Anti-Homosexuality: Uganda Faces Difficulties Accessing External Funding –Fitch
Yoweri Museveni, Uganda's President

Fitch Ratings has affirmed Uganda’s credit rating with an outlook accorded as negative following the country’s inability to get external funding support or soft loans after it signed the Anti-Homosexuality Act in 2023.

The global ratings firm said Uganda’s ratings are underpinned by favourable medium-term growth prospects and a record of relative macroeconomic stability aided by an independent central bank operating under an inflation-targeting framework.

This also reflects a Fitch Ratings expectation that real gross domestic product (GDP) growth and planned fiscal consolidation will contribute to stabilising government debt/GDP.

According to Fitch, the ratings are constrained by a low level of GDP per capita, weak governance, a low government revenue base and twin budget and current account deficits (CAD) higher than peers.

Meanwhile, Uganda’s negative outlook reflects external financing and liquidity pressures related to reduced availability of concessional external financing and grants.

“Downside risks to fiscal adjustment owing to public financial management shortfalls, notably in revenue collection, will exacerbate financing and liquidity pressures due to high government interest payments and rising external debt service amid tight financing conditions, and a weak reserve position”.

Donor concerns over democracy, human rights and corruption reduced Uganda’s access to external concessional funds, according to Fitch Ratings.

It said the introduction of the Anti-Homosexuality Act in 2023, further constrains Uganda’s ability to secure concessional financing, evidenced by the World Bank’s announcement that it will not grant new funding to Uganda until it ensures its principles of non-discrimination are satisfied.

The rating note explained that the World Bank is the most important source of external financing, accounting for 33% of government external debt. The authorities and the World Bank are negotiating about the potential to restart approvals for new projects.

Fitch stated that concessional financing shortcomings led the government to greater recourse to borrowing at higher costs from external commercial creditors and in the domestic market.

In the fiscal year ending June 2023, net domestic financing reached 3.4% of GDP against 2.7% of GDP budgeted. In the financial year 2024, additional spending has prompted the government to double its projection for net domestic financing to 1.8% of GDP.

However, Fitch analysts expect the domestic market to remain an important source of financing, averaging 2.4% of GDP in 2024-2025, raising interest costs and shortening maturities.

“We forecast external debt service at 1.9% of GDP in 2024 and 2.3% of GDP in 2025, after 1.9% of GDP in 2023. Negotiations are ongoing with commercial banks for a loan of 0.8% of GDP, and the IMF will disburse 0.4% of GDP in 2024”.

Fitch revealed that the government does not plan to receive commercial loans and budget support for 2025, while renewal of the IMF programme, scheduled to end in June 2024, has not yet been announced.

In case of a funding shortfall, Fitch analysts expect the authorities will forego or postpone non-critical expenditure.

It noted that the fiscal deficit was 5.5% of GDP in 2023, against 5.1% targeted. The shortfall in revenue collection and overspending on recurrent items were offset by the under-execution of capital spending, which fell by 16% compared with 2023.

“We forecast the fiscal deficit will narrow to 4.1% of GDP in FY24 and 4.0% in FY25, above the government’s targets of 3.8% and 3.6% of GDP, as we assume continued revenue underperformance and overrun in interest payments and recurrent expenditures”.

Uganda has a record of revenue underperformance and weak budget planning, which have led to some arrears accumulation and a supplementary budget for additional spending, around 1.7% of GDP for 2024, funded through additional domestic borrowing and spending reallocation.

Despite continued efforts, Fitch analysts expect revenue below government’s projections, due to grant shortfalls, slow removal of tax exemptions and lack of new revenue-raising measures. Uganda’s narrow revenue base reduces the government’s ability to respond to shocks.

It forecasted general government debt will decline from an estimated 47.1% of GDP at end-FY23 to 46.4% in 2025, supported by fiscal consolidation and robust GDP growth; below the ‘B’ median forecast of 55% of GDP.

Fitch said close to 65% of the debt is external, of which 13.6% is commercial debt in 2023, up from 10.4% in 2022. Analysts projected the share to continue rising, further increasing external debt service.

Uganda’s interest payments continue to increase, reaching 22.2% of domestic revenue in 2023 from 21.6% in 2022, the rating note said. Fitch analysts now expect interest payment to absorb 22.6% of revenue in 2025, reflecting low revenue mobilisation.

The ratings agency forecasted real GDP growth at 5.5% in 2024 and 6.0% in 2025 from an estimated 4.8% in 2023, on the back of the ramp-up of oil infrastructure development and increased agriculture production.

The country’s growth will also be supported by the recovery in external demand and a pickup in domestic demand boosted by easing inflation, according to Fitch.

However, analysts said near-term risks are to the downside, amid a contractionary fiscal stance adverse weather conditions and regional instability. Oil production is expected to start at the end of 2025, but could be further delayed due to the failure to conclude financing for an oil pipeline to Tanzania and its subsequent building.

Fitch said oil production will not directly affect GDP growth or government revenues until 2026 in its forecast.

The current account deficit is forecasted to remain large at 8.0% of GDP in 2024 and 2025, well above ‘B’ median forecast of 2.6%, from an estimated 7.1% of GDP in 2023, as the import bill remains high with the development of the hydrocarbon sector.

Rising external debt service will lead to higher primary income outflows, the ratings note said, projecting that current account deficits will continue to be financed through FDI inflows, related to investments in infrastructure and hydrocarbon sector development.

At the end of 2023, Uganda’s international foreign reserves increased slightly to USD3.7 billion, from USD3.6 billion in 2022, owing to the IMF disbursement in June 2023 and strong export receipts.

Nevertheless, Fitch analysts expect reserves to remain under pressure due to government imports, upcoming debt service obligations, and uncertainties over external financing. #Anti-Homosexuality Act: Uganda Faces Difficulties Accessing External Funding –Fitch Naira Suffers Big, CBN Goes Ballistic Against FX Whales

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