What you need to know:
Uganda’s economic growth has slumped from slightly more than 4 per cent to three per cent, with the agriculture sector which has always been the safety net looking to decline for the first time in the last two or so years. The economy cannot generate enough revenue as interest payments finally exceeded government spending on key economic sectors such as agriculture, health and education.
The 2022/23 National Budget comes at a time when the country’s economy is still trying to find its footing after nearly two years of lockdown aimed at curbing the spread of Covid-19 pandemic.
With inflation threatening to break the 5 per cent ceiling, the rising high prices of essential commodities including fuel will be ushering in the Shs45+ trillion Budget in an economic environment that by some indications—will suffer a revenue deficit.
The total resource envelope (national budget) for Financial Year (FY) 2022/2023 is projected to increase by 6 percent which is an additional Shs2.4 trillion. This is from Shs44.7 trillion in FY 2021/22 to Shs47.2 trillion in FY2022/23.
According to the revenue performance for the last three quarters (July 2021 to March 2022) Uganda Revenue Authority (URA) had a target of collecting slightly more than Shs16.5 trillion, representing 73 per cent of the annual revenue collection target of slightly more than Shs22.3 trillion. But instead, the taxman collected Shs15.4 trillion, representing 69 per cent of the annual target.
Even though this was a significant growth in revenue registered over the last three quarters compared to the same period in the FY 2020/21, the cumulative collection for the last three quarters of the FY was short of the target by slightly more than Shs1 trillion.
Further, the national budget will unfold at a time when the country’s economic growth has slumped from slightly more than 4 per cent to three per cent, with the agriculture sector which has always been the safety net looking to decline for the first time in the last two or so years.
So the economy cannot generate enough revenue as interest payments finally exceeded government spending on key economic sectors such as agriculture, health and education.
The large public debt stock constrains government’s ability and effectiveness to finance the implementation and management of policy initiatives as contained in the national budget. The Monetary Policy Bank of Uganda Report (Feb 2022) revealed that public debt increased from Shs69.7 trillion in June 2021 to Shs73.6 trillion in December 2021 indicating a 5.6 percent increase.
According to Uganda Debt Network, there is, however, a risk of public debt reaching unsustainable levels in future since the rising debt rate is higher than the rate of increment in GDP levels. And that is bad news for the national budget.
What is at stake?
Dr Adam Mugume, the executive director research at Bank of Uganda, noted that the FY2022/23 budget should be applauded because it focuses on industrialisation for inclusive growth while building on infrastructure development that started several years ago.
Dr Mugume also believes that the 2022/23 budget puts emphasis on fiscal consolidation, with fiscal deficit as a percentage of GDP projected to decline to about 5.1 per cent compared to 7.5 per cent in FY2021/22 and 9.1 per cent in FY2019/20.
In Dr Mugume’s analysis fiscal (revenue) consolidation is necessary to contain public debt at sustainable levels. However, the budget will have to negotiate several risks in the year.
According to Dr Mugume, the budget is premised on GDP growth of 6 per cent in an environment characterised by elevated uncertainty, largely stemming from the global economy.
In his analysis, he identified three known unknowns that the economy and national budget will have endure: first, the unknown duration of the Ukraine war and related sanctions, which have triggered a sharp rise in commodity prices.
Secondly, the evolution of the pandemic and whether another aggressive virus will emerge.
Third, the extent of tightening global financial conditions that is partly causing the shilling to weaken.
He said: “The inflation developments that are emerging due to a combination of these factors suggest that economic growth in FY2022/23 could soften, meaning that a GDP growth of 6 per cent may not be achieved.”
He continued: “This has implications on the budget: fiscal deficit and public debt could be much higher as interest payments on both domestic and external debt increase. Additionally, a lower growth also means revenue shortfall, which would require more debt if expenditure is to remain at Shs48.1 trillion.
