A  section of the Kampala Flyover.  Next financial year starting July 1, Finance Minister Matia Kasaija while delivering the Budget speech on June 15 said they will complete 16 national road projects including the Kampala Flyover.  PHOTO/Abubaker Lubowa


Fiscal consolidation: Can government really walk the talk?

What you need to know:

With public debt rising to Shs88.9 trillion, Uganda is increasingly getting into a debt trap due to persistent fiscal deficits driven by growth in foreign borrowing. So, can Uganda afford to live within her means with the Finance Minister’s promise to “limit non-concessional debt?"

Finally, the executive arm of government has woken up from a deep state of slumber after coming to terms with years of overzealous borrowing, some of which, according to President Yoweri Museveni, were clearly unwarranted.   
For the last 15 years, calls from several quarters including from organisations such as Uganda Debt Network (UDN), Civil Society Budget Advocacy Group (CSBAG) SEATINI Uganda and lately World Bank/IMF, have been calling upon the government of Uganda to tame its huge appetite for borrowing.  

Until last week on Thursday during the presentation of Budget Speech at Kololo Independence Grounds in Kampala, matters pertaining to the growing public debt seemed more of a footnote in the government’s agenda. 

Absa Bank chief finance officer Michael Segwaya (centre) and Uganda Revenue Authority's Commissioner domestic taxes Sarah M Chelangat during a panel discussion at the NTV-Absa Post-budget dialogue on June 16. PHOTO/Abubaker Lubowa

It appears as if the Shs52.7 trillion budget for the next financial year, is a real wake up call considering that out of that, a total of Shs17.1 trillion, translating to 32.4 per cent of the total budget, will be spent on debt repayment.
About Shs2.6 trillion will go towards external debt repayments, Shs6.1 trillion for interest payments, and Shs8.4 trillion for domestic debt refinancing. 

It emerged last week during the NTV and ABSA 2023/2024 post budget dialogue, that rising public debt is a major threat to the next financial year’s budget, just days away. 
“Although we are below regional peers like Rwanda and Kenya, our public debt as a percentage of GDP has risen sharply in the past decade, from 15 per cent in 2009/10 to 48 per cent today,” the Permanent Secretary and Secretary to the Treasury (PSST) told participants in attendance plus those watching live on NTV and following virtually.   

Ramathan  Ggoobi, the Permanent Secretary to the Treasury at the Finance Ministry speaks during the Absa-NTV Post-budget dialogue on Friday, June 16. PHOTO/ ABUBAKER LUBOWA

He continued: “An increasing share of the budget is therefore going towards debt service. The proportion of revenues spent on debt payment has increased from 22 per cent in Financial Year 2018/19 to 34 per cent in Financial Year 2022/2023. Additionally, Bank of Uganda’s Foreign Exchange Reserves have been recently strained by the high cost of servicing the large amount of external debt, although they are adequate and steady.”

A section of economists, public policy analysts and budget experts interviewed were of the view that should domestic arrears, unpaid compensation (PAPs) --- persons losing assets or use of resources as a direct result of the government projects, and court awards among other debts, be factored in the picture, the figure will be very different. 

With public debt consuming nearly 30 per cent of the locally collected revenue, delivery of the much-needed social services will have to give way until this is no longer an issue.  

According to Bank of Uganda director research, Dr Adam Mugume, debt servicing as a ratio of tax revenue currently exceeds 30 per cent, meaning for every shilling collected as tax, 30 cents go for debt servicing. This leaves a limited amount for expenditure geared towards service delivery. 

A government car in Kampala. The Finance Ministry in the next financial year will cut budgets from certain areas to reduce debt accumulation.  PHOTO/MICHAEL KAKUMIRIZI

The move to reduce external borrowing on non-concessional terms with immediate debt servicing and domestic borrowing at high domestic interest rates strikes a positive code for the budget, given that currently, external debt servicing will require about $1 billion per year in the next two to three years, according to Bank of Uganda data. 

This requires the Central Bank to purchase the same amount from the market, otherwise international reserves would be drained, something the Permanent Secretary to the Treasury at the Finance Ministry Ggoobi, pointed out that should be avoided like a plague in his presentation at the 2023/2024 NTV Absa post budget dialogue. 

Fiscal consolidation 
After waking up and smelling the coffee, right from the country’s chief executive officer’s high office – the presidency, the buzz word now being championed by Finance Ministry is fiscal consolidation.

Fiscal consolidation refers to the process of reducing government budget deficits and stabilizing or reducing public debt levels. It typically involves a combination of measures, such as cutting government spending, increasing taxes, and implementing structural reforms to improve economic growth. The feasibility of fiscal consolidation depends on various factors, including the country’s economic conditions, political dynamics, and policy choices.

