Govt extravagance affecting shilling’s stability, says WB

What you need to know:

The shilling has since Friday lost by close to 10 per cent of its value.

The World Bank has said the shilling will continue to weaken if the government does not check its profligate expenditure on nonproductive sectors.

Mr Moustapha Ndiaye, the World Bank Uganda country manager, said during the recently concluded high level Joint Budget Support Development Partners meeting that Uganda can’t overcome the current volatilities in the exchange rate market and high food and commodity prices unless action is taken to lessen public spending in areas such as public administration.

Mr Ndiaye said although the 2010/2011 financial year was challenging for the country in terms of economic management, characterised by high inflation and currency depreciation, development partners were pleased to see that government had responded well.

The shilling which had gained against major trading currencies especially the dollar since the beginning of this year has lost close to 10 per cent of its value since Friday last week.

The loss in the shilling’s value has been hinged on the exit of offshore investors who have lost the appetite for government papers due to low yields.

This has been brought about by the central bank’s decision to cut its key lending rates – Central Bank Rate from 22 per cent in February to 21 per cent in March.

Yesterday, the local unit was quoted at a market average of Shs2,500, weaker than the Shs2,363 on Friday last week.

Experts attribute the depreciation to the CBR movements that has seen interest on T-Bills and Bonds drop, forcing offshore investors to cut risk on investment.

The high level meeting sought to assess the government’s performance as regards to budget support provided by development partners including; the World Bank, the European Union and the governments of Austria, Belgium, Denmark, Germany (KfW) and Ireland among others.

Ms Jane Rintoul, the co-chair of the JBS DPs and head of DFID in Uganda said as budget support partners, it is important to demonstrate that the funding they provide through the budget is making a positive change to public services and to the citizens who depend on them.

Donors also advised that the government should ensure that public spending has a positive effect on economic growth and poverty reduction and that it should ensure prudent macroeconomic policy management including consistent monetary and fiscal policies.

They also urged the government to step up domestic revenue mobilisation through tax policy reforms, including reducing the extensive set of tax exemptions and re-balance budget priorities to put the country on a sustainable growth path.

Although the joint budget support partners have been contributing about $300 million per annum or 10 per cent to Uganda’s national budget over the years, it said the proportion of budget support is likely to reduce in the coming year based on the recently concluded third annual joint assessment which highlighted poor budget credibility and discipline in 2011 and low releases to some key service delivery functions such as health, water and environment and education.