12 February 2019

Uganda: 2018/19 Budget Proposal

Kampala, Uganda — The government is seeking to increase spending by 5% to Shs34.3 trillion in the next financial year that starts in July amidst proposed budget cuts for critical sectors including security, education, health, social development, water and environment and agriculture.

The new proposal that is detailed in the Budget Framework Paper (BFP) for the 2019/20 comes four months to the reading of the national budget.

It has already sparked off debate among the followers of the budget making process and its implementation.

One group supports government's move to cut expenditure for the critical sectors to favor debt repayments and infrastructure projects.

Another group is opposed to the new move saying it is wrong to allocate less money to social sectors because they support human capital development that is linked to performance of the economy.

"This is not good news for addressing social inequality," said Enock Twinoburyo, a senior economist. "The poverty that has increased in the past few years requires government to invest more in human capital."

The new allocations, he said should take into account issues like institutional capacity and human resource development which are important when it comes to effective undertaking of projects like roads, power dams and oil projects.

According to the BFP, the total allocation to social sectors of education, health, social development, water and environment and agriculture will reduce by 12% from Shs7.7tn to Shs6.8tn in the FY2018/2019 and 2019/2020 respectively. In addition, security sector will also suffer a cut.

This, however, contradicts the World Bank human capital development view that advises countries to invest heavily in early healthcare and child education.

Government's plan is to spend Shs12.6trillion or 37% of the total budget on development expenditure.

The rest of the resource envelop will be used for debt repayment, interest payments and non-revenue funds for domestic debt refinancing.

Interest payments will increase to Shs2.9tn (11.4% of the total budget - second largest share) up from Shs2.5tn in the FY2018/2019.

The domestic revenue is expected to increase by 12.3% to Shs18.3tn following GDP growth projection of 6.2%. This implies that 66% of the new budget will be financed by domestic revenue where taxes will contribute Shs17.8tn to the total domestic revenue.

Julius Mukunda, the coordinator of the Civil Society Budget Advocacy Group (CSBAG) said the local population needs not to be excited 'for the Shs34 trillion since almost half of the items that comprise it are of no direct benefit."

He also said the government needs to fast track the development of the medium-term revenue strategy as well as present new tax measures to generate the extra revenue (Shs1.9tn) for the proposed budget.

Debt burden queries

The country's total public debt stock both domestic and external as at the end of 2018 stood at US$10.7bn (equivalent to Shs41.3tn). This is equivalent to 41.5% of the GDP of which 13.3% is domestic while 28.2% is external.

While this is still below the 50% threshold, some analysts say it worries given that it can exceed the 50% limit if government implements other debt financing of huge projects such as Standard Gauge Railway, new roads and the planned oil pipeline.

The good news for the private sector is that the government plans to reduce its domestic borrowing from Shs1.7tn to Shs534.9bn - a welcome move aimed at not crowding out the private sector in the credit market.

Twinoburyo and the Makerere University based Economic Policy Research Centre senior research fellow, Ibra Kasirye told The Independent in separate interviews that the new budget should be thought out carefully in terms of avoiding debt accumulation and medium term budget theme of 'industrialization for job creation and shared prosperity'.

"Allocation and operational efficiency is critical in this process," Twinoburyo said. "We seem to be good at budgeting on paper but not at implementation," he said.

On borrowing, Twinoburyo said the government needs to take into account the changing cost of borrowing brought about by interest rate hikes and the volatile exchange rate.

He said the interest payments annually are fast approaching 3% of GDP (nearly 20% of domestic revenue), which is one of the highest. This implies that only 80% of the revenue is being invested in other 16 sectors amidst other risks.

"Utilisation of loans is marred with cost and time overruns... feasibility of projects is lacking in most cases," he says.

Overall, he adds that the medium term debt risks are pronounced - and the average weighted interest rate on debt is higher than the rate at which the economy is growing suggesting an eventual unsustainable trend if the pace of debt growth is not contained in the medium term as well sequenced in tandem with capacity to efficiently absorb loans.

The projected interest rate - growth differential up to 2025 is expected to remain over 5% per annum.

While data on debt exists, Twinoburyo says, there is not holistic understanding of how much government owns in terms of the assets which provide a buffer to mitigate debt crisis.

In terms of capacity to raise revenue, Twinoburyo says given that 90% of revenue is coming from the top 1,000 taxpayers, taxes are collected from a relatively narrow base.

At sector level, agriculture which accounts for quarter of GDP contributes less than 1% of tax revenue, while the service sector which accounts for half the annual GDP contributes two thirds of the tax collections and the remaining is contributed by industry sector.

This scenario reiterates the fact that informality is a major constraint but also could lend credence to the fact that evasion increases with self-employment, both at the individual level and beyond.

From the policy and administration front; digitalisation of the informal sector and key economic activities as well as establishing a transparent and stringent mechanisms for tax expenditures will deliver quick wins, Twinoburyo said.

He adds that establishing a strong culture of compliance, improving the tax structure, and enhancing the productivity and capacity of the tax administration too are critical to attaining Uganda's revenue objectives.

On the other hand, Kasirye, says though it is bad news to reduce expenditure for social sectors, it is also a good idea of paying off current debt to avoid their accumulation.

He says debt repayment protects government from becoming uncreditworthy, and borrowing at much higher rates.

Kasirye supports the idea of hiking revenue collection targets domestically for URA as long as projections are in line with anticipated performance of the economy.

"I believe that they (government) think they will have a larger port to collect taxes in the new financial year," Kasirye said.

Beyond debt, another item to watch is the creation of a Youth Livelihood Program vote in State House of Shs130bn in 2019/2020 which CSBAG's Mukunda says should be handled carefully given that the President's office is prone to compromising politically such initiatives because of limited public and parliamentary scrutiny.

Going forward, Mukunda says that as the country approaches the 2020 final year of the NDPII, the middle income status targets appear far in the horizon, signaling the need for prudent fiscal management with realistic targets to achieve the aspirations.

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