Govt shortfall in revenue may require tax hikes, more borrowing - BoU

Bank of Uganda headquarters in Kampala, Uganda. PHOTO | MORGAN MBABAZI | NMG

What you need to know:

  • Last week government introduced a raft of new taxes to boost tax collections with the target of achieving an annual tax to gross domestic product ratio of 0.5 percent. 

Bank of Uganda (BoU) has warned that the private sector could be crowded out from the domestic credit market as government continues to register lower than planned tax revenues. 

The shortfall in tax revenues, the Central Bank says is also likely to push government into more domestic borrowing, which will result into tax hikes as government attempts to mobilise resources to finance budget deficits. 
Government largely borrows from the domestic market through treasury bills and bonds, but has recently borrowed directly from commercial banks, which creates competition for credit with the private sector. 

In details contained in the April Monetary Policy Statement, Bank of Uganda noted that a further increase in inflation may dampen household incomes, thus leading to reduced consumer spending, which has a negative return on tax revenues. 

“Shortfalls in tax revenue relative to targets may necessitate tax hikes or increased domestic financing, which could potentially crowd out private sector credit growth,” Bank of Uganda indicated. 
Government has been registering tax shortfalls due to a slowdown in economic growth resulting from the impact of Covid-19 and the Russia-Ukraine conflict. 
For instance, during the period ended January, domestic revenues amounted to Shs2.2 trillion, which was lower than the Shs2.3 trillion target. 
The collections further declined in February to Shs2.1 trillion, returning a shortfall of Shs148.1b against a Shs2.2 trillion target. 

The shortfall had come amid muted activity on new taxes, which government had said was intended to support recovery of the economy. Government had, until last month, not introduced new taxes since June 2021.   However, it has proposed a raft of new taxes and increased some existing ones, which analysts say will negatively impact prices of goods and services.   
Last week, government tabled before Parliament a raft of new tax proposals and increments on fuel, building materials, bottled mineral water, opaque beer and withholding tax on gains earned from the sale of land in cities and municipalities, sale of rental property and sale of shares of a private company.

The move seeks to boost tax collections with the target to achieve an annual 0.5 percent ratio of tax to gross domestic product. 
The taxes are also expected to support government’s revenue efforts, which are seeking to reduce shortfalls and domestic borrowing. 
Government’s domestic borrowing remains a challenge for private sector credit access in a market that has been facing several volatilities resulting from inflation. 
The Ministry of Finance Performance of the Economy report for February indicates that the loans advanced to the private sector reduced with the stock of shilling-denominated credit reducing to Shs15.1 trillion from Shs15.2 trillion, foreign-denominated loans reduced by 0.9 percent to Shs6.3 trillion from Shs6.4 trillion.