20 January 2013

Uganda: Donor Cash Refunds

Photo: IRIN
Women carrying cartons of oil to the distribution site at Oromi IDP camp, Kitgum District, northern Uganda, 18 May 2007.

Experts fear that the desperate move to please donors could boomerang into political fights, budget cuts and depreciation of shilling

The decision by the government to raid the Consolidated Fund to refund billions of donor money lost to corruption could negatively impact on the economy in the short term with most government funded projects expected to record funding cuts in the next few months.

Various donors late last year announced aid suspensions over massive corruption in the Office of the Prime Minister and the government is desperate to have the aid suspensions lifted as soon as possible as they severely affected investor confidence in Uganda hence causing a sharp decline in foreign currency inflows in recent months.

But while one or two donors wanted their stolen money to be refunded, their main demands of the others centred on ensuring that the culprits are punished in accordance with the law, the stolen money is recovered from the thieves and measures are put in place to ensure that such massive thefts do not happen again.

Instead, the government announced on Jan. 11 that it had started refunding the stolen money of up to Shs 38 bn, which was intended for funding post-war recovery and reconstruction in Northern Uganda under the Peace, Recovery and Development Programme (PRDP). The official announcement was made by Keith Muhakanizi, the deputy secretary to the Treasury at a well-publicised press briefing at the Finance ministry headquarters on Jan.11. He said the measure was intended to ensure that mutual relationships between the donors and the government resume.

Prior to the announcement, government had refunded Shs 14.2 bn to the Republic of Ireland as it worked out ways of refunding the cash for other donors including the UK, Sweden and Norway among others.

"We have the money," Muhakanizi stressed. "We are getting it from the government's Consolidated Fund."

Illegal withdrawal

But disinclination to get Parliamentary approval before raiding the Consolidated Fund as stipulated in the law is also opening up a new battle front between the Executive and Parliament, which could potentially worsen the already strained relationship between the two arms of the State.

A cross section of MPs, led by Western Youth MP Gerald Karuhanga, are already in arms saying the withdrawal of tax payers' money from the Consolidated Fund was "illegal" because the government did not get parliamentary approval.

Article 154 of the Constitution stipulates that no monies shall be withdrawn from the Consolidated Fund except to meet constitutional expenditure or where the withdrawal has been authorised by an Appropriation Act or a Supplementary Appropriation Act. The government is reportedly preparing a Supplementary Appropriation Bill, which it will table before Parliament when the MPs return from recess in early February. Karuhanga said he is mobilizing a bi-partisan coalition to fight it and defeat it.

Muhakanizi's denials that the government does not abuse the Consolidated Fund with impunity by bypassing Parliament left many journalists unconvinced. Almost every six months, the government tables supplementary budgets to satisfy the whims of those in power at the expense of the poor who cannot have social services due to budget cuts. Over a year ago, the government without Parliamentary approval forked out $740 million from the foreign exchange reserve to pay for six fighter jets from Russia.

Economic fears

As Muhakanizi defended the decision to refund the donor money by using taxpayers' money, economists, politicians and civil society organizations have expressed concern about the move, which they said was counterproductive.

"It doesn't make economic sense," Prof. Augustus Nuwagaba, an Economics professor at Makerere University, told the The Independent. He argued that instead of taking such a decision, the government should have expedited the court process to ensure that the culprits are dealt with under the law. "Once they are found guilty, their properties and assets should be seized to recover the money. Just work on the thieves and nothing else," he said. "Otherwise, such a decision appears to mean that everyone can steal under the assumption that the government would pay back on their behalf."

But most concern centred on the fact that withdrawing from the Consolidated Fund ideally means cutting expenditure on social services such as health, education, infrastructure and agriculture among others and that would mean a tough road ahead for the economy in the short term. Nuwagaba said the cuts on government's expenditure on projects would mean no medicine in hospitals etc, which meant making the poor suffer while the thieves enjoy their loot.

However, Lawrence Bategeka, the senior economist and research fellow at the Economic Policy Research Centre at Makerere University, reluctantly supported the government decision. "It is better to pay back the Shs 38bn instead of losing the Shs 700bn aid money that the donors withheld," he said, adding, "That is if the donors indeed suspended the aid due to corruption." But if there were other reasons, he said, then that is a different matter. Asked on whether the decision would hurt the economy in the short term, Bategeka said: "It will depend, if the donors respond immediately by giving back the aid then that won't be a big issue but if they don't then your argument is right. There is nothing we can do about that in the short term."

On expediting the prosecution of the "thieves" so that the stolen money can be recovered, Bategeka said court processes often take a long time. "You can't force the court to hurry and make a judgment. There is a process," he said.

