In a recent report by Bank of Uganda, it has been revealed that interest payments on the public debt are now consuming a significant portion of Uganda tax revenues. According to the report, a staggering 23.5% of tax revenues are currently being used to service the interest payments on the country’s outstanding debt.
This figure is concerning, as it highlights the strain that the country’s debt is placing on the economy and the government’s ability to fund essential public services. With such a large portion of tax revenues being diverted to pay off interest, there may be less money available for other crucial areas such as healthcare, education, and infrastructure.
In a report released on Tuesday, it was revealed that interest payments on public debt have now become the biggest expense in terms of tax revenue, consequently overshadowing other key budgetary items.
According to the Bank of Uganda’s April State of the Economy Report, the proportion of interest payments on public debt rose by 2.9% in the quarter that ended in March. As of March, the public debt had increased to Shs86.35 trillion, which accounts for around 49.6 percent of the gross domestic product.
In March of the current period, the Bank of Uganda reported that the ongoing expansion of the public debt was placing strain on tax revenues. This was evidenced by a rise in the ratio of total interest payments to domestic revenues, which increased to 23.5 percent from 20.6 percent and 21.3 percent in the corresponding periods of 2022 and March 2021, respectively.
According to the report, the value of domestic revenues allocated towards interest repayments increased by 25% or Shs979.1b between January and March. Specifically, it rose from Shs3.45 trillion in the same period in 2022 to Shs4.35 trillion. Out of this amount, at least Shs3.38 trillion was used to finance domestic debt interest payments, which had grown from Shs2.96 trillion in the same period in 2022.
The Bank of Uganda stated that domestic debt repayments accounted for the largest portion, taking up 18.2% of tax revenues. However, the report highlighted that the rapid increase in interest repayments, particularly on domestic debt, had consistently breached the 2018 Public Debt Management Framework, which sets a threshold of 12.5%.
The report further indicates that there was a significant shortfall in tax revenues, particularly in the area of indirect taxes, during the period under review. This contributed to a fiscal deficit of Shs6.32 trillion, which was further compounded by the underperformance of grants.
This development is having an impact on both short-term and long-term prospects as there are now limited resources available to fund development expenditures. The report assesses macroeconomic developments and the associated monetary policy decisions.
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