The Ugandan government’s plan to borrow 11.97 trillion shillings from the domestic market in the upcoming fiscal year has sparked intense debate over the country’s financial direction.
As the Ministry of Finance (Treasury) prepares to navigate a complex economic landscape, the central point of contention is whether this massive loan will encourage private investment (“crowding in”) or displace the private sector from the credit market (“crowding out”).
The Deputy Secretary to the Treasury, Patrick Ocailap, has strongly defended the borrowing plan. Speaking at recent economic forums, Ocailap clarified that the government is borrowing for construction rather than consumption—specifically targeting transport, power supply, and digital connectivity.
“When we build roads and energy systems, we are actually growing the private sector,” Ocailap stated. “In this sense, government spending can ‘crowd in’ private investment because it creates the infrastructure that enables businesses to be more productive.”
This “crowding in” theory suggests that government investment, by reducing long-term business costs, attracts superior private capital that eventually replaces the funds initially pulled from the market by government borrowing.
However, many independent economists and private sector advocates view this 12 trillion shilling plan with skepticism, basing their concerns on the mechanics of the domestic credit market. When the government enters the market to borrow such a massive amount, it competes directly with local businesses for a limited pool of available funds.
Experts have raised several key concerns regarding this strategy. First, there is the issue of rising interest rates. With government bond yields currently hovering around 14%, commercial banks increasingly view lending to the state as safer and more profitable than lending to Small and Medium Enterprises (SMEs).
This trend keeps commercial lending rates for businesses stubbornly high, often exceeding 20%. Furthermore, critics warn of a “risk-free lending trap, “where banks rely on government bonds as their primary income source rather than supporting innovative private projects.
Current data highlights the scale of this issue, showing that 54% of Uganda’s total public debt is sourced domestically, equivalent to 13% of the country’s GDP.
The shift toward domestic borrowing is partly driven by the stringent conditions attached to international financing. While institutions like the World Bank or the IMF demand rigorous fiscal reforms and transparency, domestic borrowing allows for rapid access to funds without external pressure.
However, this flexibility comes at a steep price. By the end of the 2024/25 fiscal year, interest payments alone on domestic debt reached 8.2 trillion shillings. Critics warn that this creates a dangerous cycle: the government borrows more just to service the interest on old debt, ultimately draining resources that should be allocated to essential sectors like health and education.
