Broke Uganda may bank on foreigners to fill funding gaps

Private and public sources will be required to finance large and growing investment needs for government to realise its goals from programme based budgeting.

These sources should be viewed as complements, not substitutes, since private financing is insufficient in key areas of sustainable development.

As the government grapples with Covid-19 shocks, a Development Initiative report says government will bank on external sources in the short run to meet the required finances for its Covid-19 response, service delivery and development financing in the next four financial years.

The report also recommends that Uganda must urgently increase its domestic revenue collection capacity and improve fiscal management to slow down the current debt stock growth.

Senior analyst at Development Initiative, Mr Moses Owori told Daily Monitor that the current financial needs to mitigate the impact of Covid-19 would push government to borrow from the multilateral institutions such as the World Bank, International Monetary Fund, and the African Development among others. This is so because these institutions lend money on concessional basis which is cheap and does not require interest payments on the loans.

Mr Owori said currently, interest payments are taking a huge chunk of the budget because some of the borrowed funds are expensive since they use open market interest rate.

“Borrowing should be the last resort for the government in this current situation because Uganda’s public debt has increased to 50 per cent of the Gross Domestic Product (GDP) in the last financial year, which is high due to increased borrowing for fiscal operations. However, given the revenue shortfall it is inevitable for the government to borrow externally,” he said.

However, Mr Owori said the there is need for strict accountability for the borrowed funds while ensuring that the funds are used for the intended purpose. Unfortunately, there have been corruption incidences in development projects which the money has been borrowed for.

Besides borrowing externally, the government also borrows domestically using the Treasury Bonds and Bills for fiscal policy operations.

Mr Owori said domestic borrowing crowds out the private sector since the banks are also participating in government securities being issued in the market.

He suggested that from the policy perspective, there is need for strengthening domestic revenue mobilisation and improve tax administration policy because it will enable the government to realised increase in domestic revenue collection.

Among the key findings in the report are that there has been minimal change in the trend of Uganda’s budgeting and domestic resource allocation to various sectors to improve targeting of allocations towards the people living in poverty and communities most in need during Covid-19.

Covid-19 has severely affected Uganda’s economy with major shortfalls registered in domestic revenue collection and that the government may, in the immediate term, needs to depend more on external sources to meet critical funding gaps in service provision for people living in poverty, while developing long-term financing solutions grounded in improved domestic resource mobilisation.

Revenue shortfall

The report reveals that the period during Covid-19 saw a significant shortfall in tax revenue for FY2019/20, Shs3.592 trillion (18 per cent) less than the government’s target for the same year, which was not the case before Covid-19, in fact a surplus revenue was collected in FY2018/19 before the pandemic.

The report reveals that revenue collection shortfall of Shs3.952 trillion in FY2019/20 presents a major challenge for the government’s development and service delivery plans, which are pegged on increasing capacity for domestic revenue collection.

“Gaps in revenue collection associated with Covid-19 mean that the government will have to look more at external sources to meet the required funding in the short-term response to Covid-19, service delivery and development financing. Moreover, shortfalls in tax revenues may translate directly into increased borrowing, and risk of increased debt distress,” the report states.

The report further states that in the medium-to-long term, the budget deficit should be narrowed by improved productivity and expanded sources of revenue that set the country on a path of accelerated economic growth.

In the short term, the report states that the wide gap in financing will require increased borrowing, which will plunge the country into a bigger public debt burden.

Ms Margaret Kakande,the head of Budget Monitoring and Accountability Unit at the Ministry of Finance,  told Prosper magazine that the Covid-19 pandemic has affected Uganda’s economy in terms of the growth rate / domestic revenue mobilisation.

The macroeconomic stability that was ushered in by the low level of inflation immediately translated into a rebound in Uganda’s real GDP growth rates in the past years although there was a hiccup in Uganda’s economic growth rate due to exogenous and domestic factors.  

Ms Kakande said that although there are several needs for the government to raise revenue to meet the financial needs that have been brought about the Covid-19 pandemic, government will not be raising money by increasing taxes across the board because businesses are struggling due to the pandemic.

Ms Kakande also stated that the government is not going to get resources by borrowing to raise the resources needed to meet the needs that have been exacerbated Covid-19 pandemic but it will operate within the little resources available.

“We are reducing our recurrent expenditure by reprioritising our expenditure framework to ensure that the little resource we have is best used where it is needed most. We are not going into borrowing because the government has reached the limit for borrowing externally,” she said.  

Nonetheless, a sound economic framework conducive to private sector investment is the cornerstone of Uganda’s growth strategy.

Outlook

Providing the fiscal outlook, the Bank of Uganda on August 12 said in the highlight of monetary policy report for August 2021 that the International Monetary Fund (IMF) $ 1billion Extended Credit Facility (ECF) programme is expected to support the implementation of the Third National Development Plan (NDPIII) to support post-Covid-19 recovery process.

“The Terms of the IMF loan emphasize fiscal consolidation over the medium-term as well as fiscal discipline. In this case, the ECF programme thus provides a much needed policy anchor going forward,” said the Bank of Uganda.

Recently, the IMF Board approved a new Special Drawing Rights allocation equivalent to $650 billion to help individual countries build reserve buffers, but with discretion over its utilisation should needs arise.