As government prepares the budget for the next financial year, it will need to appropriate funds to the most productive sectors of the economy placed in a chokehold by the Covid-19 pandemic.
With soaring unemployment, foreclosures on property later sold at the fall of the hammer and the collapse of small-and-medium enterprises (SMEs), government will need to craft a budget that can resuscitate ailing businesses.
But as government seeks to plug a budget deficit driven by falling tax collections and provide funds in empty escrow accounts that are used to service rising interest on debt, Daily Monitor newspaper has learnt that government plans to table a supplementary budget worth Shs700b in Parliament early next week.
In a March 11 letter from the Finance minister Matia Kasaija and copied to the Speaker of Parliament, the Uganda National Oil Company (UNOC) is seeking Shs481b ‘to facilitate the company to sign off investment decisions on projects under oil and gas-related to the oil refinery and pipeline that necessitated preparation of supplementary schedule 5.’
The other items on the supplementary budget are a Shs28b State House vote, Shs101b for the Uganda National Roads Authority (Unra). The funds if approved will plug wage shortfalls for various central and local government, which has a Shs69b vote and the Finance ministry will receive Shs2.6b.
But economists are warning that this could distort the budget processing and could create a culture of ‘retrospective accountability’ where funds are spent and government reverts to Parliament to rubber-stamp the approval.
“It is important that you are disciplined and that’s what the Public Finance Management Act (PFMA) sought to cure, how do we ensure that we are disciplined? A budget is as good as your ability to stick to it,” Mr John Walugembe, an economist, argues.
Mr Walugembe says there are times when it is inevitable to seek a supplementary but ‘sometimes asking for supplementary budgets is an indictment on the process itself through which the budget is developed, it could mean that the process is not consultative enough and therefore its not able to sufficiently foresee what government will need to spend on.’
Mr Abubaker Mayanja, another economist, says supplementary budgets can take away money from productive to non-productive sectors.
This comes at the time when there is a spike in government’s borrowing from commercial banks.
In March, the Auditor General, Mr John Muwanga, warned government to step back from heavily borrowing from commercial banks, saying it presents a risk to growth and access to private sector credit.
In a report for the period ended June 2020, the Auditor General indicated that government’s non-concessional loans borrowed from commercial banks had spiked over the past three-years, growing from just Shs192.6b in the 2017/2018 Financial Year to Shs2.8 trillion for the period ended June 2020.
“We are borrowing domestically and we are crowding out the private sector. It means small businesses find it harder to borrow, they are risky. Ultimately government is sabotaging its long-term goal of generating sufficient domestic revenue,” Mr Walugembe argues.
“It also impacts on how government is able to collect its own taxes, the other secondary effect that is related with the first is the issue of liquidity within businesses,” he said.
Fitch’s credit rating for Uganda was last reported at B+ with negative outlook. In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of a country thus having a big impact on the country’s borrowing costs.
It is what analysts fear is driving the government to borrow less from Bretton Woods institutions such as the World Bank by resorting to local commercial banks.
“After Covid-19, growth has slowed down by more than 50 per cent from an average of 6 per cent to 3 per cent. The risks are for example more than 33 per cent going into debt repayment as borrowing has grown by $ 2b and when you look at domestic revenue of about Shs25 trillion, it leaves you wondering whether we are approaching a fiscal cliff,” Mr Abubakar Mayanja, an economist, warns.
Largely two school of thoughts are emerging with how countries with the Covid-19 economic slump. One of them involves offering a stimuli to propel aggregate demand.
For low developed countries like Uganda, which have a constrained fiscal space, they have struggled to offer a comprehensive stimulus package to drive aggregate demand, a Keynesian rule of thumb largely adopted in Western countries like America, which is directly placing funds in the hands of families.
“That’s why in the US they are writing cheques, expenditure is the engine of the economy,” Mr Walugembe argues.
“There is one [school of thought] that says government’s role is to regulate ----the challenge is how do you rein in capitalistic kind of tendencies, this is the kind of school of thought that tends to go for austerity, there is another school of thought that focuses on government spending during times of crisis, in fact this school of thought is more widely accepted but it matters on what you spend but in our context we seem to be spending on the wrong things,” Mr Walugembe argues.
Government continues to create new districts and cities and a growing bureaucracy, which has led to soaring public administration costs. Largely anchored on the clientele-patronage politics, the policy of creating new administrative units has faced flak from policy wonks keen on running a lean government.
