Why the Bank of Uganda Increased Interest Rates in the First 2025 Bond Auction

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The Bank of Uganda raised interest rates to their highest levels in 18 months during its first bond auction of 2025. The 15-year bond saw a yield of 17.5%, while the five-year bond offered 16.75%. This increase was driven by the government’s urgency to raise funds through domestic borrowing.

According to data from the Bank of Uganda, the government tendered UGX 990 billion but accepted only UGX 791 billion, despite receiving bids exceeding UGX 1 trillion.

Revenue Shortfalls and Rising Debt

The government’s aggressive borrowing comes amid significant fiscal challenges. In the ongoing financial year, UGX 14 trillion has already been raised from the bond market, largely to refinance maturing debt.

This approach was due to the strain caused by revenue shortfalls, with the Uganda Revenue Authority (URA) missing its 2023/24 target by UGX 7.794 trillion.

Civil society organizations, including the Civil Society Budget Advocacy Group (CSBAG), have called for improved tax compliance, reduced exemptions, and enhanced collaboration among government entities to address these fiscal imbalances.

Impact on Public Debt

Uganda’s public debt has risen sharply, increasing from 34.6% of GDP in 2018/19 to 52% by June 2023, totaling UGX 96.1 trillion ($25.3 billion).

The transition from concessional to commercial borrowing has compounded the issue, with domestic debt servicing now consuming 32% of the country’s tax revenues.

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Although the Bank of Uganda’s monetary policy has kept inflation relatively low at 2.9%, the reliance on high-yield domestic bonds risks crowding out private sector investment and credit, raising concerns among financial analysts.

Lessons from Ghana and Calls for Reform

Uganda’s situation draws parallels with Ghana’s recent debt crisis, where aggressive domestic borrowing led to unsustainable fiscal conditions.

Civil society organizations have warned that without stronger domestic revenue mobilization and public financial management reforms, Uganda could face a similar scenario.

They have urged the government to prioritize reducing reliance on borrowing by improving tax collection mechanisms and curbing wasteful expenditures.