Sometime in January, the minister of State for Finance is quoted to have said that Uganda Revenue Authority (URA) had failed to collect projected revenue because of failed Memorandum of Understanding with certain entities.
Therefore, the government was seeking a supplementary budget of $600m to cover up the shortfall.
The minister’s statement is a reflection of the perception that the government always has money and therefore all one has to do whenever confronted with budget challenges is to prepare a supplementary budget.
Supplementary budgets are remedies for oversights in preparation of the main budget and or funding for unforeseen circumstances such as the Covid-19 pandemic, floods and landslides and other occurrences of a similar nature.
To finance a supplementary budget, there are three options available to the Treasury: Internal budget adjustments; local or foreign borrowing; borrowing from the public through the central bank or outright borrowing from the central bank itself by overdrawing the Consolidated Fund.
It would appear the minister was looking at the last source of financing since he was reporting a shortfall in tax collections and not asking Parliament to borrow. Borrowing directly from the central bank occurs when the Treasury issues cheques on the Consolidated Fund against insufficient tax revenue. This amounts to printing of money /currency which is deemed inflationary and is discouraged by the International Monetary Fund or World Bank.
You recall a debate between Governor Suleiman Kiggundu and Finance Minister Crispus Kiyonga as to who was responsible for the excess liquidity that was ravaging the economy in late 1980s.
It is important to note that now, as opposed to the late 1980s, government accepts that spending through the Consolidated Fund is responsible for printing money that hurts the economy.
On the other hand, borrowing from the public through the Central Bank has become the main channel of budget financing in Uganda.
However, while this mode of borrowing may have reduced dependence on direct borrowing from the Central Bank, it has its flip effects.
Issuing treasury bills/bonds is a direct competition with the private sector for the funds available in commercial banks. It is this competition that is blamed for the high interest rates in the country.
Repurchase agreement (REPOs) are issued by the central bank as short-term measures for the government financing but passing as a tool for short term liquidity management. The REPO mode of borrowing, which has tended to become the norm other than the exception, is costly.
It is such interest costs that have come to haunt the Central Bank as its performance often ends in losses. It is these losses, which have accumulated over time, that have prompted the IMF to call for the recapitalisation of the bank.
Supplementary budgets in Uganda have become the norm other than the exception. The implication is that our budget processes are flawed hence producing unrealistic country budgets. This seems to be the case when it comes to the tax revenue expectations.
The expenditure budgets are drawn on the basis of expected tax collections by URA.
Consequently, when URA fails to meet the set collection targets and the government keeps on adding supplementary budgets. In the face of Covid-19, our budget for 2020/2021 of Shs45.5 trillion is bound to have a huge shortfall in revenue expectations.
The consequence of such a shortfall is that we are bound to witness more supplementary budgets, more losses at the central bank driven by interest on REPOs it issues to support government borrowing/spending and very high interest rates as government competes for funds in the open market.
The way forward is that our budgets be as realistic as possible. This means the government should reduce its tax revenue expectations.
Mr Turyahikayo is a concerned citizen.