A decline in aid dependence and improved tax collections has helped improve Uganda’s credit rating from “B” to “B+”. However questions over a widening current account deficit continue to linger.

Uganda now joins the Fitch list of “B+” rated peers in the region Kenya and Rwanda, enabling it to access lending at favourable terms in international financial markets. Uganda has however said that it will not be following Kenya and Rwanda in floating sovereign bonds.

Following aid cuts announced by donors in 2013, Uganda’s Treasury has intensified measures to increase domestic financing of the national budget. This has seen it raise contributions from the around 75 per cent recorded in 2012/13 to 81 per cent in 2013/14.

Total domestic financing is projected at 81 per cent in the current financial year, according to budget proposals tabled in parliament in June 2014.

A notable portion of domestic resources is attributed to borrowing activities in the government debt market, which are capped at Ush1.437 billion ($488,000) for the 2014/15 period — a benchmark intended to minimise the “crowding out effects” of high interest rates, which restrict access to credit for individuals and businesses and thus hamper private sector growth.

Despite a tax revenue deficit of Ush503.7 billion ($173 million) registered at the end of 2013/14, a modest surplus of Ush24.26 billion ($8.2 million) recorded during the first six months of 2014/15 has restored optimism about the country’s ability to finance its increasing development needs.

READ: Mixed prospects for Uganda after rebasing economy

Total revenue collections grossed Ush4.568.44 billion ($1.6 billion) between July and December 2014 against a target of Ush4,544.17 billion ($1.5 billion), according to data compiled by the Uganda Revenue Authority (URA). Besides funding large projects, improved revenue collections also boost a country’s capacity to repay its debts on time.

READ: URA gets corporate tax revenue rise, experts cautious over prospects for 2015

Though removal of some tax exemptions and tighter enforcement aimed at recovering arrears have boosted revenue growth, exploitation of joint agency synergies in expanding the tax base remains low, financial experts say.

However, the country’s current account balance appears fragile, amid surging imports pegged to ongoing construction works for the Karuma and Isimba power dams and falling exports.

Uganda’s current account deficit rose to more than $800 million at the end of last year, a trend that has exerted more pressure on the shilling, raising fears of higher inflation rates and falling standards of living among poor consumers.

The ratings upgrade comes at an opportune time for Uganda, which is in the middle of sourcing funding for big infrastructure projects.

“The current account deficit remains high but anticipated recovery in regional export markets, which could materialise this year, would ease pressure on this variable. Though the ratings upgrade offers more room to borrow at lower costs, we are not keen on seeking fresh loans unless targeted infrastructure projects are ready for implementation,” said Lawrence Kiiza, director for economic affairs at Uganda’s Ministry of Finance, Planning and Economic Development.