16 December 2012

Uganda: Anxiety As Aid Cuts Start to Bite

Analysts warn of dire consequences if gov't expenditure is not reduced

With the European Union also joining the bandwagon of donors that have suspended aid to Uganda over the corruption scandal in the Office of the Prime Minister, the stage is now set for a problematic 2013.

Experts warn that the donors' action would definitely affect the common man in addition to slowing the growth of the economy by 0.7%. While over the last 12 months, the Central Bank has literally taken the bull by the horns by bringing down the inflation rate from double digits to a single digit through its monetary policy instruments, the situation at hand now appears to be totally out of its control.

All that Emmanuel Tumusiime-Mutebile, the Bank of Uganda governor, could say at his monthly press briefing last week was to highlight the urgent need for the government to undertake fiscal measures by cutting expenditure in response to the donor aid cuts and the difficult global economic outlook.

Already, there are worries that inflationary pressures are creeping in once again with a reported spike in headline inflation in November - mostly driven by food prices, and energy, fuel and utilities (EFU), which rose to 7.5% and 13.8% compared to 4.4% and 12.8% respectively in October.

However, Godber Tumushabe, the Advocates Coalition for Development and Environment (ACODE) executive director, suggested that anyone with a hope that the government would cut its expenditure was day dreaming.

"The government will not cut the expenditure of State House or Parliament. It will cut on the budget for social services," he said, in reference to the rising cost of the Executive to the tax payer.

With the government expenditure not reducing, service delivery such as education, health and infrastructure as well as salaries for civil servants, would bear the brunt of the aid suspensions. Should the situation get worse, raising taxes to offset the deficit would be inevitable come the next budget due in the next six months.

Keith Muhakinizi, the deputy secretary to the Treasury, said suspending aid was equivalent to a Shs 600 billion budget cut. He added that this means the government has to cut its expenditure by Shs 600 billion through trimming allowances and travel expenses. He admitted that salaries could be delayed by "a week or two because we are cleaning the payrolls."

Corruption backlash

The EU suspension is a blow as the development partner has been a key partner for decades particularly in supporting priority sectors such as agriculture and rural development, infrastructure, private sector development, decentralization, law and order among others. In addition, the UK - another key partner- has a total direct financial package for this financial year which amounted to £26.9 million.

The UK has frozen the remaining £11.1m, which was due to be paid before the end of March. Roberto Ridolfi, the EU head of Delegation in Uganda, told an anti-corruption meeting of civil society activists last week that corruption has wider implications outside the country involved and for development partners.

"The electorate in our Member States scrutinize, more than ever, the way development funds are spent," Ridolfi said.

Tumushabe said because Uganda runs a large and inefficient government, aid money, which was supposed to procure drugs for health centres and hospitals, pay salaries and support free education had been suspended - which directly spelt difficult economic times.

"We will have an economic slowdown as a result of uncertainty by external lenders and internal investors, and the GDP growth will reduce," he said. Experts such as Lawrence Bategeka, an economic researcher at the Economic Policy Research Centre at Makerere University, are obviously worried. Bategeka said the government should target aid allocations to enhance production rather than consumption as provided for in the National Development Plan. He says only this would help to boost productivity.

The depreciating shilling against the major trading currencies and regional currencies should have been good news for exporters but the foreign investors are speculative, which has led to a high demand for foreign currency driven by imports for the festive season and repatriation of earnings by investors - all of which are a recipe for inflation in 2013.

Ridolfi described the recent corruption scandals and misappropriation of funds as a "breach of trust." Therefore all the Joint Budget Support Framework (JBSF) Development Partners (DPs), which include Austria, Belgium, Denmark, Germany, Ireland, Sweden, UK and the World Bank - would withhold pending budget support disbursements and any further commitments for an initial period of up to six months.

Though he sounded optimistic about the donors relenting on their stance, Muhakinizi told The Independent that the next two quarters would be difficult if aid remains suspended beyond April 2013.

"I am confident that they will release the funds by the next quarter. We will refund the stolen funds, put administrative measures in place, and prosecute [the offenders]," he said. He added that they would also strengthen the payment and transfer systems between Bank of Uganda, Ministry of Finance and the user accounts - weaknesses that the Auditor General blamed for the massive loss of funds.

Bategeka said there were no quick fixes for what he described as an "economic mess" and that Ugandans should pray that there are no natural disasters to exacerbate a bad situation. "We pray that the [weather] will favour us. Severe rains or crop failure would push up food prices, and drought would accelerate food-driven inflation," he said. "Apart from hardship, there will be nothing good to celebrate in 2013 if these two happen."

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