The International Monetary Fund has asked government to prioritize resource mobilisation to cover the funding gaps left by donors and the huge shortfalls being reported by the Uganda Revenue Authority.
"There is also a need to pay increased attention to revenue mobilization. Following the recent large shortfall in tax revenue and the risk of reductions in foreign aid, broadening the tax base and improving efficiency in tax administration are more critical than ever," said Ana Lucía Coronel, IMF mission chief and senior resident representative for Uganda, in a statement last week.
She added that government should review existing tax laws and eliminate tax exemptions that have little benefit for production.
"Efforts should also centre on strongly enforcing compliance by all taxpayers," Coronel said.
URA's shortfall is expected to be above Shs 300bn this financial year, which could limit the amount of resources available for the next fiscal year. The tax body depends on big corporations to close tax gaps. And when companies make losses or drops in profit, as many did in 2013, tax revenue is hurt.
The ministry of Finance has warned that resources for the 2014/15 budget might not be that different from what was available when the budget was read in June last year. Coronel issued a statement after the IMF completed its Policy Support Instrument (PSI) review of the country.
The IMF's framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies.
PSIs are voluntary.
Coronel applauded the ongoing issuance of national identity cards, saying they could support the government's efforts to achieve the long-awaited plan to raise Ugandan tax revenue and bring it closer to regional standards of about 16 per cent of Gross Domestic Product.
The IMF welcomed new reforms in managing public resources, particularly the public finance reforms to improve governance and budget transparency. The IMF said the private sector could see its growth lag behind due to limited access to credit and slowed government spending.
"Despite a slowdown in agriculture and unrest in South Sudan, growth continues to be robust, and is now projected to reach 5.7 per cent in 2013/14 and 6.1 per cent in FY2014/15, mainly supported by public investment.
"However, private sector growth is lagging behind. At 5.4 per cent this year and 5.7 per cent next year," Coronel said.
But as inflation remains tamed - it is within the central bank's target of five per cent - and with strong import cover reserves of between four to 4.2 months, the IMF says this provides a strong buffer against shocks to the Ugandan economy.
Medium-term growth prospects are strong, helped by integration of the East African Community and infrastructure development. The IMF, however, says the government should resist from all forms of spending pressures that don't support growth.
The IMF Executive Board is tentatively scheduled to consider the second review of the PSI-supported programme by the end of June 2014.