Fiscal indiscipline undermines economic stability
Bank of Uganda head office in Kampala.
What you need to know:
- Without such reforms, Uganda’s economic stability will remain an illusion.”
Uganda’s economy is caught in a damaging contradiction: While the Bank of Uganda (BoU) maintains monetary stability through careful policy management, its efforts are routinely undermined. At the centre of the problem is persistent fiscal indiscipline.
Over the past decade, Uganda’s public debt has surged to Shs97 trillion—about 48.3 percent of GDP—up from 27.1 percent in 2016. Much of this borrowing has not been channelled into productive investment but has instead funded consumption and politically driven expenditures.
Debt servicing now consumes over Shs6 trillion annually, crowding out private sector activity and limiting fiscal space. Supplementary budgets and off-budget spending—particularly around election cycles—have become routine. During the 2020/21 Financial Year, the budget deficit widened to 7.4 percent of GDP, mostly financed by domestic borrowing. Such pro-cyclical spending goes against basic economic principles, which advise counter-cyclical expenditure during downturns.
Uganda’s spending, however, has been driven more by political expedience than economic need. The consequences of such practices are well illustrated by international examples. Ghana, for instance, plunged into crisis after excessive pre-election borrowing, culminating in inflation exceeding 50 percent and the country seeking a $3 billion IMF bailout in 2023.
This was Ghana’s 17th IMF programme since independence—a stark warning of what awaits countries that ignore fiscal prudence. Despite this BoU has remained steadfast in its mandate. When inflation peaked at 10.7 percent in October 2022 due to global fuel prices and domestic supply issues, the Bank responded by raising the Central Bank Rate to 10 percent. By March 2024, inflation had fallen to 3.3 percent, meeting East African Community convergence criteria. BoU has also managed exchange rate volatility.
In 2023, amid fiscal pressures and capital flight, the Bank built foreign reserves, purchasing $329.6 million without offloading any currency to defend the shilling. The exchange rate was kept stable between Shs3,750 and 3,800 per USD, which helped to manage import costs and external debt repayments. These achievements, however, are increasingly overshadowed by blurred institutional boundaries. The Central Bank, established under the BoU Act (1993), is legally independent. It manages monetary policy, inflation control, and financial regulation without direction from the ministry.
The recent Shs60 billion scandal between BoU and Ministry of Finance highlights growing tensions and accountability gaps. The ministry often attributes success to “effective coordination” between fiscal and monetary arms. But coordination is not control. The Permanent Secretary to the Treasury sits on the Monetary Policy Committee (MPC) as a participant, not a decision-maker.
The MPC, chaired by the BoU Governor, includes independent members guided by data, not politics—a structure designed to insulate monetary policy from populist pressures. The dangers of undermining this structure are real. Fiscal indiscipline is not a mere policy error—it threatens macroeconomic stability and long-term development. When government bypasses its own rules, skirts parliamentary oversight, and leans on BoU for off-budget financing, it places unsustainable pressure on institutions tasked with economic stewardship. BoU has consistently responded with orthodox, effective tools. But no Central Bank can indefinitely offset the effects of runaway fiscal policy. Uganda risks following the path of countries where monetary stability eventually collapses under political and fiscal excess. It is time for the ministry to take responsibility. Restoring fiscal discipline, respecting institutional roles, and upholding the autonomy of the Central Bank are not optional—they are essential for sustainable development. Without such reforms, Uganda’s economic stability will remain an illusion.
The author, Mr Killian Arineitwe is a Development Economist/Policy Analyst. [email protected]
