Big budget. Big dreams. Big fears

By Independent Team

Is Uganda headed for a debt crisis?

What happens when you take a bunch of election spending reality, throw in a pinch of anticipated oil dollar excitement, and wrap it all up in some new accounting procedures? That is the question analysts of Uganda’s 2015/16 national budget set to be announced on June 11 are grappling with. At Shs24 trillion, it is the biggest, most ambitious, and most inexplicable budget ever.

It also has a brand new Minister of Finance, Matia Kasaija, to deliver it. Kasaija’s first budget comes in an election year where he faces a dilemma of uncontrolled public spending on elections.

He also faces a tougher dilemma of ensuring that the economy does not suffer from the post-election turbulence in 2016 like it was in 2011 when inflation went to the highs of 30%. Unfortunately, very few people in the crowd expected at the Kampala Serena Hotel Conference Centre will be listening to Kasaija.

This is partly because, thanks to changes in the national budgeting process, it was revised and passed in a special parliamentary sitting on May 30. Therefore, most of the audience will already be familiar with all the allocation figures, budget priorities, and its fiscal and monetary details. The new Public Finance Management Act requires Parliament to finish the budget process before the close of May to avoid delays in implementation. Previously, the scrutiny would come after the budget was presented in June.

Therefore, many in the audience will this time instead be waiting to hear what the vision-man from Rwakitura, President Yoweri Museveni, will have to say about the unusually huge budget.

They will have many questions.

Why the huge jump from Shs14 trillion last FY to Shs24 trillion? Why did the budget first jump to Shs14 trillion, then Shs18.4 trillion, then Shs23.9 trillion at the last minute? Why is the final figure one trillion shillings less than the Shs24.9 trillion that had earlier been communicated by the finance ministry? Were the planners unsure? Where will the new money come from?

Confusing figures

Until now, it appears, Ministry of Finance officials and the minister have had difficulty explaining the budget figures.

When he was asked why the new figure was popping up, Minister Kasaija was laconic. He said it was nothing more than a ‘mere entry’. Possibly in a ledger.

Muhakanizi told The Daily Monitor on May 26 that the increase in the budget is not ‘fresh money’ but an old bond that the new law requires to be declared and approved by Parliament.

“So it is not new but a roll over—re-investing funds from a mature security into a new issue of the same or a similar security.”

The main contributor to the new expenditures is Shs4.6 trillion for treasury operations, followed by decentralized pension and gratuity provision, amounting to Shs319.7 billion.

It was all dizzying.  Even Nandala Mafabi, the former chairman of the Parliamentary Accounts Committee, who is usually on top of the numbers game appeared confused.

“First it was Shs 14 trillion, then Shs 18 trillion and finally Shs 23.9 trillion. Which figure are we following?” he asked during debate in parliament.

Just before the budget was passed, the Minister of State for Finance, David Bahati, told journalists that most of the new money is statutory expenditure and would be used in repayment of public debts. He said it would go to pensions and gratuity and the votes for statutory bodies.

But in an explanation to the Civil Society Budget Advocacy Group (CSBAG), the Ministry of Finance’s Commissioner in charge of Budget Policy, Robert Okudi, said the new money is nothing more than an accounting procedure – similar to what Muhakanizi said. He said what appeared to be new money was money being transferred from Bank of Uganda to the Consolidated Fund in line with the new Public Finance Management policy.

“The biggest portion of the additional money is a transfer of money for domestic borrowing through treasury bills and bonds from Bank of Uganda to the Consolidated Fund as the new law requires,” Okudi explained.

Section 25 (1) of the Public Finance Act indicates that “where in respect of any financial year, it is found that the amount appropriated by an Appropriation Act is insufficient, or that a need has arisen for expenditure for a purpose for which no amount has been appropriated by the Appropriation Act, a supplementary estimate, showing the amount required, shall be laid before Parliament, by the Minister through a Supplementary Appropriation Bill.”

According to Okudi, the additional money also involves Shs150 billion in payments of taxes on imports for various state agencies.

