How ambitious revenue collection target will cost you

The mismatch between the projected revenues and the national budget is a grim indicator laced with blind ambition at a time when prudence, frugality and caution should be applied.   

In an interview with policy specialists, economic analysts and national budget experts, it became pretty clear that the government’s budget for the next financial year, barely a month away, is also overly ambitious, with the director MUBS Economic Forum and a senior lecturer in Department of Economics, Dr Fred Muhumuza, urging the government to review the revenue collection targets downwards. 

As for the various economic sector players, majority of whom fall under the micro, small and medium enterprise (MSMES) sector – the biggest victim of the Covid-19 pandemic, the government’s overly ambitious revenue projections for the coming financial year speak to the dim lenses by which the country’s economic managers and the executive arm of government see through the reality of things.        
This is because the economic environment largely remains somewhat unchartered, with many sector players spoken to preferring to focus on rebuilding their businesses rather than being hunted down for revenue purposes compounded by the inflationary pressures resulting from the ongoing Russia - Ukraine conflict.     

The national budget
After several revisions by the executive arm of the government, Parliament finally approved the national budget for the Financial Year (FY) 2023/24 amounting to a total of Shs52.7 trillion, representing a 16 per cent increase in the last three years from Shs45.5 trillion in 2020/21.  This increase is a result of a projected increase in domestic resource mobilisation from Shs25.5 trillion in FY 2022/2023 to Shs29.6 trillion next financial year.

Further explaining the revision is the increase in external borrowing, from Shs6.7 trillion this financial year to Shs8.2 trillion next financial year.  The increase in domestic refinancing (Rollover), from Shs8.01 trillion in FY 2022/23  to Shs8.36 trillion in FY 2023/2024 and the increase in Local Government revenue by Shs44.6 billion from Shs 238.5 billion in FY 2022/2023 to Shs287.1 billion were the justification by the Finance Ministry for the amplified national budget.
 
Despite an increase in tax revenue collections of Shs21 trillion in Financial Year 2021/22 from Shs14.4 trillion in FY 2017/18, which is slightly over 45 per cent growth, the national tax collector – the Uganda Revenue Authority (URA), has consistently not hit its tax revenue collection targets over the past five financial years.

A quick look at the URA’s first half year performance, indicates a cumulative collections for the six months of the Financial Year 2022/23 amounting to Shs11.6 trillion against a projection of Shs11.7 trillion, registering a deficit of Shs94.8 billion. The shortage is an equivalent of nearly five times the budget of Uganda National Bureau of Standards, the country’s standards body.  

Looking at how lackluster many if not most Ministries, Departments and Agencies (MDA) 0f government go about handling public affairs, an analysis by Civil Society Organisations under their umbrella, the Civil Society Budget Advocacy Group (CSBAG), notes that it will take what it describes as “successful implementation of this Financial Year 2023/24 budget” and anything short of that will translate into abysmal performance of the national budget. 

Another expert analysis by the Uganda Debt Network, indicates that although the increased budget is likely to have a positive impact on the economy, it could also be a challenge for the population, given the higher allocations for external financing and treasury operations.

This could see the government become more reliant on external sources of finance in the wake of threats of withdrawal of donor support/funding, thanks to President Museveni signing the anti-gay Bill into law (Anti-homosexuality Act 2023). 

“This could lead to a weakening of the Ugandan shilling and an increase in inflation. Furthermore, with increased social protection and health allocations, citizens may be subject to higher taxes or fees to fund these programmes.

“Therefore, citizens must be mindful of these possible challenges associated with the increased national budget,” reads the UDN analysis.  

Challenges of revised budget 
The elephant in the room is still in the form and shape of public debt. The country’s public debt stock has significantly increased from Shs30.9 trillion in FY 2018/19 to Shs86.6 trillion in FY 2023/24. representing a 180 per cent growth, of which domestic debt was Shs38.1 trillion and external Shs48.5 trillion. 

A re-computation of Uganda’s debt to GDP revealed consistence in growth over the period of five years from 31 per cent in June 2017 to 52 per cent in June 20224, according to the analysis presented by CSBAG executive director, Mr Julius Mukunda. 
Whereas 75 per cent of the current external debt is concessional and the balance non-concessional, by the end of December last year, the non-concessional debt had increased from 21 per cent recorded in June 2022 to 25 per cent. This is problematic because this kind of debt is more expensive in terms of interests compared to concessional loans.  

