Heavy domestic arrears crowd 2018/19 budget

Kampala.

Government has provided Shs735b to settle domestic arrears for the 2018/19 financial year.
The figure has more than doubled from Shs364b in the 2017/18 financial year which illustrates the escalating problem of government’s wanton failure to clear domestic arrears.
“We are aware that our business people dealing with government still face challenges in getting paid after supplying contracted services,” Mr Matia Kasaija, the Finance minister, said during the 8th National Competitiveness Forum last month.
However, he said, government was “prioritising that (payment) in this new Budget and accounting officers must ensure prompt payment.”
Such is the state of Uganda that has not been helped by huge borrowing, which according to civil society, puts the economy in serious jeopardy and business failure.
“That [allocation] will not sufficiently salvage debt ridden businesses unless of course they are fully paid,” says Julius Mukunda, the Civil Society Budget Advocacy Group (CSBAG) executive director.
The current payment system, he argues, has failed to work and it would be sufficient that government adopts a new system of paying arrears.

Crowded out
The private sector, analysts argue, has largely been crowded out of the domestic credit space and finds itself boxed in a corner by expensive loans that have become impossible to service.
And because of this, according to Mr Gideon Badagawa, the Private sector Foundation Uganda executive director, it will take some time before public sector investment can stimulate private sector competitiveness.
“Settlement of domestic debts must be efficiently sorted and new contracts paid on time for growth to be evident,” he says.
Government will in 2018/19 spend about 8.3 per cent of the Budget, which translates to Shs2.6 trillion in interest payment, according to Dr Adam Mugume, the Bank of Uganda executive director.
The money will mainly service interest payment of public debt.
“As of December 31, 2017 out of this $10.24b, $ 6.9b was foreign debt and $3.35b (Shs12.9 trillion) domestic,” Dr Mugume says.
Many have argued that the borrowing is getting out of hand but Dr Mugume maintains Uganda is still safe.
However, he says: “The challenge, especially [in regard to] the foreign debt, is its sharp growth as it is projected to increase further.”
According to Dr Mugume, debt repayment is sensitive to economic growth and the exchange rate trajectory. “If for example, growth was to remain at around 5 per cent, which is the average economic growth for the last five years, and the exchange rate was to depreciated fast, the result would be high debt servicing relative to tax revenues,” he says
This, he says, results from the fact that Uganda’s economy largely depends on non-tradable sector, which means that exports have not grown as fast.
Ms Mira Clara, the IMF representative in Uganda, says that even if Uganda is borrowing to lay the foundation for future growth and development in the oil sector, public debt must be kept at a safe level lower than 50 per cent of GPD.
“Our understanding is that the authorities’ plan remains a reduction in the size of the deficit and the debt stock once the large projects have been completed. In this context, it is important to stick to the objectives to keep debt at safe levels,” she says.
However, in its bi-annual Uganda Economic Update, the World Bank advises Uganda to increase domestic resource mobilisation by enhancing the country’s tax administration system.
“Even if Uganda’s debt may still be sustainable. We argue that larger fiscal space can support efforts to raise resilience to risks and also help the country finance yet unfunded needs,” says Ms Rachel K. Sebudde, a senior economist at the World Bank.

Projections:

According to the Chief Executive Economic Outlook 2018, compiled by KPMG, growth projections have been and will continue to be worrying because of low regional growth, which is projected at just 2 per cent because of liquidity constraints, which according to Mr Edgar Isingoma, the KPMG country leader, will be needed to support growth. The survey covered more than 51 business leaders within East Africa, who showed reservation about the growth prospects.
“They [business leaders] were being realistic about the economic outlook due to delays in implementation of projects and political environment,” he says.
In Uganda the survey covered 10 business leaders in finance, insurance and manufacturing sectors, who were cognizant of economic recovery albeit at a slow pace.