Uganda is pushing back against International Monetary Fund pressure to tighten its belt, arguing instead for a looser fiscal stance as it negotiates a fresh $675 million funding package.
The East African nation, grappling with mounting debt and tight external financing, sees a wider budget deficit as key to fueling economic growth through investments in infrastructure and upcoming oil projects. But the IMF, ever the fiscal hawk, is urging consolidation to safeguard stability.
The talks come at a critical juncture for Uganda, where robust growth has been overshadowed by rising interest payments and a deteriorating fiscal position. Officials in Kampala believe maintaining higher spending levels will help unlock the country’s potential, particularly as oil production looms on the horizon. Yet, this approach risks clashing with the Fund’s emphasis on prudence, potentially delaying approval of the new program until after next year’s elections.
Economic Backdrop: Growth Amid Fiscal Strain
Uganda’s economy has shown resilience, clocking in a broad-based growth rate of 6.3% in the 2024/25 fiscal year, driven by sectors like agriculture, services, and manufacturing. Inflation remains comfortably below the Bank of Uganda‘s 5% medium-term target, thanks to stable food prices and prudent monetary policy. Foreign exchange reserves have also strengthened, bolstered by higher exports and capital inflows, providing a buffer against external shocks.
However, the fiscal picture is less rosy. The budget deficit is projected to widen to 7.6% of GDP in the 2025/26 fiscal year, up from previous estimates. Public debt climbed 17.8% last year to $29.1 billion, equivalent to 52.1% of GDP, raising concerns about sustainability. Interest payments now devour nearly a third of domestic revenues, squeezing room for essential spending on health, education, and infrastructure. The government spent $2.8 billion on domestic interest in the current year alone, dwarfing the $450.7 million allocated to external debt servicing.
This strain has been exacerbated by external factors, including a nearly two-year freeze on new World Bank lending due to Uganda’s controversial Anti-Homosexuality Act, which was lifted only in June with added safeguards. The pause left a significant funding gap, pushing Kampala to seek concessional loans elsewhere.
The Push for a Wider Deficit
At the heart of the IMF negotiations is Uganda’s desire to keep the deficit elevated to support growth-oriented initiatives. Finance ministry officials argue that fiscal room is essential for investing in priority areas like roads, energy, and social programs, which could accelerate GDP expansion beyond current levels. With oil production set to kick off in the 2026/27 fiscal year, the government views higher spending now as a bridge to future revenues from crude exports, potentially transforming the economy.
Ramathan Ggoobi, permanent secretary at the Ministry of Finance, has emphasized the need for affordable financing to slow debt accumulation while pursuing these goals. “Uganda is currently negotiating a new Extended Credit Facility Program with the IMF,” he said in a recent address, adding that it would likely head to the Fund’s board post-elections in early 2026. The proposed $675 million package would provide much-needed cheap capital, helping to plug budget holes without resorting to expensive commercial borrowing.
To justify the wider deficit, Kampala points to plans for boosting domestic revenue through tax reforms and stricter enforcement, while protecting social spending. This includes measures to combat corruption and improve fiscal transparency, areas where the IMF has previously flagged weaknesses. Officials also commit to keeping non-concessional debt within limits, aiming to balance ambition with caution.
IMF’s Call for Consolidation
The IMF, however, is pressing for a different path. In its recent post-financing assessment, the Fund highlighted a “significant deterioration” in Uganda’s fiscal stance due to elevated current spending, including one-off costs. It advises tighter spending controls, revenue mobilization, and data-driven policies to ensure medium-term viability.
The previous $1 billion Extended Credit Facility, agreed in 2021, lapsed in 2024 after disbursing only about $870 million, owing to implementation hurdles and external funding constraints. Uganda missed the final payout because it failed to narrow the deficit as agreed, with the financing gap expanding to 5.7% of GDP this year. The IMF warns that without consolidation, risks from global uncertainties and policy slips could intensify.
A new program would likely include conditions for deficit reduction, anti-corruption reforms, and maintaining a flexible exchange rate. Yet, Uganda’s team is advocating for flexibility, arguing that premature tightening could stifle growth just as oil dividends approach.
Negotiation Challenges and Outlook
The talks are complicated by timing. With general elections looming in January or February 2026, any deal is on hold until a new government is in place, adding uncertainty. Domestic politics, including debates over supplementary budgets, could further erode fiscal credibility, as noted by the World Bank.
Downside risks abound: delays in oil projects, geopolitical tensions affecting trade, or renewed lender hesitancy over social policies. Reserves, while improved, stood at just 2.9 months of import cover mid-last year, underscoring vulnerability.
If successful, the $675 million infusion could stabilize finances and attract other donors, paving the way for sustainable growth. But striking a balance between Kampala’s expansionary vision and the IMF’s austerity demands will test diplomatic skills. As one analyst put it, Uganda is walking a tightrope—eager to leap forward, but wary of the fall.
