the PV of external debt-to-GDP ratio, the debt service-to-exports ratio, and the debt service-to-revenue ratio are 180, 40, 15 and 18 percent, respectively. The benchmark of the PV of total public debt is 55 percent.

External Debt Sustainability

9. The evolution of external government debt suggests a sustainable path under the baseline (Table 2). Both solvency and liquidity indicators remain below their indicative thresholds over the projection horizon (Figure 1 and Table 4). All the external debt sustainability indicators reach their peak in FY23/24: the PV of PPG external debt-to-GDP ratio peaks at 22.2 (against the threshold of 40 percent), the PV of debt-to-exports ratio peaks at 121.3 percent and then declines until starting to slowly pick up in 2030s (against the threshold of 180 percent). The liquidity indicators show a similar path. The debt service-to-export ratio is projected at 13.1 percent in FY23/24 and the debt service-to-revenue ratio reaches 17.7 percent in FY24/25 against the indicative threshold of 18 percent and then stays on a declining path.15

10. Stress tests and alternative scenarios indicate a moderate risk of debt distress rating. The PV of PPG external debt-to-GDP ratio remains under the threshold even under the stress tests, with the combined shock being the most extreme shock. However, the external debt service-to-exports rises above the threshold for a few years under the depreciation shock and the PV of external debt-to-exports ratio and the external debt service-to-revenue ratio breach their respective thresholds, remaining above the threshold, under the shock to exports (Figure 1 and Table 4).

11. The share of private debt on external debt under the baseline is on a declining path (Table 2). Private external debt peaks in FY23/24 at 8.5 percent of GDP (23 percent of the total external debt), before declining toward 4.8 percent of GDP (or 21.6 percent of external debt) in FY33/34. Under the baseline, the path of private external debt does not elevate the risk of debt distress. However, the abovementioned breaches of certain indicators under the contingent liability shock suggest that possible spillovers from private sector debt may affect debt sustainability under adverse scenarios.

Public Debt Sustainability

12. The total public debt-to-GDP trajectory under the baseline shows a declining path (Table 3).

The PV of public debt-to-GDP ratio peaks at 44.8 percent in FY23/24, before declining towards 21.4 percent by FY33/34 as oil export receipts ensue (Figure 2 and Table 5). This compares to an indicative benchmark of 55 percent for countries with medium debt-carrying capacity.16 Notwithstanding the recent increase in the nominal level of public debt-to-GDP to above 50 percent of GDP, the trajectory is expected to show a gradual decline over the medium-and long-run. The PV of debt-to-revenue ratio and the debt service-to-revenue ratio are expected to decline over the medium term, supported by the implementation of the DRMS and the oil-related revenue inflows from FY25/26 onward.

13. The stress tests confirm that adding domestic debt to the analysis does not elevate the risk of debt distress. For the PV of debt-to-GDP ratio, the most extreme stress test is the combined contingent liabilities shock (Figure 2), under which the PV of total public debt-to-GDP ratio gradually rises above the benchmark of 55 percent (and the ceiling of 50 percent of GDP in the current Charter of Fiscal Responsibility). The PV of total public debt-to-revenue ratio rises to 351.3 percent under the most extreme scenario of the combined contingent liabilities shock. Finally, the debt service-to-revenue peaks at 76.6 percent in FY23/24 under a variety of shocks.

Conclusions

14. Uganda’s risk of external and overall public debt distress is moderate, with limited space to absorb shocks. External debt burden indicators and total public debt remain below their respective thresholds and benchmark throughout the projection horizon. The stress tests, however, indicate breaches of the thresholds, some of which are lasting. Although the PV of external debt-to-GDP ratio indicates substantial space to absorb shocks without being downgraded to a high risk of debt distress, the PV of external debt-to-exports, the external debt service-to-revenues ratio, and the external debt service-to-exports ratios are close enough to their respective thresholds that a median shock would lead to a breach (Figure 5).

15. Risks to the debt outlook are tilted to the downside. Risks around growth reflect tight external financial conditions, possible spillovers to trade stemming from the conflict in Gaza and Israel, a larger-than-expected impact of the AHA legislation on the availability of external grants and loans from development partners as well as tourism, and increased frequency of natural disasters due to climate change. Domestic risks include the slower-than-expected implementation of reforms, including the revenue mobilization efforts, delays in oil production, and the potentially limited capacity of commercial banks to increase their purchase of government securities in response to future shocks given the increasing weight of those securities in their balance sheets.

