By Juliet Akello
Published: 30th June 2016
The national budget as a policy instrument helps the Government to run the state of affairs (political, social and economic) smoothly to achieve set priorities for a given financial year.Uganda’s development agenda is guided by Vision 2040 and the NDP II (2015/16 – 2019/20); therefore planning, budgeting and policy formulation processes at all have to be aligned to transform Uganda’s economy to modern and prosperous country. Of the total, national budget FY 2016/17 (sh26,361b), sh6,524.5b equivalent to 24.8% will be sourced externally. External borrowing will total sh5,034.5b which is 19% of the budget; that is; sh2,520.8b in concessional loans and sh2,513.7b in non-concessional loans; while sh1,490b in grants and domestic debt refinancing (sh4,977.7b) equivalent to 18.8%.
However, sh2,022.9b (7.7%) is expected to settle interest payments. This is more than the 3.1% share of the budget for the agriculture sector considered the back-borne of the economy. National budget deficits increase when debt service is characterised by high interest payments because part of the available resources is diverted from public service provision translating into a cost.
Notice that public debt-to-GDP was 26% by February 2015 which rose to 32.7% by June in the same year (MoFPED Report). The Budget speech FY 2016/17 indicates that this has further risen to 34% representing an increase of 31% in just one year and three months. Can Uganda’s economy growth faster than this debt growth rate to ensure debt sustainability in the future? Moreover, all this is within the context of; i) slow economic growth rate averaging less than 6% in four years, ii) stagnated revenue-to-GDP ratio at 13% for about three years now, iii) Negative Balance of Payments in recent years of less than 50% of the import bill within 12 months to March 2016 arising from a large international trade imbalance; and iv) costly infrastructural development (World Bank, 2016). These prevailing conditions are not favourable for debt sustainability.
Meanwhile, the Auditor General since FY 2009/10 to-date highlights challenges related to low absorption capacity of loans by the Government MDAs with Uganda’s debt portfolio underperforming below 50% (2015 report). This is a good sign of ill preparedness for the loans acquired yet it attracts commitment charges/fees which have been steadily increasing. In FY 2012/2013 commitment fees paid on undisbursed loans increased by 40% from sh9.023b in 2011/2012 to sh12.7b in 2012/2013 yet, total commitment fees for FY 2016/17 alone are estimated at sh84b which is highly costly. Uganda’s high appetite to borrow will heavily weigh on economic growth, especially where productivity is low.
Therefore, shall Uganda need a big-bang to shake the economy out of the current state for the national budget to deliver?; is it a case of mismatch between the country’s development needs and available credit?; do we need to borrow every time we need to advance our development? should we lower public debt or build public infrastructure first within the context of current public expenditure Vs investment for the future generation? An analysis of whether “productivity” or “job creation” comes first is another area of interest (Budget theme).
The Government should expedite the process of establishing a fully functional and empowered appraisal, monitoring and evaluation entity to approve project designs to avoid costs and delays caused by changing project designs during implementation. This will enhance the absorption capacity to ensure full utilisation of the funds released. For an economy to gain debt sustainability over time, it should grow at a rate higher than interest rate of the debt. Otherwise, it is worth discerning the “devil out of the details” if the national budget is to deliver on the theme and the NDP II.
By Peninah Mbabazi
Published: 15th June 2016
The theme of Uganda’s FY2016/17 budget that was read by Uganda’s Finance Minister Matia Kasaija on June 8th 2016 is ‘Enhanced Productivity for Job Creation’. Going by absolute figures, three priority sectors for the total budget of UGX 26.36 Trillion (approximately USD 7.86 billion) are infrastructure development (8.7%), Energy and Mineral Development (11.7%) and Education 12%. Government will spend UGX 3.78 Trillion on Works and Transport, UGX 2.423 Trillion on Energy and Mineral Development and UGX 2.2 Trillion on Education respectively. The Budget will be largely financed through tax measures. The Government’s revenue from both taxes and non-tax revenue has been projected to be UGX 11.1 Trillion.
In accordance with East African Community (EAC) protocol, ministers of other EAC Member countries who read theirs on the same date, also read highlight great emphasis on infrastructure development Kenya’s Finance Minister Henry Rotich, presented a Kshs. 2.3trn ($22.8bn) Budget focusing on infrastructure with infrastructural projects aimed at roads and railways as well as agriculture including agro processing to spur the country’s growth. Tanzania’s Finance Minister, Philip Mpango, presented a Tzs 29.54 Trillion ($13.51 Billion) budget which will be focusing on upgrading the central railway to standard gauge and port improvement. Rwanda’s Finance Minister, Claver Gatete, presented a 1.95Trn Francs ($2.6bn) Budget focusing on maintaining growth of 7%. 62% of Rwanda’s budget will be funded locally with the external sources funding at 38% which decreases donor funding by increasing domestic resources.