In line with the policy, the government will now be limiting borrowing. Once it is proven necessary, President Museveni would be the last person to give the green light.

Economist Freed Muhumuza and Civil Society Budget Advocacy Group executive director Julius Mukunda listen to the discussion during the Absa-NTV Post-Budget dialogue on Friday. PHOTO/ ABUBAKER LUBOWA

“We are learning to live within our means,” Mr Ggoobi said while delivering his remarks during the 2023/2024 NTV and Absa post budget dialogue.   
He continued: “We have started to tame our incremental budget while ensuring the budget is more redistributive.” 
This is in addition to ensuring that everything we promise is paid for as planned in the budget.  
Importantly, Mr Ggoobi disclosed that the budget will be less accommodative to restore fiscal discipline, “and with it, budget credibility.”

According to him supplementary budgets have been reduced and will be controlled further. Going forward, the government will also reduce borrowing, particularly domestic borrowing which is crowding out the private sector, revealing that, “although it is easy to access, it is actually more expensive than external borrowing.”
For the second financial year running, tax revenues are being mobilised without either levying new taxes nor introducing new rates, particularly whose burden tends to fall on the same taxpayers. 

He revealed that the fourth review of the Extended Credit Facility (ECF) programme with the International Monetary Fund (IMF) has been concluded. The Extended Credit Facility provides medium-term financial assistance to low-income countries (LICs) with protracted balance of payment problems.

Cumulatively, the ECF fund has disbursed an equivalent of S$625 million out of the approximately $1 billion. This came after carrying out several reforms focused on prudent fiscal and monetary policies, enhanced social spending, improved revenue collection, safeguarding a resilient financial sector, and anti-corruption measures.
Government, according to Dr Ggoobi, is committed to increasing revenue collection to support economic growth and development without excessive borrowing. 

But total domestic revenue (tax) collections are still suffering shotrfalls. As of last month, it amounted to Shs21.7 trillion but it is projected to be Shs25.6 trillion by the close of this financial year, just days away.
Despite an increase in tax revenue collections of Shs21 trillion in Financial Year 2021/22 from Shs14.4 trillion FY 2017/18, which is slightly over 45 per cent growth, Uganda Revenue Authority (URA) has consistently been registering revenue deficits over the past five financial years, probably explaining why President Museveni thinks URA should double its effort in terms of not only increasing revenue collections but also widening the tax base. The fiscal deficit is estimated at 5.1 percent of GDP this financial year, lower than the 7.4 percent last financial year due to a reduction in both recurrent and development expenditure and increased grants. The fiscal deficit has been financed through domestic borrowing and external loans.  

A woman begs for money on the streets of Kampala. In the 2023/24 Budget, Shs17.1 trillion will be spent on debt repayment. PHOTO/Isaac Kasamani

Eyes on oil and gas revenue 
Going forward, the government is banking on the oil and gas sector to shore up its fiscal consolidation. The oil companies are making a $ 6.75 billion (Shs25 trillion) investment in four years to 2025 – when the oil tap will open. 
“In the next 25 years, we are projected to earn between $25 billion and $ 50billion after netting off the investment cost. Add to this the job opportunities, expanded tax base, and multiplier effect for the local businesses,” said Mr Ggoobi. 

He continued: “Our goal is to make the economy work for everyone – a farmer; a trader; a street vendor; a worker; a journalist; an industrialist; a banker and you and I,” Mr Ggoobi concluded.  

Fears and uncertainty 
Despite renewed optimism going forward, the next financial year starting on July 01, 2023, faces some risks, including low tax revenues. 
Currently, URA collections comprise only 14 per cent of Gross Domestic Product (GDP) while the average for Kenya and other peers stands at 18 per cent. This means there are few people shouldering the tax burden while the rest either evade, avoid or are simply unreachable although operating in the same economy. 
Government is seeking to focus on Domestic Revenue Mobilisation, better tax administration, including use of ICT to fight tax evasion.

This is in addition to rationalising tax exemptions to improve their effectiveness while increasing revenue and expanding the tax base. 
Uganda’s economic managers are losing sleep over imported price inflation due to ongoing uncertainty and evolving risks in the global economy. These risks which are being triggered by the Russian-Ukraine war, could threaten the budget. Coupled with implementation failure, policy incoherence, poor project performance, could all affect the efforts of achieving fiscal consolidation. 
Going forward, there will be a review of the entire project portfolio with a view of stopping the poorly performing ones, a recommendation that CSBAG executive director, Mr Julius Mukunda wholeheartedly endorses.
For long, CSBAG has been proposing that Ministry, Departments and Agencies of government that have failed to complete projects shouldn’t be provided additional or new funds until they are asked to account. If culpable, they should be shown the exit door. This, according to Mr Ggoobi, is what will exactly happen.