16. Mitigating debt risks requires sound macroeconomic management and strong/steadfast policy implementation. This includes:

  • Implementing the DRMS. Given Uganda’s relatively low revenue collection, the strategy outlines key tax policy reforms, including a rationalization of exemptions, and tax administration strengthening to improve compliance.

  • Strengthening overall public financial management (PFM), including efforts to avoid arrears and the use of supplementary budgets. The published international audit of domestic arrears and the domestic arrears strategy should help the authorities in clearing arrears and preventing further accumulation. Following the progress on the extension of coverage of the Treasury Single Account to extra budgetary entities and externally funded projects, an improvement in the accuracy of monthly cash flow forecasting and preparation of an aggregate borrowing plan, considering the government’s consolidated cash position, means further progress can be made through the operationalization of monthly and quarterly cash flow forecasting. Finally, over the course of the recent ECF-supported program, the authorities have repeatedly made a commitment to aim to avoid supplementary budgets. In the exceptional case where a new one was to become necessary again, they will ensure that these are limited to unforeseeable unexpected shocks, with any such request costed, financing sources identified, and debt impact assessed.

  • Improving spending efficiency, including the strengthening of public investment management. Priorities should include improving the use of medium-term fiscal envelope forecasts to achieve better project prioritization and capital expenditure budgeting. The project selection criteria published in May 2021 should be regularly used to identify priority projects. Public investment management (PIM) shortcomings could be addressed by reducing overcommitment in multiyear projects and by reducing or eliminating the use of emergency procurement procedures, fostering open and competitive bidding while refraining from procuring through direct channels.

  • Strengthening debt management. In line with its medium-term debt strategy, public debt management in Uganda should continue to ensure that the government’s financing needs, and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with prudent risk-taking. Better communication and coordination across government agencies, including on new borrowing plans, would further enhance debt management.

  • Improving debt transparency. Over the last decade, Uganda has enhanced debt transparency, both in terms of fiscal reporting and publication of explicit and implicit debt and debt management information. However, debt transparency could be further enhanced, including through the publication of a statement of fiscal risks in the budget framework paper that lists contingent liabilities and reports on risks arising to the budget, the extension of coverage to potential debt collateralization in the public sector, as well as better communication, thereby contributing to a better understanding and management of risks.

  • Broadening the scope of potential creditors. The scope of potential creditors and financing sources could be broadened, including by finalizing the public investment financing strategy (which is already in advanced draft form) and expression of interest guidelines, and setting up a mobile money platform for retail investors to purchase Treasury securities.

  • Closely monitoring contingent liabilities. Contingent liabilities have in general been one of the largest sources of fiscal risk across countries, since the materialization of contingent liabilities can contribute to unexpected increases in the debt-to-GDP ratio, crowding out private credit and jeopardizing debt sustainability. There has been important progress on the collection of data on the debt of state-owned enterprises. Efforts, however, should be stepped up to estimate, disclose, manage, contain, and shorten the lag in the publication of information on contingent liabilities, especially those in the financial sector, state-owned enterprises (including through their potential inclusion in government finance statistics), and PPPs.

  • Implementing a set of particular reforms to improve fiscal and debt sustainability. Given the moderate risk of debt distress, the government would need to implement a set of reforms – known as Performance and Policy Actions (PPAs) as per IDA’s Sustainable Development Finance Policy (SDFP) – through actions in the areas of debt sustainability, debt management and fiscal sustainability. The purpose of this is to ultimately incentivize the government to reduce debt vulnerabilities.17

  • Enhancing governance frameworks. These are equally essential to safeguard the quality and effectiveness of public investment and other government spending. Better infrastructure and the impact of parallel reforms, e.g., improvements in the business climate, are expected to strengthen Uganda’s competitiveness. Sound asset-liability management and avoidance of a premature reliance on uncertain future oil-related flows remain essential preconditions for debt sustainability.

