2014/2015 budget pain

By Independent Team

As Museveni’s election cash is set to flow again

The forthcoming 2014/2015 budget is set to Finance Minister Maria Kiwanuka’s first election budget. She faces a common dilemma; uncontrolled public spending on elections, which requires an uncommon response; tough controls, especially on the foreign reserves.  Of course, observers say, the critical year is the 2015/16 Financial Year. But will Maria Kiwanuka do enough this year to ensure that the economy does not suffer the post-election turbulence in 2016 that left the macro-economic fundamentals in shambles with inflation hitting historical 30% highs in 2011?

With barely a fortnight to budget day, GDP growth remains robust at a projected 5.7%, inflation is low and within the 5% medium term target, and international reserves; which are the economy’s cushion against economic shocks, are at a healthy 4.0 to 4.2 months of imports.

As a result, GDP growth for 2014/15 is projected to be a high 6.1%.

The only trouble-spots appear to be the tax collection shortfall reported by the Uganda Revenue Authority (URA) and the lagging private sector growth, which is consistently projected to be at least one percentage point lower than the overall public expenditure-spurred GDP growth. The gap between Uganda’s exports and its imports is also projected to increase, but observers – including the IMF – say it will remain manageable.

Overall, according to the 2014/15 Budget framework Paper, Maria Kiwanuka intends to remain bullish and propose a 20% rise in domestic revenue and 15% growth in revenue by handing URA a record target of Shs10,127.3 billion in 2014/15 up from Shs8,805.1 billion in 2013/14.

Once again, the IMF and other stakeholders are warning the authorities about the danger of “spending pressures that are not compatible with Uganda’s economic priorities.”

The IMF, in a statement after its Second Review of Uganda’s Policy Support Instrument in May, could have been making a veiled reference to the 2010 off-budget purchase by President Museveni’s government of fighter jets from Russia worth US$740 million. The story broke at almost the same point as today in the election cycle and the initial US$446m (Approx. Shs1 trillion) was paid to unnamed arms dealers in December. According to reports, the unauthorised money was withdrawn directly from the Central bank as supplementary classified defense expenditure.

Vision 2040 blue print

This year’s budget speech on June 12, and President Museveni’s State of the Nation Address a few days earlier are an opportunity for the nation to take stock of the first year of Uganda’s Vision 2040, the country’s blueprint for national development in the next 40 years.

On April 18, 2013, President Museveni launched the long-term development blueprint – the Vision 2040 – at Kololo Ceremonial Grounds in Kampala.

In his speech, the President, in an unusually ebullient mood, said the country would be “unstoppable” on its path to a lower income economy in four years’ time and a middle income status not later than 2040.

The main drivers towards this goal, according to the President, are the private sector and entrepreneurs, who he said must never be mishandled.  Indeed, Vision 2040 involves a radical shift under the theme; “Accelerating Uganda’s Socioeconomic Transformation.”

According to the document, Uganda would have raised its GDP by 30 times in the next 30 years to attain that upper middle income status.

Barely two months after the document was launched, Finance Minister Maria Kiwanuka presented her 2013/14 budget speech, which for all purposes and intents was seen as the first test of the government’s commitment to the achievement of the Vision 2040 plan.

“Vision 2040 requires a fundamental change on the way of doing things by the government and the private sector to unlock the binding constraints to Uganda’s progress,” Kiwanuka said in her budget speech.

In April just over a month ago, it was exactly one year since the document was launched, which means that the first year has now been chalked off. Was Kiwanuka’s budget implementation plan successful in giving the country the good lift it needed during the take off year? There are mixed opinions about this.

At the end of the IMF mission in May, Ana Lucía Coronel, IMF mission chief and senior resident representative for Uganda, issued a statement that could point to the overall performance of Kiwanuka’s budget.

Coronel said: “Performance under the authorities’ program supported by the PSI [Policy Support Instrument] was mixed. End-December targets for inflation and for monetary and external sector indicators were met, but the indicative target on tax revenues was not observed, and the ceiling on government’s net domestic financing was missed by a small margin”.

The IMF’s PSI offers semiannual assessments of Uganda’s, and any other eligible country’s economic and financial policies.

2013/14 budget review

Overall, the government appears to have performed well on the maintenance of macroeconomic stability, which is vital for long-term economic growth and structural transformation.

