Thursday June 11 2015

Is the economy big enough to bankroll Shs24 trillion Budget?

Finance Minister Matia Kasaija makes a presentation

Finance Minister Matia Kasaija 

By Mark Keith Muhumuza

Kampala-Two days to the passing of the 2015/16 National Budget, Parliament was thrown into a frenzy. Legislators had spent the better part of April and May sifting through pages of Ministerial Policy Statements, Budget Estimates, Income Tax Amendments and other tax policies.

Two days to the end of the process, Mr Keith Muhakanizi, the Secretary to the Treasury, wrote to Parliament, saying the Budget was to expand to Shs24 trillion from Shs18 trillion.

Despite their many complaints, MPs did not have enough time to look at the changes thoroughly and as dictated by the Public Finance Management Act, 2015, they had to pass the Budget by May 31. On May 30, there was an unusual sitting that eventually passed the Budget.

Every financial year, the Budget increases with the rise in government expenditure. In the last two financial years, the Budget has gone up by at least between Shs2 trillion and Shs3 trillion. In the coming financial year, it will almost double, to Shs9 trillion, an increase of about 60 per cent.

The “new budget cycle” confusion
When the proposed Shs24 trillion was tabled in Parliament, Finance state minister David Bahati laboured to explain the source of the funding.
Mr Bahati told MPs that the additional Shs4.7 trillion would be used to “redeem government securities.”

The source of the financing, however, remained unexplained as he appeared before the finance committee.

Mr Geoffrey Ekanya, the shadow minister for finance, noted that government is planning to issue new debt to finance its activities.

But that would not be the case. Instead, Mr Muhakanizi pointed out that the additional Shs4.7 trillion was “a mere book entry in compliance with the Public Finance Management Act 2015.”

Section 30 (i) of the Public Finance Management Act states that all revenues or other money raised or received for the purpose of government shall be paid into and shall form part of the Consolidated Fund.

The Shs4.5 trillion carried forward as mostly domestic debt is being transferred from the Bank of Uganda to the Consolidated Fund, the first time this has happened, and is the largest contributor to the budget surge.

Being an election year, all eyes were on Mr Matia Kasaija, the Finance minister, for signals on any unusual expenditure.

The Civil Society Budget Advocacy Group has already raised the red flag on how government would raise revenue yet the budget had expanded rapidly.

Daily Monitor has learnt that the World Bank and International Monetary Fund (IMF) were also initially worried about the Shs4.5 trillion addition to the Budget.

Is URA funding enough?
In the next financial year, the Uganda Revenue Authority (URA) is expected to contribute at least Shs11.182 trillion, up from Shs9.5 trillion in 2014/15, representing revenue expansion of 17.7 per cent.

The URA contribution will be less than 50 per cent of the Shs24 trillion Budget. In the last four years, URA’s budget financing has been above the 62 per cent mark.

Just like the paper entry for the additional expansion of the budget, the percentage of revenue collection to the actual expenditure – Shs18 trillion – will be above 60 per cent.

New tax measures are expected to generate about Shs500 billion. They include hikes in excise duty on commercial vehicles, environmental levy on importing cars older than eight years from the date of manufacture, passport fees, excise duty on fuel and visa fees among others.
The tax body is projecting better economic performance, which will also translate into higher tax revenue for the government.

Third year of domestic borrowing
For the third consecutive year, government will be borrowing to finance a deficit. In the Financial Year 2013/14, government opted to start borrowing from the domestic market to finance the fiscal budget shortfall.

By end of the current financial year, government will have borrowed Shs1.5 trillion.

The projection for 2015/16 is to stay within the target of Shs1.5 trillion. In the current financial year, government has not borrowed from the domestic market to finance a supplementary budget unlike in 2013/14 where government borrowed Shs700b to finance, among others, the mission in South Sudan.

Dr Fred Muhumuza, a former adviser to former Finance minister Maria Kiwanuka, has voiced his concerns against domestic borrowing, saying it affects private sector lending and interest payments.

Already, interest rates for lending to the private sector have gone high as it becomes more lucrative for commercial banks to lend to government.

External debt
External debt in the next financial year is expected to surge after a relative lull in large scale borrowing in four years. In 2015/16, external borrowing is expected to more than double by 181 per cent to Shs4.5 trillion. The bulk, about Shs4.2 trillion, is from the Chinese Export and Import Bank (EXIM), meant for the construction of the 600MW Karuma Dam.

The balance, according to ministry of Finance officials, is for energy-related projects and the completion of the compensation of people who are in the 29,000 square kilometres of land meant for the oil refinery.

In the last four financial years, external debt has not exceeded Shs2 trillion. In 2013, the IMF noted that Uganda’s external borrowing was set to increase as donors’ budget support declines.
“Without budget support loans, government will count on improved revenue collections and turn to domestically issued securities and non-concessional external borrowing to provide the financing necessary to support their ambitious fiscal programme,” the IMF wrote in its review of Uganda’s economy in 2013.

It is no wonder that in 2014, the IMF approved Uganda’s request to change the external borrowing limit from $1.5b to $2.2b for the country to finance the Budget deficit.

The ambitious fiscal programme includes road construction, building of the oil refinery, Standard Gauge Railway, Entebbe International Airport expansion and hydro power projects, among others.

“Don’t get worried about the external debt. You should instead be worried about what it will do.

Even if government is borrowing heavily, we are still below 50 per cent of GDP, which is still manageable. If you are borrowing to have the standard gauge railway, roads and electricity, the assumption is that this will boost production,” says Prof Augustus Nuwagaba, a managing consultant at Reev Consult. He is also a consultant with the ministry of Finance.

The projected trend is that as long as Uganda continues to pursue large scale infrastructure projects, then external borrowing will continue to rise.

Works, energy, health and security continue to be the dominant sectors of the Budget, each taking more than a trillion. President Museveni, in his State of Nation addresses in the last four years, has justified more expenditure on these sectors, saying they boost production.

Source of funding for the budget

Shs4.787 trillion on the Consolidated Fund will be used to redeem government securities. A total of Shs359.96 billion is to be raised through the above means.

Of this, Shs105.3 billion will be from the reduction of interest rates resulting from reduced external debt and through Uganda Revenue Authority’s enhanced tax administration.

Shs359.96 billion to be raised through borrowing
Shs105.3 billion will be from the reduction of interest rates resulting from reduced external debt External financing will account for Shs100.26 billion, which will be spent on, among others, the Northern Uganda Social Action Plan Phase II and the feasibility study for the Standard Gauge Railway and the Inspectorate of Government.

Shs42 billion will be for the Karuma and the Isimba hydropower plants insurance and management fees, Shs150 billion counterpart funding for taxes and Shs110b for the Standard Gauge Railway.