Authorities’ Views

17. The authorities broadly agree with the results of this DSA and the overall conclusion of a moderate risk of external debt distress. The authorities regularly carry out their own debt sustainability analyses and pay very close attention to maintaining a low risk of debt distress. They remain committed to ensuring debt sustainability and bringing debt below 50 percent of GDP (in nominal terms) through longterm prudent debt management, as outlined in their Medium-Term Debt Management Framework. They are committed to carefully prioritizing infrastructure projects and financing of the projects to preserve debt sustainability. The authorities acknowledged the significant vulnerabilities from growing public debt and contingent liabilities risks and stand ready to adjust policies as needed to safeguard debt sustainability. They also commit to continue to engage with IDA/IMF staff on debt management issues and to address debt vulnerabilities by building policy credibility and deepening the markets.

Figure 1.
Figure 1.

Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, FY23/24-FY33/341

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2034. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Indicators of Public Debt Under Alternative Scenarios, FY23/24-FY33/34

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2034. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Realism Tools

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

Figure 5.
Figure 5.

Qualification of the Moderate Category, 2023/24-2033/341/

Citation: IMF Staff Country Reports 2024, 290; 10.5089/9798400288821.002.A003

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
Table 2.

Uganda: External Debt Sustainability Framework, Baseline Scenario, FY22/23-FY33/34

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Uganda: Public Sector Debt Sustainability Framework, Baseline Scenario, FY22/23-FY33/34

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central, state, and local governments, central bank, government-guaranteed debt. Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 4.

Uganda: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, FY23/24-FY33/34

(In percent)

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Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Includes official and private transfers and FDI.
Table 5.

Uganda: Sensitivity Analysis for Key Indicators of Public Debt, FY23/24-FY33/34

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Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 2/ Includes official and private transfers and FDI.
1

EBUs are funds that are not included in the national budget appropriated by parliament (such as pension schemes and revenues or user fees collected by government ministries, departments and agencies unreported or not included in government’s general revenues, termed as “Appropriation in Aid - AIA"). EBUs and SOEs are not allowed to raise funds through issuance of loans or guarantees without an authorization from the Minister of Finance. According to the FY2022/23 Annual Contingent Liabilities Report, the total end-June 2023 debt of public entities, including SOEs and EBUs, was UGX 2,152 bn or 1.2 percent of GDP. This stock is distributed across 12 companies with three quarters of it (UGX 1,599 bn) owed by Uganda Electricity Distribution Company. Other SOEs with significant debt are Uganda Development Bank (UGX 213 bn), National Water and Sewerage Corporation (UGX 114 bn), and Housing Finance Bank (UGX 87 bn).

2

The arrears to Tanzania date back to the Uganda-Tanzania War in 1978-79, with an alleged lack of documentation of the debt, therefore the validity of these arrears is disputed and not included in officially reported total external debt. In contrast, arrears to Iraq (US$657, given massive depreciation of the Iraqi dinar) and Nigeria (US$11.5 million) are recorded in the official debt statistics. The Iraq and Nigeria arrears are pre-HIPC Initiative arrears to non-Paris Club creditors, which continue to be deemed away under the revised arrears policy for official creditors, as the underlying Paris Club agreement was adequately representative, and the authorities continue to make best efforts to resolve the arrears.

3

The June 6, 2023 DSA also included an estimate of non-guaranteed SOE debt of 9.1 percent of GDP that reflected a preliminary at that stage report by AFRITAC East. The authorities have clarified to the Article IV mission that this amount reflected an on-lending operation and thus, is already accounted for in the stock of the public debt.

4

Macroeconomic parameters related to oil exploration are based on the findings of an FAD TA mission that took place in the second half of March.

5

The INVITE project provides subsidized financing for microfinance institutions and banks to support business creation, and provides technical assistance to agencies for the development of private sector regulation and mechanisms for export promotion.

6

Uganda is prone to various types of natural disasters and limited adaptation infrastructure magnifies the socioeconomic impacts of extreme events. In the past 20 years, droughts have been the type of hazards that have affected the largest number of people, undermining food security. Disruptive natural disasters, such as droughts and floods, impact the economy to a large extent. Going forward, climate change will likely exacerbate the frequency and severity of natural disasters and cause large economic damages. Scaling up adaptation and preparedness is essential to ensure resilience of the population and the economy to extreme weather events. However, climate adaptation measures pose planning, implementation, and financing challenges, and require international support. Model simulations show that building adaptation infrastructure can reduce by two thirds the GDP losses at the trough triggered by a disruptive disaster and almost halve the resulting fiscal gap. For donors it may be cost-effective to help finance investment in adaptation because it would reduce post-disaster disbursements (see Selected Issues Paper,IMF Country Report No. 2022/078 for more details).

