The Bank of Uganda's first bond auction of 2025 saw significant increases in interest rates, with the 15-year bond reaching 17.5 percent and the five-year bond hitting 16.75 percent, marking the highest rates in 18 months.
While the government tendered UGX990b and received bids exceeding UGX1 trillion, it only accepted UGX791b, with trading in the secondary market dropping by 38.5 percent to Shs1.01 trillion, as reported by Crested Capital.
So far in the current financial year, the government has raised Shs14 trillion from the bond market, with a substantial portion being used to refinance maturing debt amid revenue shortfalls, as the Uganda Revenue Authority fell short of its 2023/24 target by Shs7.794 trillion.
Civil society organizations, including CSBAG, have advocated for increased tax compliance, fewer exemptions, and greater collaboration among government entities to address these fiscal challenges and reduce reliance on domestic borrowing.
The government's ambitious bond issuance program comes at a critical juncture, with public debt rising from 34.6% of GDP in 2018/19 to 52% by June 2023, totaling UGX 96.1 trillion ($25.3 billion).
The transition from concessional to commercial borrowing has exacerbated this trend, with domestic debt servicing now accounting for 32% of tax revenues.
While the Bank of Uganda's monetary policy stance has helped contain inflation at 2.9%, the increasing reliance on domestic borrowing through higher-yielding bonds risks crowding out private sector credit and investment.
The situation mirrors Ghana's recent experience, where aggressive domestic borrowing led to a debt crisis, prompting Uganda's civil society organizations to advocate for strengthened domestic revenue mobilization and public financial management reforms.
With external debt repayments projected to reach 35% of GDP in 2024/25 amid declining aid flows and growing infrastructure needs, the fundamental question remains:
Can Uganda successfully balance its ambitious development agenda with fiscal sustainability without falling into the "public debt safety trap" that has ensnared other African economies?