The FY2016/17National Budget Agricultural sec-tor allocation has increased from UGX 480bn last year to UGX 824bn this Financial Year. This in-crease goes to show that the Government of Uganda has started paying attention to a sector that was lagging behind. It is important to note that the Agricultural sector employs a large number of Ugandans and has the potential to employ more thus catering for the unemployed youth once funded adequately.
In Uganda’s specific projects under the proposed budget include Karuma and Isimba Hydro Power projects, the Standard Guage Railway, Kampala-Jinja Expressway and Entebbe Airport rehabilitation. This is at the backdrop of the recently released a UNRA Commission of Inquiry report that highlighted a loss of UGX 4 Trillion (worth 3647km of new roads) out of the UGX 9 Trillion that was allocated to UNRA since 2008. With Public Debt estimated to be UGX 29.984shs which is 30.5% of GDP is below 50% of the EAC convergence criteria but still Government hopes to fund the budget at 44.5% most of it from taxes with the remaining 55.5% to be attained from external and domestic borrowing. Most of the revenue to fund this budget will be got from increasing taxes on luxuries and essential products such as Cigarettes, ready-to-drink spirits, Petrol (gasoline), cane or beet form, Motor vehicle lubricants and confectionaries. As much as this is in a bid for Government to raise more revenue, there is still need to identify other vital revenue collection areas. This will enable a shift from the few compliant tax payers willing to struggle with the tax burden alone.
In view with the continuous trend of endemic delays in implementation of highly funded projects, cost overruns and corruption as major constraints to having proper transformation of the country socially and economically. At a time when Government is focusing on loans and borrowing, not much consideration is put into the cost of repayment being higher and continued concessional loans from China that are still not sustainable in the long run. Uganda already grapples with non-performing loans, borrowed funds which are idle and low absorption capacity of borrowed resources. It is obvious that we as a nation are yet to learn from our past mistakes. If the theme ‘Enhanced Productivity for Job Creation’ is to be a reality, the proposed budget should be a basis for all citizens to be vigilant and actively involved in monitoring finances allocated to different sectors for prudent accountability of their money.
By Imelda Namagga
Published: 22nd June 2016
While Ugandans kept tabs on the 2016/17 Budget presentation recently, many had high hopes anticipating proposals that will give some relief to the “common man” who is already burdened with the high cost of living. Much as some of them emerged winners, another lot of taxpayers were weighed down by a combination of increased taxes on some items. Imelda Namagga assesses whether the Budget will deliver citizens’ expectations.
Uganda presented its Shs26.361 trillion national Budget for the financial year 2016/17 on June 8, 2016. The Budget, which is a 9.7per cent increase from that of FY 2015/16, was presented under the theme; “Enhanced productivity for job creation.” In FY 2015/16, the economy grew by 4.6 per cent, with services growing at 6.6 per cent from 4.5 per cent last financial year, agriculture at 3.2 per cent in real terms compared to a growth rate of 2.3 per cent in FY 2015/16. Furthermore, the country’s foreign exchange reserves slightly grew slightly from 4.3 months of future imports of goods in March 2015 to currently stand at 4.4 months, slightly below the medium term target of 4.5 months. While this performance is quite commendable, there are fears that this may not directly trickle down to the common man.
Gross nominal public debt is estimated to be Shs29.984 trillion by end of June 2016, of which Shs18.665.7 trillion is external debt and domestic debt Shs11.319 trillion. This is equivalent to 34.1 per cent of GDP, an increase from 25.9 per cent in FY 2013/14. Though this amount is below the Public Debt Management Framework (PDMF) threshold of 50 per cent, this figure has increased from 25.9 per cent in 2013/14 to 34.1 per cent in 2015/16. Though most indicators (for both domestic and external debt) are below the required threshold proposed in the PDMF, the ratio of domestic debt stock to private sector credit (as at June 2015) was estimated at 95.1 per cent, way above the required threshold of 75 per cent. This implies a crowding out of private sector credit with diverse effects for private investment.
Impact of tax measures on common man
In the past financial years, the government has made it a habit to increase taxes on items such as fuel. Just like other previous Budgets read by the Finance minister, the government is in the next financial year 2016/17 proposing an increase in excise duty of Shs100 on each litre of diesel and petrol. This will contribute to increasing the cost of production. Since this tax will be borne by the final consumer, this will see an increase in pump prices and will force transport fares as well as other commodity prices up. The poor will be greatly affected since they will be required to spend a larger portion of their income to meet basic commodities.
