Uganda: Cover Story - Tough Budget

Finance Minister Matia Kasaija presents the Budget (file photo).

Kampala, Uganda — The 2020/21 national budget read on June 11 has been criticised by experts as weak on all fronts; from its stimulus and bailout programmes to the manner in which its figures were arrived at and communicated.

Most observers are concerned at how the government intends to raise revenue through increased taxes on businesses in crisis and how it intends to spend it; mainly on non-productive government departments.

The main fight over the budgeting process revolves around the clear signs of government lack of budgeting clarity and preparedness; especially its plan to extensively review the proposed departmental budgets; apparently to align them to the nine strategic priorities of the country and the challenges caused by COVID-19. Why was the alignment not done before the figures were presented, many ask.

"The proposals in the budget are contradictory to the economic reality on the ground," says Mohammed Ssempijja, the team leader at Ernst and Young Uganda (EY).

"Focus on production is good but it has not put in place measures that would increase people's disposable income to boost aggregate demand for goods and services," says Fred Muhumuza, a senior economist and former advisor to the Minister of Finance.

"At the end these producers will not be able to produce," concludes Muhumuza, who is a senior lecturer at Makerere University.

"Money consuming government agencies and departments/arms (like Parliament and others) have continued to receive lots of money than production facilitating MDAs - which are critical in creating jobs and related opportunities," says Ramathan Ggoobi, the senior economics lecturer at Makerere University Business School.

The pessimism, doubt, and criticism appear indirect contrast to the confidence shown by President Yoweri Museveni and Finance Minister Matia Kasaija as they spoke at the budget reading on June 11.

That MPs gathered for the budget reading in tents erected in the parking lot of parliament to allow for social distancing endured interruption from a mid-afternoon rain-storm added to the turbulent times caused by COVID-19.

Even as the MPs dashed for cover, Museveni and Kasaija confidently spoke about how the budget is great for jumpstarting the economy.

FULL Uganda Budget-speech 2020-2021 by The Independent Magazine on Scribd

They admitted the economy had been negatively impacted by the measures put in place to stop the spread of the coronavirus pandemic since March this year but said the economy would survive.

"The coronavirus pandemic has helped us to once again demonstrate the economic capacity and the vast opportunities that our country has," Kasaija said, "The budget for Financial Year 2020/21 will support the economy to fully recover, harness the potential that we have, and get back to our progressive journey of double digit GDP growth rate."

He swept aside the 50% decline in growth of the economy in just three months, starting March when the first COVID-19 case was registered in the country. It is now estimated that the economy will grow by just 3.1% in the financial year ending June 30, about 40% slower than the average growth rate of 5.4% in the previous four years.

Kasaija said that if it was not for the emergencies that the country faced in the last six months, the rate of economic growth would have been at least 6%.

In terms of sector growth, agriculture which has been the perpetual laggard of all sectors has emerged as the savior as COVID-19 crushed industry and services.

Agriculture grew by 4.2% up from 3.8 percent in the previous four years. Industry also grew, but by only 2.3% compared to an annual average of 7% in the previous four years; while services grew by 3.6% compared to the annual average of 5.6% in the previous four years.

Kasaija called the huge declines "temporary shocks".

"The medium term outlook for economic growth is positive and will be stronger given the measures the government will implement," he said. That was overly optimistic because nobody can be certain about the future, given the COVID-19 pandemic is far from over and the numbers of infections in Uganda are rising dramatically.

Even the new measures in the budget which Kasaija said would stimulate the economy to safeguard livelihoods, create jobs, support businesses, and ensure industrial recovery, are not universally convincing; not least his claim that "the budget would focus on production and not consumption". This idea has sparked mixed reactions among budget analysts.

The measures

To stimulate the economy, the government appears to favour intervening from the supply side. So it has waived interest and tax arrears accumulated by businesses before July 01, 2020. It has also deferred their payment of Pay As You Earn until September and offered to expedite payment of outstanding Value Added Tax (VAT) refunds worth Shs120.53 billion. Finally, it is offering to pay businesses that supplied it goods and services arrears worth Shs673billion.

