Even as Uganda fights to salvage a shilling that has been falling steadily against the US dollar, the country’s fiscal deficit is projected to rise to 6.4 per cent of gross domestic product this financial year.

This fiscal deficit — that is, excess expenditure levels weighed against available resources — has raised fresh fears of increased domestic borrowing, diminished access to credit and doubts over external fundraising plans.

In comparison, the country’s fiscal deficit stood at 3.8 per cent of GDP at the end of 2013/14, an outcome supported by lower than projected expenditures and delays in the implementation of large energy and transport projects, World Bank data shows.

Faced with a higher fiscal deficit, and modest tax collections and budget support, the government may borrow more locally, economists predict, thereby locking out many private borrowers over the medium term.

Whereas a slight recovery in revenue collections yielded an $8.2 million surplus during the first half of 2014/15, tax growth appears fragile due to slow economic activity and sharp shilling depreciation.

“The fiscal deficit is likely to grow bigger by the close of 2014/15 due to infrastructure-related spending and potential declines in tax revenues caused by low growth rates. Latest supplementary budget demands could escalate it even further in the event that the national coffers suffer a funding gap,” said Dr Fred Muhumuza, an economist with KPMG Uganda.

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Donor budget support fell by roughly 45 per cent to Ush69 billion ($23.8 million) in the current financial year, amid misgivings about the country’s anti-corruption efforts and gradual aid reduction by development partners since 2005.

Recent massive government borrowing has seen the share of domestic borrowing grow from 8.8 per cent of GDP at the end of 2012/13 to 14.2 per cent at the end of 2013/14, World Bank data showed.

This was shown in rapid movements in government borrowing in the last half of 2013/14. Total government borrowing in the domestic market amounted to Ush1.7 trillion ($587 million) against a ceiling of Ush1 trillion ($345 million), leading to increases in rates on government securities and a slowdown in private sector lending, analysts pointed out.

Consequently, private sector credit grew by 12 per cent in the previous financial year compared with 14.5 per cent target, according to the Bank of Uganda.

So far, accelerated domestic borrowing by the government has put pressure on Treasury bill and bond rates, increasing lending rates among commercial banks. Interest rates earned on the 91-day and 182-day Treasury bills partly determine mainstream lending rates and, therefore, any increase in the former directly feeds into average borrowing rates charged on bank loans.

For example, the yield earned on the 91-day Treasury bill rose from 12.4 per cent on March 11 to 14.16 per cent on March 18, according to BoU reports.

Efforts by the central bank to curb rising yields on government securities have raised more fears of shrinking access to credit.

In an attempt to slash liquidity levels in the interbank market and minimise banks’ ability to invest heavily in Treasury auctions and currency speculation, BoU has shrunk inflows of funds injected into this window for short-term borrowing needs.

As a result, overnight and one-week borrowing rates in the interbank market shot up to 15 per cent and 18 per cent, respectively, in the past two weeks compared with 8.5 per cent and 11 per cent, respectively, in February, according to Stanbic Uganda financial trading reports.

Interbank rates also influence commercial banks’ lending rates, with most lenders factoring them into rates charged on overdraft facilities and short-term loans of less than five years.

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