The proposal to increase registration fees for personalised number plates from Shs5 million to Shs20 million is a welcome move, since this is since as a luxury, which is mainly consumed by the rich. Likewise, the move to increase taxes on soft cup cigarettes to Shs50,000 per 1,000 sticks and hinge lid cigarettes to Shs80,000 per 1,000 sticks as well as that to increase taxes on sweets and confectionaries to 20 per cent is commendable since the above products have diverse effects on health. This move will discourage some sections of the population from consuming more of these products.
The government’s proposal to allow producers of solar, wind and geothermal energy relief on VAT incurred on their businesses inputs is a good move since it will not only promote the use of alternative sources of energy but also make them affordable to most households. With the high electricity tariffs in Uganda, some sections of Ugandans will resort to using solar, wind as well as other available cheap alternatives.
Similarly, government’s move to grant VAT relief in respect of supplies procured from the domestic market for aid-funded projects will promote the use of Ugandan products hence encourage local investments.
In FY 2016/17, the government is proposing to grant tax relief on losses to taxpayers who merge or acquire loss-making businesses and continue to operate this same business after this transaction. The move is aimed at promoting Uganda’s investment climate and facilitating mergers and acquisitions. While this is seen as a good move, measures should be put in place to ensure that this incentive is not abused by other tax payers who may deliberately declare losses with an aim of receiving tax relief. The decision to grant this should be considered after an audit is done on such businesses.
The government is commended for its efforts to expand the tax base by implementing the Taxpayer Registration Expansion Project and its plan to increase the budget of Uganda Revenue Authority (URA) by Shs40 billion to roll out the tax payer education programmes aimed at helping businesses to formalise their operations through business licensing and registration. While we hope that this will help in educating the public, a deliberate effort should also be made by the government to promote transparency and accountability in the collection of domestic revenues.
For agriculture, the backbone of Uganda’s economy, the government is planning to allocate Shs823.42 billion in FY 2016/17, a 65 per cent increase from Shs343.46 billion in FY 2015/16. In spite of this increase, the overall share of this sector’s Budget remains at a mere 3.1 per cent of the total national Budget.
Furthermore, the government has pledged to transform this sector though investing in interventions such as agricultural research and development; construction of irrigation infrastructure including on-farm valley tanks, valley dams and medium to large scale irrigation schemes for communities; financing post-harvest handling facilities for commodity storage through the agricultural credit facility; and implementation of a comprehensive National Agriculture Finance Policy and Strategy to support private sector investment in agriculture and establishing an agriculture insurance scheme to reduce farm risks and attract investment in agriculture.
With 64 per cent of the population still stuck in subsistence farming, there is a fear that most of these interventions may not benefit the bulk of the farmers, unless the government makes deliberate efforts to target these categories of people.
The education sector Budget is projected to increase from Shs2.029 trillion in 2015/16 to 2.745 trillion next financial year. While this represents a 35 per cent increment in the sector’s total Budget, a larger portion of the increment is to cater for the 15 per cent increase in teacher’s salaries. Given the increase in enrolment rates for both primary and secondary pupils, the resources available in this sector may not be adequate to cater for the increased development needs as well as address challenges that this sector is currently facing.
All in all, we await the actual implementation of this Budget in July 2016. We hope this Budget contributes towards the government’s expectations of transforming the country into a middle-income country.
In FY 2016/17, the government is planning to put aside a total of Shs6.4 trillion to cater for interest payments due. This reflects a total of 24 per cent of the total national Budget, the largest amount ever. Moreover, the ratio of interest payments as a percentage of GDP has continued to increase from 0.9 per cent in FY 2010/11 to 2.0 per cent in 2015/16 and is expected to rise further to 2.2 per cent in the next financial year.
Since the country has continued to borrow to finance large infrastructure projects, if these investments do not generate sufficient amounts of revenue in future, there is a growing fear that the country will continue spending huge amounts on debt service; thus, compromising allocations to other productive sectors of the economy.
In FY 2015/16, most of the domestic revenue sources performed below the planned target. Among the local revenue sources, only income taxes (i.e corporation tax and withholding tax) met the planed target. However, despite a Shs42.77 billion shortfall in trade taxes, the government managed to collect a Shs7.71billion surplus from excise duty. Even with this revenue shortfall, domestic revenues are projected to increase to Shs12.914.3 trillion in the next financial year. The question one would ask is whether given the current economic conditions, this higher projection will be met without undertaking some fundamental reforms, particularly to bring those in the informal sector under the tax net.