That is welcome relief and good money (if it comes). But how does it encourage businesses to invest and produce? Most experts say only demand by consumers can do that, especially in periods of uncertainty when businesses are most afraid to invest.

Ssempijja, the team leader at EY says the government's decision to waive interest on tax arrears as well as defer payment of Pay As You Earn till September is not a solution to many people/businesses struggling because that period, he said, is too short and that the burden will be too much for them to meet the pending and new tax obligations.

He also said Uganda should have thought of reducing corporation tax currently at 30% to maybe Kenya's 25% to attract foreign direct investment.

That is possibly why Kenya, for instance, has waived Pay As You Earn tax for workers and not business. Employees earning less than Ksh24,000 or Shs 864,000 will now have more cash to spend. Companies that want that money have no choice but to pump up production.

The Kasaija budget also proposes that companies unable to pay their loans can take advantage of loan restructuring offers of up to a period of 12 months through the Bank of Uganda. Others can borrow from a Shs1 trillion tranche the government is pumping into Uganda Development Bank for onward lending to businesses. Government plans to invest another Shs138 billion in strategic areas through Uganda Development Corporation (UDC).

The trouble with these offers and measures are not new. They have been recycled so many times most business owners cannot plan on them.

The same uncertainty lingers over proposed measures to give an additional Shs300 billion immediately to boost agricultural production and productivity. The money would go to seedlings, fertilizers, irrigation, storage facilities and value addition processing for coffee, cotton, tea, palm oil and other oil seeds. Cassava, maize, cocoa and dairy, beef, and fish production could also benefit.

But doubts double when the government talks of securing funding for the development of Kampala Industrial Business Park at Namanve and for power transmission and substations for Mbale, Kapeeka, Bweyogerere, Kasese, Soroti, Luzira, Jinja and Mbarara industrial parks. This is a copy and paste job from previous budgets. Same with the offer to boost funding to Uganda Industrial Research Institute (UIRI) for innovation, research and incubation of business start-ups.

Some economic experts say any useful stimulus packages must involve direct injections of money into the economy.

They cite Kenya's waiver of Pay As You Earn tax to employees earning less than Ksh24,000 or Shs 864,000.

Or even its reduction of corporate income tax rate for resident companies from 30% to 25% on 2020 income and the turnover tax rate from 3% to 1%. Kenya has even cut the penalty for late submission of turnover tax returns by 50% and repealed the pesumptive tax previously payable at 15%.

Many say those are bones businesses can immediately chew on.

Resource envelop

The other main concern is how the government aims to finance the budget and how to spend.

The Resource Envelope of Financial year 2020/21 is Shs45.4 trillion (approx. $12billion at current exchange rate). Of this Shs25.5 trillion or 56% would be raised domestically, mainly through taxes by the Uganda Revenue Authority (Shs21.8 trillion). That is an 8% increase from last year in taxes on business laying off workers, cutting salaries, and crying out for waivers over the COVID-19 crisis.

External financing consists of project support of Shs 9.5trilion and general budget support Shs2.9trillion. Domestic re-financing amounts to Shs7.4trillion and appropriation in aid is Shs215billion.

Next financial year's domestic revenue target is Shs21.8trillion, comprised of tax revenue amounting to Shs20.2trillion and non-tax revenue of Shs1.5trillion, which translates into a revenue effort of 14.3% of GDP.

Experts like Sempijja say the planned revenue target appears to be ambitious given that the economy is struggling due to coronavirus lockdown measures.

But Kasaija calls these "modest adjustments in some taxes".

The modest adjustments even touch on the sensitive excise duty rate on fuel.

Kasaija says this will support enhanced economic recovery and maintain an acceptable level of social welfare. How, when companies close and unemployment rises?

In fact Kasaija anticipates resistance and says "tax administration will be strengthened" to improve efficiency in revenue collection, close loopholes, and revenue leakage.

Even local governments will roll out the digital collection of fees and rates.

To promote import substitution and the development of local industries, the government has increased import duties on goods that are produced or can be produced locally. The import duty on agricultural products has been increased to 60% and other products to 35%.

