Last year’s Budget theme was “The Journey Continues – Towards Socio-Economic Transformation”. I expect the minister’s budget for financial year 2014/15 to reflect a “staying the course” on this journey of socio-economic transformation.
The government has been consistent over the last five years, focusing on macro-economic stability at the same time positioning Uganda in the context of the EAC integration to ensure competitiveness. This week’s budget will again emphasise the government’s monetary and fiscal policy focused at containing inflationary pressures, while ensuring debt and exchange rate stability which are essential for creating a suitable environment for growth.
Tax will be a headline grabber this week, when the Finance minister delivers her budget. The government is budgeting to spend Shs14,317 billion during FY 2014/15. Domestic resources will account for about 82 per cent of the total budget. Of this, URA revenue collections will account for 69 per cent, at Shs9,835 billion. This means that the government is expecting tax revenue collections to increase by nearly 20 per cent next financial year. To achieve this very ambitious growth in tax revenue, I expect the Minister to announce a range of new tax measures. These measures are likely to include both new taxes and more strict measures of tax enforcement.
Time for tough decisions
It is also the penultimate budget in the NRM’s current five year term before the next elections. By the time we get to next year’s budget, the elections will be less than seven months away. The government will not want to introduce many new taxes in next year’s budget which will be a few months before the election. Because of this, I expect all the tough decisions relating to taxation to be made in this week’s budget.
The year 2013 was a difficult year for many businesses in Uganda. Many of the key sectors of the economy which contribute the bulk of the taxes collected by the URA saw a decline in their sales and profitability compared to the previous years.
These sectors include the banking, telecoms, manufacturing and the trade and retail sectors. Because of these challenges in the economy, URA will not meet their revenue collection target this year. Despite these challenges, tax collections are expected to grow by 20 per cent compared to what URA collected last financial year.
However, this will still be short of this year’s revenue target by about 3 per cent. In addition to this, the government has also faced some fiscal challenges including the aid freeze of last financial year which has resulted in a decline in grants receipts for budget support.
In order to cover this shortfall in both revenue collections and budget support, the government has had to borrow more from the domestic market to finance the budget. As result of this, government borrowing especially from the domestic market has increased by about 0.7 per cent of GDP this year. This has ultimately increased the government’s total debt stock as a percentage to GDP.
ECONOMY EXPECTED TO grow by 6%
According to the Budget Framework Paper 2014/15, the economy is projected to grow by 6 per cent. However, the business community expectations with regards to the growth of the economy are a lot more conservative. I believe it will be a figure somewhere between 5 per cent and 6 per cent.
Anything lower than 5 per cent will be a major disappointment and cause for concern, considering the target for the five year National Development Plan (NDP) was annual economic growth of 7 per cent. During the current financial year, Bank of Uganda has continued to implement the Inflation Targeting Lite monetary policy, through its Central Bank rate (CBR). This policy has been very effective in controlling inflation.
As a result headline inflation has remained in single digits for most of the year averaging at about 6 per cent. This low inflation rate has enabled the Bank of Uganda to keep its CBR at 11.5 per cent and this has helped spur private credit growth and improve business and market confidence. The Shilling has been very stable throughout the year, and as result the government’s foreign exchange reserves have improved slightly and currently stand at about 4.3 months of import cover.
The writer is Country Senior Partner, PwC Uganda.