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KAMPALA - Credit ratings agency, Moody’s, has downgraded Uganda’s long-term creditworthiness due to fiscal challenges, external vulnerability, and economic concerns.

Uganda’s foreign-currency and local-currency issuer ratings have declined to B3 from B2, with a stable outlook.

According to the statement issued by the global rating agency, the downgrade is largely due to concerns over Uganda’s debt affordability and financing options, which have become increasingly constrained.

“The stable outlook reflects Moody’s assessment that at the B3 rating level, Uganda’s credit challenges and strengths are incorporated,” the statement read in part. 

The ratings also mean that the government may face challenges accessing global credit markets and attracting investors, which is likely to affect economic growth projections.

Moody’s noted that Uganda’s reliance on costly domestic and non-concessional external financing sources has elevated its external vulnerability risk.

As a result, debt affordability has weakened, with interest payments consuming 22.2% of government revenue in fiscal 2023, up from 14.2% in fiscal 2019.

This trend, Moody’s noted, is expected to persist, limiting Uganda’s fiscal space to respond to future shocks.

Moody’s expects the ratio of interest payments to government revenue to remain at similar levels of above 20% through at least fiscal 2025.

Beyond the increasing cost of debt, Moody’s noted that the higher reliance in recent years on net domestic financing and ad-hoc funding methods – such as advances from the Bank of Uganda to the government to cover temporary deficiencies of recurrent revenue – points to increasingly constrained access to funding.

Data from the Ministry of Finance shows that Uganda’s public debt stock has been on the rise in the last five years from sh42.20 trillion in June 2019 to sh86.75 trillion in June 2023.

By the end of December 2023, total public debt had increased to sh93.38 trillion, marking a notable rise of sh12.61 trillion from sh80.77 trillion recorded at the end of December 2022.

This indicates a 13.6% growth in debt stock over the span of a year. The rise is on account of the progressive acquisition of commercial loans for budget support and costs associated with increased domestic borrowing.

In its Medium Term Debt Management Strategy 2024/25-2027/28 released in March this year, the Ministry of Finance said during fiscal year 2024/25, the government will effectively manage borrowing costs and risks by determining the appropriate balance between domestic and external borrowing.

“The government will therefore implement a macroeconomic framework that envisages 40% of the total borrowing to be sourced externally, while 60% will be sourced domestically. This plan anticipates a gradual decrease in domestic borrowing by reducing the net domestic financing. This blend is intended to progressively integrate alternative financing in the fulfillment of the provisions of the Public Investment Financing Strategy,” the report said.