“A budget of Shs48.1 trillion will need to be funded through a combination of borrowing and revenue mobilisation and this is complex when inflationary pressures are broadening, requiring monetary policy tightening.Rising prices ideally require intervention to ensure that vulnerable households are protected. But with a tight budget and the need to safeguard debt sustainability, this is delicate balancing, even when the situation could be temporary.”
As for economist and policy analyst Fred Muhumuza, the problem that is beyond the budget in many ways is the question of constrained economic activities which will certainly take a toll on revenue mobilisation (collection) efforts and consequently impact the budget.
For example, he said: “The tax on fuel that I use is not based on value. So, whether the pump price per litre increases as it is the case, the government will still be collecting the same amount per litre. But if I consume less litres because I cannot afford it, then the tax revenue will go down. And that is a bigger worry because of its implication on the budget.”
In his presentation at the BDO-Signum organised breakfast meeting last week, Dr Muhumuza was of the view that government’s role in the domestic market where it is currently refinancing Shs8 trillion is not helping the economy because there is no evidence that the domestic debt incurred through the government papers in form Treasury Bills and Bonds is returning dividends save for crowding out private sector which essentially undermines the foundation of economic progress that the government preaches.
The other problem with the debt especially if it doesn’t serve its purpose is that it undermines production. This results in scarcity of goods and services, triggering inflation. Worse still, given the scarcity, people resort to importing because the public debt didn’t achieve its purpose which is investing in productive areas of the economy or in sectors whose return on investment is pretty much decent and guaranteed.
And should the importing country get hit by inflation, then rest assured that those shocks will find their way to your door step—economy. This is the problem we are facing now. We cannot substitute even in a short term the things we are importing.
“As a result, the economy takes care of itself through high prices for the scarce goods or services. So inflation will always try to solve distortion within the economy although often time in an ugly way,” said Dr Muhumuza.
Speaking during the in the high-level conference titled, “Building Stronger Partnerships for Sustainable Financing in Uganda” at Kampala last week Ms Mukami Kariuki, the World Bank’s country manager, said increase in public debt puts a lot of pressure on government in form of servicing debt and interest payments which affects the resources available for the national budget. She said the rise in public debt leaves the government with limited fiscal space.
Given that the government needs revenue to operate, Mr John Jet Tugume, a tax expert argues that tax payers should brace for revenue enforcement because it is only through that measure that some revenue can be squeezed out of the lull economy.
“This time, the budget has tried to keep away from increasing taxes on many commodities because of the challenging prevailing economic situations. This makes sense. But remember it is a huge budget with high expectations. So government is looking at enhanced enforcement of existing laws to collect the revenue needed,” Mr Tusabe said during the BDO-Signum budget analysis meeting it held in Kampala last week.
When contacted, the Economic Policy Research Centre Research Fellow, Corti Paul Lakuma noted that although there is need to suppress the effects of Covid-19 induced shocks through spending, it should been done wisely lest another Pandora box is flung open.
He said: “Indeed, we are in a state where we need to increase public spending to contain the impacts of Covid-19. But common sense suggests that this would be inflationary and may hurt household spending capabilities.
“However, we should remember that the inflationary pressure we are experiencing is, largely, supply driven; and not demand driven. Therefore, easing interest rates will only address the short run inflationary pressure.”
He continued: “This suggests that the best solution to this problem is to deal with the supply shocks by creating a stock of petroleum products, and increasing the domestic production of cooking oil and soap.”
This is in addition to what he refers to as enhancement of production, productivity and consumption of essential items which in turn create jobs, and boost fiscal capabilities through taxation.
“The enhanced fiscal capabilities would provide the budget with more resources to spend on social and infrastructural project with large, but inclusive, multipliers,” he concluded.
In his speech during the Domestic Revenue Mobilisation for Development reflection held in Kampala last week, USAID Chief of Party, Mr Kieran Holmes was of the view that for the budget to fulfil its agenda, domestic revenue mobilisation must be top on the priority list.