Uganda’s Paradox: When expansion fuels fiscal strain

DAR ES SALAAM: AS the curtain closes on 2025, Uganda’s economic story is no longer a simple tale of recovery or resilience. Instead, it is a carefully balanced narrative of solid growth colliding with rising fiscal constraints, policy experimentation and a rapidly changing tax environment.

On Christmas Eve, the World Bank released its 26th Uganda Economic update, cultivating prosperity through Agro-Industrialisation, delivering a verdict that is both encouraging and cautionary. Uganda’s economy is expanding at a healthy 6.3 per cent, yet it is increasingly constrained by debt dynamics that are narrowing the state’s room to maneuver.

Growth accelerated modestly from 6.1 per cent last year and has been notably broad-based. Household consumption has recovered, services remain resilient and construction activity has been supported by public investment.

At the macro level, stability has been reinforced by disciplined monetary policy from the Bank of Uganda, which has kept inflation anchored at 3.5 per cent, well below several regional peers.

This achievement matters. Low and stable inflation has preserved purchasing power and avoided the sharp social tensions seen elsewhere in East Africa during recent price shocks.

Yet beneath these reassuring headline numbers lies a more complex and fragile reality. Uganda has reached what the World Bank terms a “fiscal crossroads.” Interest payments on public debt now consume roughly a quarter of total government revenue.

This single statistic explains much of the country’s policy tension. Every shilling spent servicing debt is a shilling not available for roads, power, irrigation, education, or health.

More importantly, heavy domestic borrowing keeps Treasury yields elevated, pushing commercial lending rates into the 18–20 per cent range and effectively pricing out local manufacturers and agro-processors from affordable credit.

The structure of growth further complicates the picture. While output is expanding, employment remains concentrated in low-productivity agriculture and informal services.

These sectors are highly vulnerable to climate shocks and offer limited pathways for income mobility, an acute concern in a country where more than one million young people enter the labour force each year.

Without a decisive shift toward higher-productivity activities, growth risks becoming socially thin, unable to absorb demographic pressure or generate broad-based prosperity. This is where agro-industrialisation emerges as the strategic centerpiece of the 2025 Economic Update.

The World Bank argues that Uganda’s long-term trajectory depends on moving decisively beyond subsistence farming toward value addition, processing and agro-based manufacturing. The logic is sound: Agriculture remains Uganda’s largest employer, yet its output is largely exported in raw or minimally processed form.

Capturing even a modest share of downstream value could transform rural incomes and foreign-exchange earnings. However, the report highlights a persistent and binding constraint, a severe “finance gap.” Less than 10 per cent of commercial bank lending flows to agriculture and agro-processing, despite the sector’s central role in employment and exports.

High interest rates, weak collateral frameworks and elevated sovereign borrowing all combine to limit credit availability. Regional comparison sharpens the contrast.

ALSO READ: Ending FGM: Survivor voices drive change in Mara Region

Tanzania, for example, has maintained a more favourable debt structure and allocated a larger share of its budget to development spending, allowing it to crowd in private investment even amid global tightening.

Uganda, by contrast, remains trapped in a cycle where domestic debt sustains fiscal operations but suppresses private-sector dynamism. The government, for its part, has pushed back firmly against critiques of its interventionist approach.

The Ministry of Finance, under Permanent Secretary Ramathan Ggoobi, has defended the Parish Development Model (PDM) as a non-negotiable pillar of Uganda’s development strategy.

The UGX 3.3 trillion programmes is designed to channel resources directly to the parish level, monetising subsistence households and strengthening food security. From the government’s perspective, administrative presence is not a flaw but a feature essential in a country where markets alone have struggled to reach the poorest communities.

The tension here is not ideological but operational. The World Bank does not dispute the objective of rural monetisation; it questions efficiency. Direct distribution of inputs and credit through administrative channels is vulnerable to quality leakage, uneven targeting and weak accountability.

The debate echoes earlier experiences in countries such as Ethiopia, where large-scale stateled agricultural support initially delivered gains but eventually strained public finances and distorted incentives, forcing painful adjustments.

Uganda now faces the challenge of ensuring that PDM spending translates into productivity gains rather than recurrent fiscal commitments. Running parallel to these structural debates is a profound shift in tax administration.

The Uganda Revenue Authority has rapidly expanded the Electronic Fiscal Receipting and Invoicing System (EFRIS), extending it to twelve additional sectors in an effort to raise the tax-to-GDP ratio from roughly 14 per cent toward the East African average of 16.1 per cent.

From a fiscal sustainability standpoint, the logic is compelling. Uganda’s revenue base remains narrow and debt dynamics cannot stabilise without stronger domestic resource mobilisation.

Yet the social and political risks are real. To cushion the transition, the government has introduced incentives such as a three-year income tax holiday for newly registered Ugandan-owned startups. Still, this is a high-stakes gamble.

Recent experience in Kenya shows how aggressive tax digitalisation, introduced without sufficient trust-building and sequencing, can trigger widespread backlash, pushing small traders back into cash-based informal systems and undermining the very compliance gains authorities seek.

