Donor-funded project inflows rose modestly in the 2024/25 financial year but remained well below target, continuing a multi-year trend of underperformance in external grant disbursements.
Data contained in the Bank of Uganda September State of the Economy Report indicates that government received Shs1.36 trillion in grants, far short of the Shs2.88 trillion that had been budgeted, creating a Shs1.53 trillion shortfall.
The central bank attributes this gap to absorption challenges in government projects, which delayed donor disbursements and affected the implementation of externally financed programmes.
‘The underperformance in grants was largely due to delays in the readiness of some budgeted projects for execution, which slowed the release of external project support,’ the report noted.
Despite the underperformance, grants remain a critical component of Uganda’s fiscal framework, supplementing tax and non-tax revenues to support national development priorities, including infrastructure, education, and health.
However, although the 2024/25 receipts were higher than the Shs1.01 trillion recorded in the 2023/24 financial year, they remain almost 50 percent below pre-pandemic levels, when Uganda consistently received more than Shs2.5 trillion in project grants annually.
The improvement, though modest, signals partial recovery in donor disbursements following years of disruptions caused by Covid-19 and changing global aid priorities.
However, the report indicates that Uganda still faces significant challenges in effectively absorbing external financing, a problem that has persisted for several years.
Over the past three fiscal cycles, grant inflows have been uneven, reflecting both domestic and external factors.
In the 2022/23, project grants amounted to about Shs2 trillion, before dropping sharply in the 2023/24 financial year and only slightly recovering in the 2024/25 financial year.
The pattern is attributed to inconsistent project implementation, bureaucratic delays, and stringent donor requirements tied to governance and accountability.
The Bank of Uganda report identifies slow procurement processes, land acquisition disputes, and limited project readiness as the main bottlenecks undermining timely disbursement of external funds.
These factors not only erode donor confidence but also hinder progress on critical projects in infrastructure, water, and social services.
Capital expenditure for the 2024/25 financial year also fell short by Shs2.03 trillion, a reflection of the same structural weaknesses in project execution.
‘When projects lag behind schedule, donors often defer or withhold funds, affecting both disbursement performance and service delivery,’ the report notes.
Such delays have ripple effects, leading to cost overruns, contract disputes, and reduced development impact.
Despite the drop in external financing, Uganda’s fiscal deficit narrowed to 6.1 percent of GDP, better than the projected 7 percent.
This improvement was driven largely by strong domestic revenue mobilization.
The report indicates that tax collections grew by 16.1 percent, boosted by higher corporate income tax, value-added tax and import duties.
Total government revenue, including taxes, non-tax revenue, and grants, rose to Shs33.43 trillion, representing a 16 percent increase from the previous year.
The robust tax performance helped cushion the impact of lower donor disbursements, enabling government to maintain funding for key priorities such as infrastructure, health, and education.
However, Bank of Uganda warned that relying heavily on domestic borrowing to bridge the financing gap could lead to higher interest costs and crowd out private sector credit, particularly in a tightening monetary environment.
‘While revenue performance has improved, the cost of financing the deficit domestically is rising. This could constrain private investment and slow economic recovery if not managed carefully,’ the report warns.
Grants have historically played a central role in Uganda’s development financing. Five years ago, they accounted for about 15 percent of total government revenue.
Today, that figure has fallen to below 5 percent, underscoring the declining reliance on donor aid amid shifting global funding patterns and Uganda’s efforts to expand its domestic revenue base.
Nonetheless, external grants remain important, not only as a source of budgetary support but also for technology transfer, technical expertise, and concessional project financing that domestic borrowing cannot easily replace.
Thus, unless government addresses absorption capacity challenges, Uganda risks missing out on critical concessional resources needed to accelerate economic growth and reduce dependence on expensive commercial loans.