Monday June 2 2014

Tough budget lies ahead as demands rise

By Francis Kamulegeya

By the end of this month, the government would have presented to Parliament and the nation as a whole its revenue and expenditure plans for the financial year 2014/15. This will be the final year of the five year National Development Plan that was launched by the President in April 2010.

The NDP was the government’s blue print which contained a series of proposals that were intended to set Uganda on the path of becoming a middle income country. In this plan the government set out its medium term strategic direction, development priorities and implementation strategies.
The government’s long term ambition and strategy is to transform Uganda into a modern and prosperous country by the year 2040. This will be achieved through a series of six 5-year NDPs.

Therefore in analysing the government’s performance for this financial year, it is important to consider the original NDP targets set in April 2010 and assess how we have performed against these targets as a nation, and what should be government’s key priorities and objectives for 2014/15 considering that this will be the last year of the five year NDP.

The NDP Score card
Let’s start with the good news. The government has done well with respect to maintaining macroeconomic stability. Inflation has remained low throughout the NDP period, apart from the spike we saw in 2011/12. The foreign exchange rate has remained fairly stable over the period, and foreign exchange reserves have also been within the government set target of at least 4 months of import cover.

Revenue collections have also increased by over 50% over the period, and as a result the government is funding nearly 70% of the national budget with resources from tax collections. The government has also done well with regards to social indicators.

For example people living below the poverty level have reduced to 22%, life expectancy has increased slightly to 54 years, and infant mortality has also reduced although it is still high by global standards.

Not so good
According to the NDP, the economy was projected to grow by an average of 7.2% per annum over the five year period. This was the growth that was required to ensure that the average annual earnings for every Ugandan increase from the Shs 800,000 which was the figure in 2010 to at least Shs 1.8 million by 2015. This growth in the economy has not been achieved.
According to the Budget Framework Paper, published by the Ministry of Finance in March this year, the economy has been growing at an average of only 5.8% per annum over the last four years.

We have also not done well with regards to growing our exports. The export earnings to GDP have remained flat, while the trade deficit has worsened as result of importing more than we export.

Despite the increase in domestic revenue collections, revenue as a percentage of GDP has also remained stagnant at 13%. This low growth on domestic revenue combined with the reduction in budget funding by the development partners has forced the government to borrow more from both the local and international markets. As a result the fiscal deficit excluding grants has worsened from -6.1% four years ago to -9.1% as of now.

Many demands but limited resources
Faced with the numerous demands such as increasing the salaries of the government teachers, accelerating infrastructure development, increased spending on national security and defence, the government is budgeting to spend Shs 14,317 trillion in financial year 2014/15.

This is an increase of about 10% compared with the approved budget for the current financial year. This will be funded predominantly by domestic revenue. According to the Budget Framework Paper 2014/15, the government expects to collect Shs 9,834 trillion in tax revenue, an increase of about 19% compared to what URA is expected to collect this financial year.

In order to achieve this, the Minister of Finance is expected to announce a number of new tax policy measures when she presents her budget to Parliament next month.

I will be sharing my sneak preview of what these tax measures will be in a series of articles from today up to budget day, as well as explaining what impact these new tax measures will have on both businesses and individuals.

The writer is Country Senior Partner, PwC Uganda.