The Gains And Pitfalls Of Domestic Debt

Uganda’s bond market has never been busier. Each month the Bank of Uganda announces an auction, and each time the market responds with gusto.

Bonds are how government borrows from the public, and from past evidence, they remain the safest instrument in any fund manager’s toolbox. 

To the casual observer, this looks like a vote of confidence — citizens and institutions lending willingly to their government in shillings, helping bridge yawning budget gaps. But beneath the optimism lies a more sobering story. Debt levels are climbing faster than revenues, interest payments are ballooning, and the weight is increasingly distorting the budget.

Outstanding Treasury bills and bonds reached roughly UGX 58–60 trillion by June 2025, up from about UGX 53 trillion a year earlier. Bonds alone account for approximately UGX 51–53 trillion, reflecting government’s deliberate pivot toward longer-dated instruments.

In the 1990s, government paper was a niche tool, deployed mainly to mop up liquidity in an economy groaning under inflation. Rates shot above 30% at times as the state scrambled to soak up excess cash. Investors treated treasury bills as curiosities, not the bedrock of their portfolios. 

By the 2000s, the picture had changed. Inflation had been tamed, liberalisation entrenched, and treasury bills became routine monetary instruments. Bonds were introduced to create a yield curve and extend maturities, but domestic debt stock remained modest relative to GDP. Donors and concessional loans still carried much of the budget. Domestic borrowing was a supplement, not the mainstay.

Today, it is the mainstay. Government paper has become the oxygen line keeping the budget alive.

 

The weight of interest

That reliance comes with a punishing bill. In FY2023/24, Uganda spent just over UGX 6 trillion servicing its debt. By the close of FY2024/25, total interest payments had risen sharply to approximately UGX 9.6–9.8 trillion, with domestic interest accounting for about UGX 8.2–8.4 trillion of that figure. Interest is now one of the fastest-growing items in the national budget.

The arithmetic is merciless. When coupon dates fall due, the Treasury must pay. Wages can be delayed, suppliers fobbed off, projects shelved. But bondholders are untouchable. The result has been a steady pile-up of arrears, as ministries juggle their bills. Government has even carved out budget lines for arrears clearance — an open admission that resources meant for drugs, textbooks and road repairs are being redirected to service debt.

This is how debt quietly crowds out public goods. It does not announce itself with ribbon cuttings. It simply shrinks the space for service delivery, one coupon at a time.

 

The crowding out effect

There is another crowding out — one that hits the private sector directly. With government sucking up vast sums of domestic savings, banks find lending to the state safer and more rewarding than lending to businesses. Why risk a manufacturer or farmer when a gilt-edged treasury bond pays a tidy coupon on schedule?

The effect is to starve entrepreneurs of credit. Lending rates remain stubbornly high, partly because government sets the benchmark. If a 10-year bond pays 16%, no bank is going to lend to a small business at single digits. This is the unspoken cost of a hungry government debt programme: it diverts capital away from enterprise, slows job creation, and keeps the economy trapped in a high-interest equilibrium.

The paradox is painful. The very instrument that gives government fiscal breathing room can suffocate the private sector it relies on for growth.

 

Why borrowing at home still matters

It would however be wrong to dismiss domestic borrowing as reckless. Borrowing in shillings protects the state from currency mismatches that come with external debt. Servicing in local currency is far less precarious than scrambling for scarce dollars to pay Eurobonds.

The bond market has also matured into the scaffolding of Uganda’s financial system. Banks use yields as benchmarks for lending. Corporates price their bonds against the curve. Pension funds and insurers rely on the long-term paper government issues. What began as a shallow experiment in the 1990s is today a backbone of the economy.

And perhaps most importantly, domestic borrowing strengthens sovereignty. In the early 2000s, nearly half the budget was donor-funded. Today, that dependence has fallen sharply. Being able to raise money internally means fewer strings attached and more resilience when donor flows dry up or foreign investors retreat.

The paradox of Uganda’s debt story is this: today’s fiscal pain could seed tomorrow’s independence — but only if the money is borrowed and spent wisely.