There are exemption on VAT on the supply of agricultural equipment and processed milk and customs duty on Covid-19 supplies for diagnosis, prevention, treatment, and management.

On the expenditure side, out of the Shs45.4trillion, the ministry of works and transport will take a lion's share of Shs5.8trillion (12% of the entire budget), followed by security that was allocated Shs 4.5trillion or 9.9% of the entire budget.

Interest payment on the existing loans has been allocated a whooping Shs4trillion or 8.8% of the entire budget, followed by education and health at Shs3.62trillion and Shs2.77trillion respectively.

Energy and mineral development sector has been allocated Shs2.6trillion, accountability Shs 2.1trilion, justice law and order Shs 2trillion and local government allocated Shs 1.75trillion.

Water and environment has been allocated Shs1.68trillion while agriculture and public administration each have been allocated Shs1.3 trillion.

Tourism and hospitality which has lost billions of revenue as a result of COVID-19 has been allocated a paltry Shs198 billion while the trade ministry has been allocated Shs171bilion.

Public debt concerns

According to the budget speech, total public debt as at December 2019 amounted to $13.3billion, with external debt accounting for $ 8.59 billion or 64.4% while domestic debt amounted to $4.74billion or 35.6% of total debt stock.

Critics have expressed anger about Uganda's growing debt which they say will compromise economic activity in future. But Kasaija appears to be in control.

He said that public debt remains sustainable and that government will implement the Domestic Revenue Mobilisation Strategy to increase its capacity to finance programs with less reliance on domestic and external borrowing. In response to the COVID-19 crisis, Kasaija said government has commenced negotiations with some creditors for debt relief.

Expert views

Joseph Stiglitz, an American economist, public policy analyst, and a professor at Columbia University says it is clear that the coronavirus pandemic will last much longer in world economies. This means, he says, the governments need to focus on the long term.

He said that during periods of deep uncertainty like it is at the moment, precautionary savings typically rise as households and businesses hold on cash for fear of what lies ahead.

"The key for now, then, is to reduce risk and increase incentives to spend," he said. "As long as firms are worried that the economy will remain weak six months or a year from now, they will postpone investments, thereby delaying recovery."

As such, Stiglitz says it is only the state that can break this circle. "Governments must take it upon themselves to insure against todays risks, by offering compensations for firms in the event that the economy does not recover by a certain point in time," he said.

He said governments should also consider issuing spending vouchers to stimulate household consumption, citing China where local governments across 50 cities are issuing digital coupons that can be used to buy various goods and services within a certain framework.

The expiration date, he says, makes the vouchers potent stimulus of consumption and aggregate demand in the short terms when it is needed most.

Stiglitz says that another approach that has worked in several countries is to provide assistance to firms on condition that they retain their workers, supporting wage bills and other costs in the proportion to an enterprise's decrease in revenue.

"Poorly designed stimulus programmes are not just ineffective, but potentially dangerous," he says adding, " Bad policies can contribute to inequality, sow instability, and undermine political support for government precisely when it needed to prevent the economy from falling into prolonged recessions."

Sarah Chelangat Muzungyo, the associate director in charge of tax at the audit firm, Ernst & Young Uganda, says government has put a lot of emphasis on stimulating agricultural production, which is a good thing, as more people are now involved in agriculture.

Ramathan Ggoobi, the senior economics lecturer at Makerere University Business School said at a post budget online conference organised by the Institute of Certified Public Accountants of Uganda on June 12 that the government has been heavy on rhetoric /talking but light on allocation of resources.

"The previous budgets have not been compliant to the National Development Plan II and now NDP III," he said. He said that as the government moves to implement the new budget amidst COVID-19 threat, it has to deal with the weaknesses regarding, general oversight, and leadership in government MDAs, planning and budget discipline, corruption and human resource capabilities.

He also supports the idea of investing more in agriculture value chain for as long as the government is open to searching for good markets for the products.

"This is a time we should not be preaching to anyone the way we should do things because COVID-19 has already changed us," Ggoobi said.

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More From: Independent (Kampala)

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