Moses Ogwal, the policy director at the Private Sector Foundation Uganda (PSFU), says the private sector is happy with the way the government has maintained macroeconomic stability, which he described as a “tremendous success.”

The performance on macro-economic fundamentals has seen annual consumer price inflation kept to within a single digit.  A competitive real exchange rate to support the growth of exports has been in place for most of the year.

Kiwanuka’s budget speech pointed to investment in priority sectors including the commencement of major infrastructure projects such Karuma Dam as vital to spurring economic growth.

On the business climate improvement, the government hoped to introduce e-licensing registry as a measure to reduce the cost of doing business.

That and the Youth Venture Capital Fund did not produce the results that were anticipated.

The performance on improving infrastructure to stimulate increased output in the productive sectors through value addition, particularly in agriculture, manufacturing and the services has been average. Average marks have been scored on accelerating road infrastructure development as a way of enabling connectivity between centers of production, processing and national plus regional markets so as to increase export earnings. That area also experienced some setbacks.

Some critical Bills such as the PPP Bill, Anti-Counterfeits Bill, Trade Licencing Amendment Bill, and the Investment Code (Amendments) Bill, among other bills, are yet to be passed by Parliament.

Unmet commitments

It is not easy to see any remarkable highlights on how the implementation of the 2013/2014 budget made the creation of an enabling environment for growth, development and socio-economic transformation a priority going forward.

An additional Shs 744.7 billion allocation to roads and works in the previous budget was expected to bring the total to about Shs 2.4 trillion. Some gains have been achieved on this front, but complaints about poor roads persist across the country.

And if the government needed a reminder that pledges on road projects have are yet to be fulfilled, it got it in Kanungu – Prime Minister Amama Mbabazi’s home district, on May 23. In the absence of President Museveni who never turned up to open a nursing school in the district, Mbabazi sweated plasma as he attempted to explain to his constituency why the Ishasha-Rukungiri Road is yet to be worked on.

Cornered, Mbabazi warned of a ‘Republic of Kanungu,’ suggesting that it cannot be okay for one part of the country to be cut off from the rest of the country for years.

However, Dan Alinange, the Uganda National Road Authority (UNRA) publicist, says the delay on some road projects has been due to the “vagaries” of having donor-funded projects. The road in Kanungu for instance, is being funded by the African Development Bank, which means that UNRA has to fulfill the procurement requirements of both Uganda and the donor, leading to all sorts of delays.

But all that has been sorted out now, and construction works are should start in the next few months, according to Alinange.

On UNRA’s general performance this year, Alinange said all the money promised in the budget was delivered and this has enabled them to have a very busy and constructive year.  However, they are carrying forward a debt of Shs 200 billion, which means that even the record allocation was not enough given the huge demand.

On the outlook for the next financial year, Alinange said it would be even busier than the year ending because several large scale projects such as the dualisation of the Kampala Northern By-pass and the construction of the new Jinja bridge would be taking off, while the Kampala Express Highway will also be moving into a new phase of serious construction following the completion of the process for compensating land owners.

“Overall, all the donor-funded projects will be taking off in the next financial year given that most of the projects have now got clearance from the Attorney General; we are expecting it to be a busier year than ever before,” said Alinange.

However, Ogwal of the PSFU, said while the work being done by UNRA is commendable, there appears to be a “mismatch” between trunk roads – managed by UNRA – and feeder roads, which are the responsibility of local authorities.  He argued for instance that if the larger lorries cannot have access to farming areas because the roads are impassable and the bridges on the roads are too weak, farmers or agro-industries have to transport their produce in small portions to places over long distances where the lorries can pick it. This, he says, makes access to markets too expensive for the farmers and industries.

“That too requires government intervention,” he said. Even in Kampala, he said congestion still comprises a big cost to the private sector – amounting to 52 working days per year in lost time.

Depressed economy

On energy, Ogwal said it has been stable over the past 12 months though the business community in some parts of the country- particularly western Uganda -have been complaining about intermittent power supply.

Ogwal said however, not all sectors of the private sector have had a good year and many have had to sell off property and scale back production in order to survive. Indeed, some companies have completely exited the Ugandan market after finding the going too tough.