7

The World Bank digital acceleration project aims to (i) lower prices for international capacity and extend the geographic reach of broadband networks and (ii) improve the government’s efficiency and transparency through eGovernment applications.

8

Inflation projections for Uganda and IMF WEO inflation projections for advanced economies pin down nominal exchange rate projections under the assumption of a constant real effective exchange rate.

10

Implementation of the DRMS is projected to raise tax revenues by 0.5 percent of GDP per annum. The strategy outlines key tax policy reforms, including a rationalization of exemptions, and revenue administration modernization to improve compliance. While tax revenue has underperformed, recent measures are expected to rectify this issue. A Tax Expenditure Framework – to streamline and eventually scale down revenue leakages from tax expenditures – has been approved by MoFPED. These leakages were estimated to have reached about 5.2 percent of GDP in FY20/21. Furthermore, several partners, including the IMF, World Bank, USAID and FCDO, are providing significant support to the Tax Policy Department (MoFPED) and Uganda Revenue Authority (URA) to ensure full implementation of the DRMS.

11

Uganda has ratified the AfCFTA agreement, however the country needs to undertake policy reform to address constraints that may affect implementation of the agreement. These include reducing red tape and simplifying customs procedures, promoting the uptake of modern technology in the agriculture sector and improving quality and standards.

12

The U.S. share in Uganda’s exports is below 2 percent, as most of them are destined to the SSA region, Middle East, Asia, and Europe.

13

World Bank disbursement has been affected by the slow implementation of the portfolio in Uganda and the long period between approval and effectiveness. Most of the committed portfolio in Uganda are from IDA19 (38 years maturity, 6 years grace period and interest rate below 1 percent). Financing under IDA19 has a grant element of 77 percent. However, there are some pipeline projects with expected disbursement in FY2024 that will be under the IDA20 terms (50 years maturity, 10 years grace period, no interest, no commitment fees).

14

World Bank disbursement has been affected by the slow implementation of the portfolio in Uganda and the long period between approval and effectiveness. Most of the committed portfolio in Uganda are from IDA19 (38 years maturity, 6 years grace period and interest rate below 1 percent). Financing under IDA19 has a grant element of 77 percent. However, there are some pipeline projects with expected disbursement in FY2024 that will be under the IDA20 terms (50 years maturity, 10 years grace period, no interest, no commitment fees).

15

The decline in the liquidity indicators is mainly driven by the projected increase in exports and government revenue.

16

The government’s Charter of Fiscal Responsibility requires public debt to stay below 50 percent of GDP in present value terms, which is also one of the convergence criteria for monetary union in the East African Community. The government’s publicly stated debt ceiling is 50 percent of GDP in nominal terms.

17

As two FY23 PPAs were not implemented, 10 percent of the IDA allocation was made unavailable until the authorities implement five PPAs in FY24. (WB COLLEAGUES TO VERIFY)

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Cover IMF Staff Country Reports
Uganda: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Uganda
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2024: Issue 290
Publisher:
International Monetary Fund
ISBN:
9798400288821
ISSN:
1934-7685
Pages:
115
DOI:
https://doi.org/10.5089/9798400288821.002
Text Figure 1.

Public and Publicly Guaranteed Debt

(Percent of GDP)
Text Figure 2.

Public Domestic Debt

(Cost Value, Percent of GDP, as of end-FY2022/23)
Text Figure 3.

Borrowing costs

(Percent)
Text Figure 4.

Real GDP growth projections

(Percent)
Text Figure 5.

Official External Financing, Net

(US$, Millions)
Figure 1.

Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, FY23/24-FY33/341
Figure 2.

Indicators of Public Debt Under Alternative Scenarios, FY23/24-FY33/34
Figure 3.

Drivers of Debt Dynamics – Baseline Scenario
Figure 4.

Realism Tools
Figure 5.

Qualification of the Moderate Category, 2023/24-2033/341/