Mr Mayanja, who is an advocate of fiscal discipline and lean governments, argues: “Bloated government takes away money for productive infrastructure and the fiscal room to create an enabling tax environment to grow the demand side. On the contrary, if your expenditure is going to bureaucracies, it takes away the freedom to make the investments you have made in developing the processing sector, which is absolutely necessary to backstop the investments you are making in the rural economy.”
“You need to invest in the productive sectors of the economy through which money will get to businesses and households. The cost of public administration is rising, in time of crisis we need to save this money and plough it back into other sectors that will kick-start the economy and create jobs, this should be coupled with austerity for non-essential expenditure,” Mr Walugembe argues.
Mr Mayanja reveals that government can create fiscal room by reining in on government expenditure and limiting borrowing.
“The debt to tax revenue ratio and debt to GDP ratio are about to hit the ceiling,” he argues.
In the budget framework paper for the next financial year, which has been prepared by the Finance ministry, government plans to create fiscal room by enforcing better macro-management. But beyond the text in the policy document, how will government offer pragmatism to improve macro-management?
As a method of recovering from the slump, government has committed to clear outstanding domestic arrears of nearly Shs600b owed to local investors to revive the manufacturing sector and hence improve tax collection. Uganda has one of the lowest tax-to-GDP ratios in the region.
As a way out of this rut, Mr Mayanja recommends tax policies that encourage SMEs to grow and become more formal.
“I have seen places where the tax tiers or corporate tax changes are in sync with gross revenues, you can qualify for lower tax rates if you have $100,000 to allow you to expand and that kind of policy can make us create medium enterprises out of small enterprises,” Mr Mayanja opines.
In March, the International Monetary Fund highlighted the example of Georgia, which was able to enforce sweeping reforms to improve its tax-to-GDP ratio.
Among the progressive reforms, the country adopted a revised tax code, which simplified the tax system, rates were reduced, and local taxes that were generating little revenue were phased out.
Progressive personal income tax rates were replaced with a flat rate of 20 per cent, and the social security contribution tax rate was first reduced from 33 per cent to 20 per cent and then eliminated altogether. Corporate income was taxed at a flat rate of 15 per cent, and the value-added tax (VAT) was reduced from 20 per cent to 18 per cent.
The revenue lost from lower tax rates was made up through a broader tax base, better compliance, and stricter enforcement. URA has of recent adopted stringent enforcement methods and tried to halt leakages by introducing the Electronic Fiscal Receipting and Invoicing Solution.
“This makes a strong assumption that people are not paying what they should be paying,” Mr Walugembe argues, who is an exponent of a broadened tax base.
“You can use the carrot which is the incentive or you can use the stick which is enforcement, but ultimately we must ensure that our tax rates are low enough to de-incentivise anyone who wants to dodge tax, at the moment our tax rates are rising every other year, and that’s the problem you can’t broaden the tax base that way,” Mr Walugembe opines.
Mr Mayanja says government should desist from enforcing taxes that are retrogressive and create an imbalance.
“Most of the output from the rural areas has to be consumed in urban centres for the economic system to be complete in order not to have an imbalance. So when you create a system where the tax is going to be mainly incidental on urban areas without necessary fiscal initiatives to create room for SMEs to grow, then that creates a bigger risk to the economy.”
Mr Mayanja suggests that government should offer tax incentives to SMEs to spur growth that will automatically transform the rural backwaters that supply agro-products to urban dwellers.
The Covid-19 pandemic has amplified the digital economy but restrictive taxes on data seem to have knocked the sting out of relying on this versatile space.
Mr Mayanja proffers that cyberspace offers a value chain linked to the global market, which is placed at the doorstep.
“The youth in urban areas and SMEs are relying on these global platforms and digital platforms to integrate in the global economy which will have a knock-on effect on the service exports, but when you put tax on data and these digital platforms then its creates limitation, if you look at the top 10 countries at NYSE [in the past] they were brick and mortar companies now they are tech companies,” he says.
Mr Walugembe adds that: “We have many young people educated and they are not going to work in the agriculture space, so government needs to look at the service space and look at how do we support the young people to create an enabling environment. Government needs to make it easier, it needs to reduce taxes, some of the measures are self-defeating about 12 per cent of data, we have high youth unemployment.”
They may be no specific economic antidotes to uplift Uganda’s wobbly economy but a number of measures enforced by an austere bureaucracy that favours fiscal discipline in the place of wasteful expenditure could be the saving grace.