The aid freeze is the kind of action long demanded by transparency campaigners who charge that the money oils a corrupt system.
Uganda has a reputation as a corrupt country, but the latest scandal – brought to light by the country's auditor general in October – is remarkable for its details: More than $220 000 was spent on gas in four days, millions of dollars were diverted to buy luxury vehicles for top officials, and millions were deposited into individuals' private accounts.
Because the money was for the rehabilitation of parts of northern Uganda devastated by decades of warlord Joseph Kony's brutal insurgency, the scandal has provoked a lasting rage around the country and inspired aid cuts that foreign donors had been reluctant to inflict on this East African country.
Roberto Ridolfi, the head of the European Union delegation to Uganda, said in a statement late on Tuesday that the scandal and those before it amounted to "a breach of trust" on the part of Ugandan authorities.
Sweden, Germany, Ireland, Britain and Denmark have already cut or cancelled all aid to Uganda over the scam, saying they have lost faith in the government's capacity to spend money responsibly.
Western donors fund up to 25% of Uganda's budget.
Ridolfi said the EU and its development partners in Uganda "will withhold pending budget support disbursements and any further commitments for an initial period of up to [six] months".
The donors are giving Uganda until April 2013 to pay back all the lost money, investigate the scandal, and take action against all the suspects.
But investigations of this nature, when they happen, rarely produce the intended results in Uganda, where corruption charges are often politicised and then dismissed.
This year three ministers with close ties to President Yoweri Museveni who faced corruption charges were set free by a judge who said they were scapegoats.
The three politicians swiftly returned to their jobs.
Critics of Museveni, who has been in power since 1986, charge that he protects corrupt but loyal supporters and cannot afford to upset the patronage network that keeps him in power. Although mid-level officials, including some accountants, have been sent to jail over the latest scandal, top officials in the prime minister's office are still hanging onto their jobs.
Prime Minister Amama Mbabazi has resisted calls for his resignation, and Pius Bigirimana, the ministry's top accounting officer, says he is going nowhere.
Both men deny any wrongdoing.
Museveni told a meeting of donors last month that official graft has proved hard to fight in Uganda because "the suspected thieves are very cunning". Museveni asked the donors to reconsider the aid cuts, saying "the fight against these thieves is going on well".
Skepticism about change
Although the donors seem to be serious with their new transparency demands of the government, some activists say it is unlikely the donors will stand their ground in the long term.
The donors' action is not likely to steer the Musweveni government toward greater transparency and accountability, said Jackie Asiimwe-Mwesige, a Ugandan lawyer who is a prominent anti-corruption activist.
"The NRM is not about to change," Asiimwe-Mwesige said, referring to the party in power. "Corruption is the way the ruling party does business … What drives this system is money changing hands. The scandals are going to deepen and widen."
Some campaigners who had long urged donors to take tougher action against official waste and graft say the audacity of the latest scandal vindicates their calls for the dismantling of an often comfortable relationship between the state and its donors.
They want foreign aid to be channeled through non-state actors engaged in service delivery and for donors to work directly with contractors in cases where the authorities cannot be trusted with cash.
"For the first time the donors are coming out and putting clear benchmarks and I think it's a good move," said Cissy Kagaba of the Anti-Corruption Coalition of Uganda, a watchdog group. "But there are other alternatives they can use to ensure that the money reaches the intended beneficiaries." – Sapa-AP