 Auditor General’s report 2022 reveals that the proportion of domestic revenue that goes into servicing debt has been overwhelmingly breeched.  Between 25-30 per cent of the revenue being collected domestically is going into servicing debt against a benchmark of less than 12.5 per cent. 

“This cripples government’s capacity to deliver services such as the deteriorated state of roads in Kampala and other parts of the country. It should also be noted that government in the last financial year used commercial loans to a tune of Shs4.5 trillion for recurrent expenditure –wage and administration,” says Mr Mukunda, policy and budget analyst.   
Also, domestic arrears have increased from Shs4.6 trillion in 2021 to Shs7.5 trillion in 2022 (which is about 62 per cent increase) despite the existence of the strategy to clear and prevent domestic arrears. 

For the next financial year government has allocated only Shs205 billion for domestic arrears, implying the private sector are in for another financial year of “rude reawakening”, demonstrating a failure in government’s controls system. 

“We demand that government enforces fiscal disciplinary by reprimanding errant accounting officers and at the same time set aside adequate resources in the domestic arrears budget to clear the current stock of domestic arrears over the medium term,” reads the CSBAG analysis.  

It further emerged that continued approval of supplementary budgets without a corresponding increase in revenue/financing, leads to increased funding gap that affects the earlier budget objectives and plans. Increased supplementary budgets can have negative consequences such as an increased public debt burden, fiscal imbalances resulting from inadequate revenue increases or inefficient resource reallocation, inflationary pressure due to financing through money creation or excessive borrowing.

This, according to CSBAG report, crowds out private investment, raises interest rates, reduces investor confidence stemming from excessive reliance on supplementary budgets and frequent adjustments, and unsustainable fiscal practices indicating underlying mismanagement, leading to chronic fiscal instability and economic uncertainty. 

Untapped revenue 
The biggest irony, according to the food and agriculture policy specialist, Ms Agnes Kirabo, is the persistent tendency by government to “starve rather than feed the cow that can produce the most milk”.  
The Agriculture sector, she says, is one such economic sector that does not get proper attention despite its massive potential to finance the entire budget while providing for the entire population a livelihood.  Food security and productivity concerns continue to fall on deaf ears, warning that the country should brace for food insecurity that she said is just around the corner.    

The other sector whose potential is not properly being tapped is manufacturing. With a budget cut of Shs235 million, it doesn’t reflect well at a time when import substitution is the government’s mantra. 

Further, the manufacturing programme is one of the cores of NDP III which aims at increasing the product range and scale for import substitution and improved terms of trade. The NDP III – the government development blueprint, also notes that there is considerable under-investment in manufacturing industry, which is the ultimate driver of the socio-economic transformation. 

The NDP III midterm review notes that Poverty levels have stagnated to levels of 21 percent accompanied by lower growth. The Covid-19 pandemic and its aftereffects also worsened the levels of poverty. To reverse this trend, it recommends investment in human development and productive programmes such as agro-industrialisation and manufacturing for the remaining two years of the plan. 

Illicit Financial flows 
According to the Ministry of Finance Permanent Secretary and Secretary to Treasury (PSST),  Mr Ramathan Ggoobi, huge revenue collected is not reaching the national treasury, estimating that VAT alone, in the range of between Shs3 to Shs5 trillion is lost to illicit financial flows alone. 

When contacted, the deputy executive director, Environmental Democracy Advocates Coalition for Development and Environment (ACODE), Mr Onesmus Mugyenyi, said: “The problem is corruption in revenue assessment and collection leading to evasion and paying less than what is due. This is in addition to companies that are not paying taxes due to political connections and impunity.” 
He continued: “Closing revenue leakages in the mining sector could help in enhancing domestic revenues which are being lost.” 
But that, he says, should begin with solving data discrepancies in exports which fictitiously indicate loss of revenues. There are also discrepancies in data relating to mineral volumes extracted and reported by different agencies. 

“This shows that there are undeclared volumes which leave the country and the revenue body with uncollected taxes.”
Reviewing tax exemptions provided to companies is another way to sort out undeserving players, closing revenue loopholes. World Bank studies show that tax exemptions do not attract foreign direct investment.