Expensive loans, reducing reserves weakening Uganda's growth outlook, says Moody’s 

Government has been borrowing from the commercial market, which Moody's says creates repayment pressures that eventually affect the economy. Photo / File 

What you need to know:

  • Bank of Uganda recently indicated that as of June, the stock of Uganda's public debt had increased to Shs78.8 trillion, a growth of 2.3 percent

A combination of expensive loans, rising debt repayment and decline in foreign reserves, among other risks have influenced Moody’s to downgrade Uganda’s outlook from stable to negative. 

The negative outlook, Moody’s said, was due to increasing external debt-service repayments, tightening of global financial conditions and erosion of the foreign exchange reserves, noting that the debt trajectory was vulnerable while currency depreciation continues to put pressure on the economy.   

“The structure of Uganda’s debt is becoming less favourable. Shorter-term and more expensive domestic borrowing has been key in financing the fiscal deficit in recent years. Domestic debt accounted for 38 percent of public debt as of December 2021, but 83 percent of interest payments,” Moody’s said.   

Bank of Uganda recently indicated that as of June, the stock of public debt had increased to Shs78.8 trillion, a growth of 2.3 percent largely driven by expansion in domestic debt to finance underperformance of tax revenue and growing expenditure pressures. 

Therefore, Moody’s said, Uganda’s debt burden has increased, reaching 48.6 percent as of June, from an estimated 35.1 percent of gross domestic product in June 2019. 

Moody’s also noted that the weighted average interest rate for Uganda’s total debt has risen to 6.1 percent from 5.6 percent in June 2019 with interest rate on external debt remaining at 1.6 percent, which means that much of the external debt remains predominantly concessional from bilateral and multilateral lenders. 

Moody’s also said about 21.7 percent of Uganda’s external debt stock was contracted at variable rates, increasing exposure to interest rate risk while debt affordability continues to deteriorate due to high interest repayments, which now accounts for 21.6 percent of government revenue, up from 14.2 percent in 2019 and is further projected to rise to about 23 percent by  2023.   

Government, with support from the International Monetary Fund, has been seeking to strengthen revenue mobilisation through removal of tax exemptions and improving administration, as well as sustained access to concessional financing. 

However, the continued erosion of debt affordability threatens Uganda’s fiscal space at a time when the globe economy has slackened. 

External vulnerability risks continue to increase driven by tightening of global liquidity conditions, higher external debt servicing requirements and a weakening foreign exchange reserve position.  

Moody’s said portfolio outflows and increased exchange rate volatility have led to a drawdown in foreign exchange reserves over the course of 2022 with reserves declining to $3.7b as of from a peak of $4.5b in March. 

The erosion in reserves, Moody’s said, is expected to continue beyond 2023, driving the import cover below the recommended four months by Bank of Uganda. 

Moody’s also said more challenges coming from external debt servicing profile over the next few years, are expected to heighten as principal repayments rise - driven by payments to the Export-Import Bank of China and non-concessional creditors - and repayments to the IMF begin from 2025 onward.

Moody’s also affirmed Uganda’s B2 rating, which reflects the country’s credit constraints, sustained erosion in fiscal strength, and elevated susceptibility to event risk, including political risk.


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