Uganda’s Strategic Shift in the 2026/27 Debt Reduction Plan
On December 16, 2025, the Ministry of Finance, Planning, and Economic Development tabled a pivotal National Budget Framework Paper (NBFP) for the FY 2026/27, signaling a major shift in Uganda’s fiscal policy. Faced with a “ballooning” public debt that recently breached the 50% debt-to-GDP threshold, the government has announced an aggressive plan to cut domestic debt issuance by 21.1%.
This move is not merely a technical adjustment; it is a calculated effort to prevent the “crowding out” of the private sector and to ensure that the dividends of upcoming oil production are not swallowed by interest payments.
A Significant Scale down
The government’s borrowing strategy for the next financial year involves a sharp reduction in the reliance on the local credit market. According to the Ministry of Finance:
- Projected Borrowing: Domestic borrowing via Treasury bills and bonds is set to drop to Shs 9 trillion in FY 2026/27, down from Shs 11.4 trillion in the current period.
- The Debt Stock: As of June 2025, Uganda’s total public debt stood at $32.3 billion (approx. Shs 116.2 trillion), a 26.2% increase from the previous year
- The Burden: Interest payments are now projected to consume nearly one-third of all domestic revenue in the coming fiscal year, leaving little “fiscal space” for education, health, and infrastructure.
Why the Cut? The “Crowding Out” Effect
The primary driver behind this 21% reduction is the need to revitalize the private sector. In recent years, commercial banks in Uganda have found it safer and more profitable to lend to the government (by buying Treasury bonds) than to lend to local businesses and SMEs. This phenomenon, known as “crowding out,” has several negative effects:
- High Interest Rates: With the government competing for the same pool of local savings, interest rates for private loans remain prohibitively high (often between 18% and 24%).
- Credit Scarcity: Businesses struggle to access the capital needed for expansion, which slows down job creation and overall economic productivity.
- Liquidity Strains: As commercial banks tie up more capital in long-term government securities, the overall liquidity in the market tightens.
By reducing its domestic borrowing footprint, the government aims to force banks to look toward the private sector for lending opportunities, thereby lowering interest rates and fueling industrial growth.
The Role of Oil and the “Tenfold Growth” Strategy
The timing of this debt reduction plan is critical. Uganda is expected to commence commercial oil production in 2026. The government’s “Tenfold Growth Strategy” relies on the premise that oil revenues will provide a “fiscal cushion” that allows the country to stop borrowing for consumption and start investing purely in high-multiplier sectors like agro-industrialization and mineral quantification.
“This robust growth outlook will be primarily fueled by the start of oil production,” the Ministry of Finance noted. “It is expected to generate substantial revenue and boost productivity through strong inter-sectoral links.”
The projected GDP growth for FY 2026/27 is a staggering 10.4%, a massive jump from the 6.6% expected this year. The government plans to use this growth to lower the debt-to-GDP ratio back toward sustainable levels.
Challenges and Risks
Despite the optimistic framework, experts and lawmakers have raised several red flags:
- The “Supplementary” Habit: Critics like the Shadow Finance Minister, Ibrahim Ssemujju Nganda, argue that the government frequently bypasses its own budget caps through supplementary expenditures. For instance, an Shs 8.1 trillion supplementary was approved just weeks ago, largely funded by new borrowing.
- Credit Downgrades: In 2025, Moody’s downgraded Uganda’s credit rating to B3, citing vulnerability to external shocks. This makes international borrowing more expensive, potentially tempting the government to return to the domestic market if external funds fall short.
- The 50% Threshold: At 51.3% debt-to-GDP, Uganda has already crossed the IMF’s recommended safety limit for low-income countries. This breach complicates future negotiations for concessional (low-interest) loans.
Conclusion
A Test of Fiscal Discipline
The FY 2026/27 budget is being framed as the “Launch Year” for the Fourth National Development Plan (NDP IV). By cutting domestic borrowing by 21%, the government is making a bold promise to the business community: that the state will stop competing with them for bank credit.
If successful, this strategy could lower the cost of doing business in Uganda and ensure that the coming oil wealth is used to build a sustainable economy rather than just servicing old debts. However, the true test will be whether the Ministry of Finance can resist the urge to return to commercial banks when “unforeseeable” expenses inevitably arise during the 2026 election cycle.