For Uganda, the critical question is whether EFRIS becomes a bridge into formalisation or a barrier that drives vulnerable enterprises into the shadows. Hovering above all these policy choices is the promise and risk of oil.

The government and international partners are treating 2027, the year of “First Oil,” as a structural reset point. Once production begins, growth is projected to accelerate sharply, potentially exceeding 10 per cent.

Oil revenues could ease fiscal pressure, stabilise debt ratios and finance long-delayed infrastructure. But expectations themselves are dangerous. The World Bank warns that premature spending, pipeline delays, or governance slippages could expose Uganda to a classic Dutch Disease scenario, where currency appreciation and misallocated capital weaken nonoil sectors. Uganda’s Paradox: When expansion fuels fiscal strain THE rise of Islamic finance has been a notable development in the global financial ecosystem, providing an alternative to conventional banking that aligns with the ethical and moral values of Shariah principles.

Islamic finance, which prohibits interest (riba) and speculation (gharar) and promotes profit-and-loss sharing, has expanded across Muslim-majority countries and non-Muslim countries alike. With the global Islamic finance market valued at approximately 4.5 trillion US dollars and projected to grow to 6.7 trillion US dollars by 2027, this segment shows no signs of slowing down.

The Islamic capital markets, a crucial part of this growth, offer Shariah-compliant financial instruments and have attracted both Muslim and non-Muslim investors, resulting in widespread adoption. The global Islamic finance industry has seen exponential growth, particularly over the last two decades. The industry has grown at an average rate of 10-12 per cent annually, with countries in the Gulf Cooperation Council (GCC) region, Southeast Asia and parts of Africa at the forefront of this expansion.

Leading growing markets include; Saudi Arabia: As the largest economy in the GCC, Saudi Arabia leads with a robust Islamic finance sector, representing 28 per cent of the global Islamic banking assets. Islamic finance aligns closely with Vision 2030, the Kingdom’s economic diversification programme, which has spurred significant investments in Shariahcompliant projects.

Malaysia: Malaysia has consistently ranked among the top in Islamic finance, holding around 25 per cent of global Islamic assets. It has developed a wellregulated and mature Islamic capital market, offering a range of Sukuk (Islamic bonds) and equity products. The country has over 290 billion US dollars in Islamic banking assets and is a global leader in Islamic finance education, research and development.

United Arab Emirates (UAE): The UAE holds a strong position in the Islamic finance industry, particularly in Dubai, which is branded as the Islamic economic hub. The country’s Islamic banking assets stand at over 170 billion US dollars and the UAE is home to prominent Islamic banks like Dubai Islamic Bank and Abu Dhabi Islamic Bank.

Indonesia: With the largest Muslim population in the world, Indonesia has been progressively enhancing its Islamic finance sector, achieving a 6.0 per cent market share of total banking assets in 2022. With an estimated 70 billion US dollars in Islamic finance assets, Indonesia is accelerating its adaptation by introducing favorable policies and initiatives.

Qatar and Kuwait: Both countries also contribute significantly to the Islamic finance market, especially in Sukuk issuance and Islamic banking, contributing around 15 per cent of the GCC’s total Islamic banking assets.

United Kingdom and the United States: Although non-Muslim majority nations, both the UK and the US have made strides in Islamic finance. The UK, which issued the first sovereign Sukuk in Europe in 2014, now has five fully Shariah-compliant banks and an active Islamic finance infrastructure.

The growing adaptation of Islamic finance is based on a number of reasons. The most crucial reason is its ethical and moral appeal.

Islamic finance is based on ethical principles, aligning with a growing trend of socially responsible and sustainable investing (SRI). Islamic finance prohibits investments in certain sectors (such as alcohol, gambling and weapons), which attracts investors seeking ethical investment opportunities.

This moral grounding has led to collaborations between Islamic finance institutions and Western financial institutions aiming to cater to a more ethically conscious clientele. Another reason is the resilience in economic crises. Islamic finance has shown resilience during financial crises.

For example, during the 2008 financial crisis, Islamic banks demonstrated greater stability due to their asset-backed structure and prohibition on speculative investments. As a result, conventional financial institutions and governments started recognising Islamic finance as a stable alternative.

Additionally, the subsector’s synergy with ESG is appealing to global investors. Islamic finance and ESG share a natural synergy.

Islamic finance’s ethical principles align well with ESG criteria, which has led to the development of Islamic ESG funds. The Islamic Development Bank (IsDB) has issued green Sukuk for sustainable energy projects and Malaysia has introduced guidelines for green Sukuk.

This convergence has made Islamic finance appealing to non-Muslim investors interested in impact investing. Moreover, with over 1.9 billion Muslims worldwide, demand for Shariahcompliant financial services is substantial.

The rapid population growth in Muslim-majority countries coupled with increasing awareness of Islamic financial services has led to a surge in demand.

By 2030, Muslims are expected to constitute 26 per cent of the world’s population, driving further growth in this sector. Despite recorded notable growth, Islamic finance faces a number of challenges including a lack of standardisation, limited products and limited awareness.