 

A mirror from Nairobi

Kenya shows both the promise and peril. Nairobi has built one of Africa’s deepest domestic securities markets. Infrastructure bonds are regular fixtures, pension funds and banks line up to buy, and even retail investors have been roped in through the M-Akiba mobile bond. The market is liquid and government rarely struggles to sell paper.

But the price is clear. Nearly a third of Kenya’s revenues now go to interest, much of it domestic. Banks have grown accustomed to lending to government, starving entrepreneurs of credit. Private borrowers complain of punitive lending rates, yet the reality is simple: government sets the floor. What began as a sign of maturity has become a treadmill, forcing the state to run faster each year just to stay upright — while the private sector wheezes on the sidelines.

Uganda must heed this warning. Access to debt markets is not the same as affordability. Without discipline, the very market that gives independence can easily become the trap that strangles both the budget and the private sector.

 

A turning point on the Nile

Ethiopia offers another angle. In early September 2025, Addis Ababa officially commissioned the Grand Ethiopian Renaissance Dam, Africa’s largest hydroelectric project. At US$5 billion, it was not only an engineering marvel but a financing one. Ninety-one percent of the cost was carried by the centralw bank and the Commercial Bank of Ethiopia. The remainder came from citizens, civil servants whose salaries were docked, and the diaspora, who bought bonds and remitted money specifically for the dam.

The symbolism was immense. GERD was not just a dam; it was a declaration of sovereignty. Farmers, schoolchildren, public servants, and Ethiopians abroad all contributed.

The commissioning was more than the flick of a switch. It was proof that disciplined domestic mobilisation can deliver monumental projects. For Uganda, it is a reminder that local markets, patriotic contributions and diaspora capital are not abstractions — they are tools that, used transparently, can change a nation’s trajectory.

Uganda’s diaspora remits more than a billion dollars annually. Yet no serious diaspora bond has ever been floated. Properly structured, these flows could build industrial parks, oil infrastructure, and export corridors. GERD shows the potential, but also the risks: pouring so much into one project strained Ethiopia’s wider economy. Inflation rose, and opportunity costs mounted. Domestic mobilisation is powerful, but never free.

 

Borrowing smarter

Uganda stands at a crossroads. It can keep auctioning larger volumes, rolling over maturities, and letting interest bills balloon. Or it can borrow smarter.

That means issuing more long-term bonds like the 25-year paper that was recently oversubscribed, to spread obligations across decades. It means broadening participation so that SACCOs and ordinary citizens can buy in, not just banks and pension funds. It means guarding credibility like gold, because once trust erodes, yields spike. And it means mobilising the diaspora not just as remitters but as investors, through transparent instruments tied to visible projects.

Above all, it means showing value for money. Increased borrowing would not be a problem if government demonstrated efficiency in project execution, completing works on time and within budget. If corruption were curbed and waste reduced, investor confidence would deepen. The result would be lower yields, less crowding out, and cheaper credit for the private sector.

 

The long view

Uganda’s domestic debt journey is three decades old. In the 1990s, securities were tools to tame inflation. In the 2000s, they were modest supplements to donor inflows. Today, they are the backbone of fiscal financing. Tomorrow, they will be judged either as the burden that strangled growth or the foundation that sustained it.

Kenya shows the danger of a deep market turned treadmill, where private borrowers are squeezed and lending rates remain high. Ethiopia shows the power of patriotic mobilisation, crowned by the September 2025 commissioning of GERD, but also the risks of overconcentration. Uganda must find its own balance.

The bond market will keep expanding, and coupons will keep falling due. The real test will be whether, in 10 years, we see power lines, factories and highways that justify the sacrifices — or only ballooning interest bills and a private sector starved of credit.

Borrowing from ourselves is neither inherently good nor bad. It is what we do with the money that matters. If government can show efficiency, curb corruption and deliver value, today’s debt could become tomorrow’s prosperity. If not, we risk mortgaging the future while suffocating the very entrepreneurs who should be building it.

Uganda is learning this lesson one auction at a time — and the GERD, flickering to life across the Nile in September 2025, stands as both inspiration and warning of what disciplined domestic financing can achieve.