Saturday August 2 2014

Domestic borrowing will lead us into more trouble

By Nathan Nandala Mafabi

Hardly two months have gone by since government announced a Shs15trillion 2014/15 Budget that now finds itself with a Shs2.7trillion deficit. Development partners insist that they can only fund selected projects within the Budget which they can easily monitor while government on the other hand wants them to contribute to the common basket. Faced with this hitch, government now wants to resort to domestic borrowing to curb the deficit. But have government bureaucrats considered the adverse effects of domestic borrowing?
Domestic borrowing is more expensive than external borrowing. How? When you sell the treasury bills, Stanbic bank will for instance buy these bills for their customers who are non Ugandans. These foreigners will then lend the money to Uganda at 17 per cent per annum. This is as opposed to direct external borrowing of 1 per cent per annum. This means that local people will pay more by 16 per cent as a result of domestic borrowing. Remember that banks would also love that government borrows domestically because this is money payable just after a year without the frustration of running after borrowers. If government borrows locally, then local investors will be regarded as high risk borrowers and given tough conditions for accessing loans.
Two scenarios will emerge; either people will fear to borrow and therefore not invest or they will borrow and fail to pay back the loans. Both scenarios can only stifle the economy and worsen the already bad poverty and unemployment levels in the country.
Parliament should thus first approve domestic borrowing by scrutiny as they do external borrowing before appropriation. This is provided for in our Constitution.
Overall, what is needed is sobriety while making fiscal and monetary decisions. For example, URA failed to hit the collection target last financial year and again this year they have increased the target. Where is the guarantee that they will hit the target this year?
In my view, if we can’t raise Shs15 trillion, government would rather cut the Budget. Moreover we can achieve the same results with a scaled down Budget if the resources are prudently used. For instance, why should we have the so called patriotic clubs under the President’s Office when this can be handled under the Ministry of Education? Ironically, it is this very government that abolished the teaching of political education in secondary schools only to bring it back as a project in the President’s Office! Must we allocate 6.5 per cent of the Budget to security when a whole Shs14 billion will be spent on purchase of tear gas and riot gear instead of addressing issues that hurt the local person? Where are our priorities?
Secondly, government needs to seriously address measures that plug the loopholes. Money is lost through inflated tax credits, tax incentives given to undeserving firms and tax evasions. Uganda loses Shs630 billion per year in tax evasions according to a report released by Danida in May this year. This same report recommends to governments among other things to; ensure that banks in the country know the true beneficial owner of any account opened in their financial institution; that Uganda should actively participate in the worldwide movement towards the automatic exchange of tax information as endorsed by the G20 and the OECD; and that government authorities should adopt and fully implement all of the Financial Action Task Force’s anti-money laundering recommendations. These are processes that need fast tracking and strengthening instead of going after the already burdened local person by imposing tax on kerosene and agricultural inputs.
Importantly, government should recover the trillions of shillings lost in corruption scandals. From 2012 to date, Uganda has lost more than Shs1 trillion through corruption in form of breach of contracts, compensations to firms, botched deals or government ministries. This money should be recovered to finance the Budget.
Finally, if we do not have the discipline to live within our means, we can only try to be disciplined and comply with the demands of World Bank, IMF, ADF, and/or BADEA whose lending interest rate is 0.5 per cent to 1 per cent. Creating short cuts through domestic borrowing can only make the already bad Ugandan economic situation worse!
Mr Mafabi is the chairman of Bugisu Cooperative Union and Member of Parliament for Budadiri West.