“There has largely been a depressed situation in the economy for all the sectors because of depressed demand,” he said, largely attributing it to the liquidity tightening and the political instability in South Sudan, which caused lucrative trade activities between the two countries to come to a virtual standstill.

“It shouldn’t have come as a surprise therefore that even URA has reported a big deficit on its targets because many of the businesses have been making losses,” he said.

Prof. Venancius Baryamureeba, the proprietor of Uganda Technology and Management University (UTAMU), concurred with Ogwal on the issue of depressed demand in the economy, which he also attributed to the political instability in South Sudan, the hefty costs UPDF is incurring in operations there, plus the decision by major donors to cut aid to Uganda. Consequently, most of the government programmes have been starved of cash. The government cannot pay civil servants. Funding to local and international NGOs has been slashed and many employees have been retrenched for lack of money to pay salaries, which definitely has meant less money in circulation. Baryamureeba said his university has been greatly affected as students cannot pay tuition in time because the parents or their guardians and sponsors don’t have money. Going forward, the famous educationalist said this must be an eye-opener for the government. “We as a country must make a deliberate and conscious decision to cut back on donor dependency,” he said, adding that the amount of money the government spends on public expenditure should also be cut down drastically. The government he added, must prioritise expenditure on productive sectors of the economy at the expense of consumptive ones.

In Kiwanuka’s budget, the total resource inflows for 2013/14 were projected to amount to Shs 13.17 trillion with domestic sources contributing Shs 10.5 trillion (81.1%) of the total budget. URA was handed a Shs 8.48 trillion target- which it will be extremely lucky to hit – while Non-Tax Revenues were projected to amount to Shs 275 bn, which is also likely to suffer a sizeable deficit.

Total external financing (donor support) was projected at Shs 2.66 trillion (20% of the total budget) of which Shs 213 bn was in budget support and Shs 2.44 trillion was expected to be in project support – indicating an increase of Shs 234bn over the previous year. However, only a portion of the 20% from donors was realised as several of them announced significant aid suspensions over corruption concerns and the decision by President Museveni to assent to the Anti-Homosexuality Act. By March, URA had reported a deficit of about Shs 300 billion. The government however, has refused to back down and by looking to China as its alternative development partner, the government appears to have heeded Kiwanuka’s advice to “examine non-traditional sources of financing in light of declining budget support.”  The financial squeeze has also been attributed to the stringent accountability and financial management measures that the Ministry of Finance has put in place – requiring that government money is paid directly to the bank accounts of payees – which of course has deprived corrupt public officials of money to spend on luxurious living and spending sprees. Also, the ongoing implementation of the Integrated Personnel and Payroll System (IPPS) has deprived corrupt public officials of money, which they used to get from paying ‘ghost’ public employees.  These measures have contributed to the ongoing liquidity squeeze, and naturally the market has had to feel a tight pinch.

But going forward, Baryamureeba suggested that as the government is allocating trillions of public money to UNRA for its large-scale road projects, the government should consider engaging in public-private partnerships for such projects so that private investors put in their money and recover it from road tolls over a period of say a dozen years.  The billions of public money saved from such ventures could then be put into the construction of access roads or provided to prospective local investors with capacity to create many jobs, according to Baryamureeba.

Positive developments

On a positive note, the construction of the Karuma Hydropower Project (600MW) commenced as Kiwanuka predicted in her budget. Also, there has been significant movement in the Oil and Gas sector after the issuance of the first production licence to CNOOC in September. Also, the February signing of the agreement between oil companies and the government was a major milestone.

Also, digital TV transmission was implemented and cyber laws were operationalized as well as the Students Loan Scheme, which was launched together with the enabling legal framework.

Also on another positive note, the National Identity (ID) Card Project finally took off, but the Anti-Corruption Bill is yet to be passed by Parliament.

By and large, the first year on Uganda’s 2040 journey has been a mixed bag. But if attaining medium income status means minimal dependence on donor aid, the events of this financial year should have given the government a pretty loud wake-up call. With the next wave of elections around the corner, donors are unlikely to loosen the taps anytime soon lest their money finds its way into financing elections.  But even if their money does not come, it is unlikely that the government would fail to get billions of cash to inject into the 2016 campaign, which economic observers fear could send the economy into yet another spiral and consequently the realization of the Vision 2040 agenda off track for several more years.