Week Ending June 27, 2025

Fiscal Operations: Larger Than Anticipated Deficit and Revenue Shortfalls

In May 2025, Uganda’s fiscal deficit widened beyond initial projections, driven principally by expenditure overruns and underperformance in non-tax revenue streams. The Ministry of Finance reported total government expenditure of UGX 4.52 trillion, exceeding the budgeted UGX 4.18 trillion, while revenue collections amounted to UGX 2.69 trillion, falling short of the UGX 2.74 trillion target. The resulting fiscal gap of UGX 2.37 trillion surpassed expectations due to lower grant inflows and subdued non-tax receipts. This divergence implies an increased reliance on borrowing to finance the deficit, intensifying fiscal pressures for the second half of 2025.

Bank of Uganda / MPC Stance

The Bank of Uganda maintained its benchmark interest rate at 9.75 % for the third consecutive meeting, signalling a cautious stance amid uncertain global economic conditions. Governor Michael Atingi-Ego emphasised the elevated risks posed by renewed international trade tensions, notably following the reinstatement of tariffs by the United States under President Donald Trump’s administration. The decision to hold rates steady reflects a data-driven approach, balancing the need to contain inflationary pressures against the imperative to support ongoing economic recovery.

Trade Balance: Significant Narrowing Driven by Export Growth

Uganda’s trade deficit contracted sharply by 58.3 % year on year in April 2025, narrowing to USD 126.9 million from USD 303.9 million in April 2024. The improvement was underpinned by a remarkable 72.1 % year-on-year increase in export revenue, which reached USD 1.11 billion. Key export commodities contributing to this rise included coffee, gold, electricity, cocoa beans, sugar, and beer. Conversely, imports increased by 30.4 % to USD 1.24 billion, reflecting heightened domestic demand and inventory replenishment.

Inflation (CPI YoY)

Headline inflation in Uganda edged up to 3.9 % year on year in June, from 3.8 % in May, signalling modest but broadening price pressures. Core inflation remained steady at 4.2 %, while food crop prices rose by 4.7 %, up from 4.3 % in the previous month. Energy, fuel and utility prices declined marginally by 0.2 % compared with a 0.9 % fall in May.

Monthly inflation slowed to 0.1 % from 0.5 %, with monthly core inflation moderating to 0.3 % from 0.5 %. These developments suggest that while inflation remains contained, underlying momentum warrants continued vigilance by policymakers.

Output Growth (GDP Q1)

The Ugandan economy expanded by 8.6 % year on year in the first quarter of 2025, significantly exceeding Bloomberg consensus forecasts. This growth was broad-based, encompassing services and industrial sectors, and underpinned by resilient export performance. Consensus projections anticipate real GDP growth of 6.4 % in 2025, 6.9 % in 2026, and 7.0 % in 2027. These forecasts align closely with the Bank of Uganda’s medium-term target range of 7 to 7.5 %. Notable institutional projections include Standard Chartered’s 7.0 %, Fitch Ratings’ 6.5 %, and Citigroup’s 6.2 %.

Yield Curve and Sovereign Spread Dynamics: Mid-Curve Steepening Reflects Risk Repricing

Recent weeks have seen selective steepening of Uganda’s sovereign yield curve, particularly in the 5-to-10-year maturity segment where spreads widened by approximately 86.3 basis points. The 5-year UGANGB yield increased from 16.64 % to 17.5 %, while the 10-year yield rose from 16.23 % to 16.84 %. The 2-year yield remained largely unchanged at 15.83 %. This movement expanded the 2s10s spread from around 40 basis points to just over 100.4 basis points, signalling greater compensation required for medium-term credit and inflation risks.

Additionally, the 5 to 15 years spread widened by about 47.5 basis points, reflecting heightened term premium demand linked to inflation uncertainty and fiscal refinancing risk over longer horizons. These yield curve dynamics coincide with robust first quarter GDP growth, suggesting investors are factoring stronger medium- to long-term growth prospects and inflation pressures into their valuations.

Relative to US Treasuries, Uganda’s sovereign bond spreads remain elevated, with the 10-year bond trading at approximately 1,257 basis points over the US 10-year Treasury yield of 4.27 %, and the 5-year bond yielding about 1,323 basis points above the equivalent US Treasury rate. This risk premium reflects investor caution concerning fiscal sustainability, inflation expectations, and potential exchange rate volatility.

Business Confidence

The S&P Global/Stanbic Bank Uganda Purchasing Managers’ Index (PMI) rose to 56.4 in May 2025, up from 55.3 in April, representing a 110-basis point positive surprise. After a trough of 49.62 in January, the year-to-date increase of 690 basis points underscores improved business sentiment and a more optimistic near-term economic outlook.

The Uganda Securities Exchange (USE) All Share Index has demonstrated robust performance year to date, gaining approximately 15.5 % and significantly outperforming global benchmarks such as the S&P 500, which has risen around 5.4 % over the same period. In our view, this strong equity market performance aligns with broader improvements in business sentiment, as reflected in the S&P Global/Stanbic Bank Uganda Purchasing Managers’ Index (PMI), which rose to 56.4 in May 2025 from 55.3 in April. After a low of 49.62 in January, the PMI’s year-to-date increase of 690 basis points underscores renewed optimism among businesses and investors alike.

Outlook

Growth

Uganda is expected to maintain strong economic momentum with real GDP growth forecast to reach approximately 6.4 % in 2025. This expansion will be supported by continued strength in export-oriented sectors such as agriculture and mining, alongside steady growth in services and manufacturing. The recovery is underpinned by robust external demand and improving domestic investment conditions.

Inflation

Inflationary pressures are likely to remain contained, with headline inflation anchored below 4.5 % through 2025. This environment should enable the Bank of Uganda to maintain the policy rate at 9.75 %, assuming global commodity prices and exchange rate volatility remain moderate.

Fiscal

The fiscal deficit is projected to narrow gradually to between 5 and 6 % of GDP by 2026, contingent on improved non-tax revenue collection and the gradual implementation of tax reforms. Continued expenditure control will be essential to sustaining this consolidation path.

At Regal Capital, we look to closely monitor Uganda’s fiscal reforms, monetary policy signals, and external shocks. We recognise that strategic investment positioning requires a nuanced and balanced approach in this evolving macroeconomic environment.

While export-led trade gains and strong GDP growth underpin optimism, fiscal discipline and cautious monetary policy remain paramount to managing external vulnerabilities to global growth risks and inflation pressures. Credit quality is expected to remain stable but under careful watch, as fiscal consolidation efforts and revenue mobilisation will be key determinants of Uganda’s sovereign risk premium and investor confidence long term.

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