But indeed, what the donors are interested in is seeing government confiscate and sell off assets belonging to the thieves so as to have the money paid back by them and not by the tax payers. Two, they want to see tangible efforts/measures put in place to ensure that such scandals don't happen again. Once those measures are fully implemented observers say, donor confidence could be restored.

It is not clear how the donors such as Republic of Ireland are going to respond after the money has been returned to them. But in any case for most of them, it would not make sense to demand that a mere Shs 38 billion be refunded then release Shs 700 billion. Whether it is going to be given back to Uganda or not, that needs time.

But press reports quoted The Republic of Ireland's Minister for Foreign Affairs Eamon Gilmore as saying that the four million Euros (Shs14.2bn) refunded to the country would be given back to Uganda to support health, education and HIV/Aids projects for which the aid was originally earmarked but it would not be channeled through the government. Ireland has, however, announced that the suspension of its bilateral aid to Uganda would remain in place until they are sure that controls have been put in place to prevent misappropriation of aid money from their taxpayers.

Stringent measures?

The corruption scandal in the OPM was particularly perturbing because it was pulled off over a period of time by a racket of officials from various institutions - including the OPM, Bank of Uganda, the Treasury and Accountant General's Office - who conspired to beat all the foolproof systems in place so as to steal billions of money. Muhakanizi said the government is putting in place "strict measures" to restore confidence in the financial management system.

He said the government was reviewing "weaknesses" in the system and that the Public Finance and Accountability Act would be amended to strengthen it. For instance, new procedures, according to Muhakanizi, are being put in place for the control of donor budget support disbursements within Bank of Uganda and the Treasury, whereby all flows of funds will first be remitted to the Consolidated Fund Appropriation Account before they are credited to spending entities' accounts.

It is not clear how long the whole process would take but all indications are that it would go on up to the end of the financial year. Muhakanizi added that all the dormant project accounts in Bank of Uganda have been closed by Bank of Uganda. Also, the government has widened the forensic investigations in government spending starting with the top six big sectors of energy, roads and works, education, health, agriculture, and water.

"The accounts that are no longer necessary are being closed in consultation with accounting officers of the respective votes," he said, adding that the officials involved in the OPM scandal had taken advantage of dormant accounts in Bank of Uganda to steal the money. However, the government has opened an account in Bank of Uganda on which it will deposit all the money recovered from the OPM culprits, while another account has been opened to receive recoveries from other departments and ministries - measure that he hoped the donors would respond to positively.

"We hope by June this year the donors will have resumed giving aid to us because of these measures," he said.

The Independent could not verify the veracity of all these developments and but if or not these new measures would win the confidence and trust of the donors and convince them to resume funding remains to be seen.

But the government still has to answer difficult questions, for instance why the majority of the culprits in the OPM scandal are yet to appear in court, while the court proceedings for the chief culprit Geoffrey Kazinda are not making any headway. Also, the probe by the Public Accounts Committee of Parliament is taking too long, and it could be several more months before the whole process is completed. Experts said very few donors if any, whose money was stolen in the scandal, are expected to re-open the taps until the whole process of punishing the culprits and recovering the money from them comes to a logical conclusion.

More economic woes

But as Ugandans await the donor response, Nuwagaba feared the next few months could be very difficult. He expressed worries about the local unit depreciating further against foreign currencies especially the US dollar. To make matters even worse, the withdrawal of the Shs 38 bn would weaken the shilling further in the sense that the demand for foreign currency on the market would shoot up and cause a depreciation of the shilling, hence hurting the economy further at a time when it was starting to recover from the harsh inflationary pressures recorded in the last two years.

He said the government needs to maintain prudent financial management procedures by spending the scarce resources on critical sectors such as social services, infrastructure and agriculture to increase productivity and grow the economy in the New Year. He expressed worry that the economy in 2013 may be no different from the previous year because the country's export performance, finance management and aggregate demand all remain constrained.

His view was that the country needed to fight corruption firmly to avoid future incidences of donor aid cuts. Also, it is important to have affordable interest rates in the market to support production for the domestic and foreign markets.

"But to achieve all that you need to balance all the economic indicators very well," he said, adding that Ugandans need to get involved in production so as to be producers and not mere consumers.

Any severe economic or financial squeeze often results in social agitation, which only makes the situation worse. Bategeka said Ugandans should pray that there would be no protests such as the 'walk-to-work' demonstrations and other strikes by various groups, which led to violence and paralysed economic activities in the country last year.

He agreed with Nuwagaba that the government needed to show that it is keen on zero-tolerance for corruption so that actions such as the donor aid cuts that negatively affect the poor and the exchange rate can be avoided.

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