A lack of standardisation across jurisdictions remains a major challenge for Islamic finance. Different interpretations of Shariah law led to discrepancies in product structures and compliance requirements. This fragmentation increases costs and complicates cross-border transactions.

Organisations like the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have made efforts to establish uniform standards, but further global collaboration is needed. Limited product offering is another challenge facing the subsector.

Compared to conventional finance, Islamic finance offers limited product diversity, especially in retail and wealth management services. This limitation can restrict the sector’s competitiveness and deters non-Muslim investors from participating fully. As Islamic finance expands, developing more diversified and innovative products will be essential.

Moreover, due to additional requirements, Islamic finance products tend to incur relatively higher compliance costs. The need for Shariah-compliance certification, coupled with additional compliance checks, can increase the cost of Islamic financial products. In competitive markets, these costs may render Islamic finance products less attractive than conventional ones.

However, digital transformation and automation are expected to lower these costs over time. Another major challenge is the perception and lack of awareness.

Non-Muslim markets often have limited awareness of Islamic finance and misconceptions about its restrictions and benefits. Many non-Muslim investors and institutions are unfamiliar with the stability and ethical appeal of Islamic finance, which can limit its expansion in Western markets.

Despite the challenges, the future of Islamic finance is promising with expansion into emerging markets. Emerging markets in Africa, Central Asia and Southeast Asia present a promising growth avenue for Islamic finance. Countries like Nigeria, Kenya and Kazakhstan have Muslim populations eager for Shariah-compliant options and are enacting regulations to promote Islamic finance.

Sub-Saharan Africa alone has an untapped market potential estimated at over 2 trillion US dollars. Furthermore, Islamic social finance mechanisms, such as zakat (charity) and waqf (endowment), present opportunities for addressing global challenges like poverty, healthcare and education.

The pandemic highlighted the need for resilient financing and integrating Islamic social finance into the broader financial system could provide sustainable development funding. I N the shadow of escalating financing costs, Tanzanian banks are creatively navigating the waters of capital acquisition.

DCB Commercial Bank Plc and Azania Bank Plc, two stalwarts in the Tanzanian financial sector, are each pioneering distinct pathways through the capital markets to secure the necessary funds.

This move is a strategic shift from traditional deposit-driven funding mechanisms that have become increasingly expensive, reflecting a broader, perhaps transformative trend in the country’s banking finance landscape. DCB recently unveiled its plan to raise 10.74bn/- through a rights issue, offering existing shareholders 97,646,913 new shares at 110/- each.

This decision is emblematic of a deeper commitment to fostering shareholder loyalty and ensuring financial stability. A rights issue, particularly in the context of a tightening financial environment, serves as a testament to the bank’s proactive approach to capital management.

It empowers existing shareholders to bolster their investment at a fixed, preferential rate, potentially positioning them to benefit from the bank’s future growth without the dilutive effects typically associated with additional equity influxes. This move could be seen as a winwin.

Shareholders get a chance to deepen their stakes under advantageous conditions, securing their confidence and support for DCB’s strategic direction. For DCB, this approach not only enhances its capital adequacy—vital for future expansions and navigating economic fluctuations—but also solidifies its balance sheet in a way that debt financing simply cannot match.

On another front, Azania Bank is reaching out to the broader capital market with the issuance of a 30bn/- corporate bond, with the flexibility to increase to 45bn/-, depending on the market’s response. This bond, part of a larger 100bn/- medium-term note programme, offers a 12.5 per cent annual interest rate, disbursed quarterly. This structure is particularly appealing in today’s volatile market, providing a beacon of stability with fixed, predictable returns.

From an investor’s perspective, Azania’s bond is a compelling proposition. It promises regular income returns in a market where such guarantees are few and far between, appealing especially to those who prefer lower-risk investments.

For income-focused investors, this could be a strategic addition to their portfolios, offering both security and satisfactory yields. For Azania, this bond issuance is more than just a fundraising exercise; it’s a strategic lever to diversify funding sources and enhance financial flexibility.

The capital raised will be earmarked for various strategic initiatives that align with the bank’s long-term goals, potentially fueling sustainable growth and operational resilience.

The initiatives by DCB and Azania are indicative of a larger shift within the Tanzanian banking sector—a pivot towards more innovative and diverse financing strategies. This trend is not just about overcoming the immediate challenges of costly financing but is also about setting a foundation for more robust financial structures that can weather economic uncertainties. For market observers and participants, these developments are significant.

They not only offer new investment opportunities but also hint at the evolving dynamics of financial management in regional banking.

As these banks adopt more capital market-centric approaches, we may see a ripple effect across the sector, leading to a more vibrant and resilient banking environment in Tanzania. Turning towards the weekly performance in the DSE.

Market turnover took a steep dive, plummeting by 96 per cent, with trading volumes following suit at a 92 per cent reduction. Amid these fluctuations, the market cap told a different story.

The total market cap nudged up by 0.48 per cent, suggesting some underlying strength or perhaps cautious optimism in specific sectors. However, the domestic market cap slightly retracted by 0.12 per cent, hinting at a more restrained view towards Tanzanian domiciled enterprises. Tanga Cement and Twiga Cement