Mounting public debt eating into forex reserves, says BoU 

Uganda’s foreign exchange reserves decreased by $490m in the six months to January, according to Bank of Uganda. 

The decline was due to mounting external debt repayments and the inability of Bank Uganda to purchase foreign exchange from the market due to the depreciation of the shilling, which in February lost by 5.1 percent year-on-year against the dollar due investor outflows, seasonal demand, and hedging pressures. 

However, the pace of depreciation has since slowed, even as the market continues to face heightened volatility pressures. 

Data contained in the State of the Economy Report indicates that foreign exchange reserves declined by about 12 percent between June 2023 and January this year, dropping from $4.07b in June to about $3.6b at the end of January. 

The reserves now cover 3.4 months of imports excluding oil project-related imports, which is below the required four months of import cover. 

“The reserves have declined from $4.1b at the end of June 2023 to about $3.5b, largely due to external debt payments and the inability of [Bank of Uganda] to purchase foreign currency from the market given the exchange rate depreciation. Nonetheless, there is room for reserve buildup from the expected budget support loan inflows,” the Central Bank noted in the State of the Economy Report. 

Uganda’s foreign exchange reserves have remained under pressure in the three last financial years since, during which period, they have continued to be under the targeted four months of import cover. 

Bank of Uganda has previously warned that increased expenditure on public debt had put pressure on its efforts to build foreign exchange reserves, which at the time (in December 2023) had dropped from $4.5b in June 2022 to $3.9b in December 2023. 

Data contained in the Uganda Revenue Authority Annual Data Book, shows that government expenditure on debt servicing has been growing, expanding to Shs8.3 trillion from Shs6.7 trillion in the period ended June 2022, and more than doubling the Shs3.7 trillion spent in the 2019/20 financial year.  

In the four years to June 2023, the cost of debt servicing has increased by 44.9 percent from Shs3.7 trillion to Shs8.3 trillion, due to an upsurge in public debt, which has risen from Shs57.1 trillion to Shs96.1 trillion ($25.3b), according to data from Ministry of Finance. 

URA data further indicates that the Shs8.3 trillion spent on debt servicing represents at least 32.5 percent of Shs25.7 trillion collected as domestic revenue during the period, of which Shs5.9 trillion was spent on interest payments and commitment fees, while Shs1.2 trillion and Shs2.4 trillion went to external debt and amortization, respectively. 

Experts have previously warned that whereas Uganda’s debt is still within sustainable levels, the country risks entering a debt trap given that a large portion of the country’s domestic revenue now goes towards debt servicing, which limits allocation of resources to development financing.  

Debt servicing currently takes the largest share of domestic revenues. 

A recent public debt analysis published by the International Monetary Fund noted that each Ugandan is now indebted to a tune of Shs2.5m. 

Inflation projected to increase above 5% central bank target 

Meanwhile, Bank of Uganda has projected inflation to increase above the 5 percent target in the first quarter of the 2024/25 financial year. 

The increase, the Central Bank noted could be a result of further weakening of the shilling, which in February alone weakened by 5.1 percent. 

“The forecasts indicate that further exchange rate depreciation could drive inflation above the medium-term target of 5 percent by the first quarter of [the] 2024/25 financial year and stay above 5 percent throughout 2025 unless the monetary policy is tightened,” Bank of Uganda said in the State of the Economy report.

The shilling has largely been volatile with the worst negative movements recorded in February.  

During the month (February), the shilling lost against the dollar with the mid-rate increasing to Shs3,932 per dollar from Shs3,816 in January, and Shs3,541 in February 2022.

The negative movement has impacted inflation, which in March slightly reduced to 3.3 percent from 3.4 percent. 

Bank of Uganda further indicated that besides exchange rate depreciation, the inflation outlook will remain highly dependent on global and domestic environment with an overall bias to higher inflation in the coming months, resulting from higher global commodity prices partly due to geopolitical tensions, an increase in shipping costs. 

The Central Bank also noted that Uganda’s overall balance of payment, which records transactions with the rest of the world, remained resilient in the year to January, recording a surplus of $278.5m (Shs1 trillion). 

Details indicated that the current account deficit narrowed during the period to 7.4 percent to $3.7b (Shs1.441 trillion), largely due to higher export revenue and a stronger secondary income surplus. 

During the period, the report noted: “Export earnings grew 61.8 percent to $7.1b (Shs27 trillion), largely due to gold exports, noting that financing the current account deficit was largely supported by an increase in foreign direct investment, thus insulating a weak investment inflows position, amid continued outflow of portfolio flows.

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