This year’s budget is almost Shs10 trillion higher than the 2014/2015 budget. At the beginning of April, the first draft budget was Shs14 trillion and towards the end of April it was revised upwards to Shs18.4 trillion partly due to the parliamentary approval of the Shs4 trillion for the 600MW Karuma Hydropower dam. Then, in a May 19 letter to the Clerk to Parliament, Keith Muhakanizi, the Secretary to the Treasury spelt out details of new revisions to the budget, just six days after the original correction in budget which further raised the budget to a record high of Shs 23.9 trillion. The total development expenditure will be allocated Shs 9.7 trillion, statutory expenditure (Shs 7.7 trillion) and recurrent expenditure (Shs 6.4 trillion).

Considering that government’s total revenue from both taxes and non-tax revenue is projected to be Shs11.1trillion, it means government will be able to fund next year’s budget by only 44.5%. The balance, 55.5%, will have to come from external and domestic borrowing from the private sector.

The Civil Society Budget Advocacy Group (CSBAG) — a civil society organization that advocates for people centered budget that dignifies humanity— say the new budget takes Uganda back to the 1990s when the government used to fund less than 50% of its budget.

This is a major reversal of the government policy of moving towards funding the budget fully. It is reminiscent of the early years of President Museveni’s government when donors had to fund up to 70% of the budget.

The move is doubly risky because in recent years, donors have shown a tendency of cutting their budget support. It happened over the Anti-homosexuality Bill in 2014 and Office of the Prime minister Corruption scandal.

That is one of the reasons why some economists have said that it will be a difficult budget for the government to implement.

The other reason is the uncertainty around the anticipated collection by the Uganda Revenue Authority. The tax payer is expected to finance 80% of the budget while 20% will be acquired through donor support.  As a result, taxes are going up mainly on cosmetics, cigarettes, and fuel.

There are also fears that such an expansionary budget will negatively affect monetary policy targets, including inflation and currency stability.

Bank of Uganda to clean up mess

Fred K. Muhumuza, a renowned Research and Advocacy Specialist working with Financial Sector Deepening Uganda, says the budget is likely to create instability in the economy.

“Our budget reflects expansionary monetary policy and yet the monetary authorities would prefer a restrictive or contractionary monetary policy,” he says.

He says although budgets should address monetary concerns, it rarely focuses on them in the case of Uganda.

“Our budget is heavily skewed as a fiscal/government instrument for spending, leaving the Central Bank (monetary authority) to deal with the monetary, inflation, and currency stability issues,” he says.

He said President Yoweri Museveni’s government simply draws an investment programme and proceeds to try and fund it at whatever cost. A better way, according to Muhumuza, would be for the whole of the government; the executive and monetary authorities, to work together both in planning and budgeting to ensure harmonization of objectives.

“It is not the case in Uganda,” he said, “the Central Bank is left to clean up by responding to ‘government’ actions.”

Muhumuza predicts that inflation is likely to shoot up partly due to increased liquidity from the government’s big budget but also due to reduced supply especially of food items.

“Whatever the budget is going to finance, will not increase supply of goods and service to counter the inflation,” he said.

“Inflation is going to rise,” he says, “In response, the Bank of Uganda will raise interest rates, which is another variable of macroeconomic stability that worsens the instability as rates go up and cripple private sector activity.”

The already battered shilling is to receive more thrashing, according Muhumuza because it is closely related to inflation. However, stability will only be either restored or moderated by high interest rates.

“Currency stability may also refer to exchange rates that we might see continuing in the high level category (around and/or above Shs3, 000),” he says.

It could be difficult to drive domestic production, which in turn could drive exports, due to rising costs like interest rates, cost of utilities and labour. Unfortunately on the flip side, says Muhumuza, there is likely to be more demand for imports to support government investment programmes. That will also drive exchange rates up.

Lawrence Bategeka, an economist, says that this year’s budget was not based on reality as assumptions are not based on the gross projections.

“80% of the budget should be locally generated which translates into approximately 17 trillion. But if URA only raised 12 trillion, there are high chances of having budget cuts in the course of the financial year after failing to hit the projections,” he told The Independent.

Over the past three years, the annual fiscal deficit has widened from Shs2.6 trillion in FY 2011/12 to Shs3.1 trillion in 2012/13 and Shs3.5 trillion in 2013/14. During the FY 2013/14, the government fiscal deficit exceeded its programmed levels leading to issuance and acquisition of Shs1.7 trillion in domestic borrowing. It is now projected to become even bigger. Critics are warning of a “debt crisis”.

This is because the government is expected to borrow from domestic sources; including pension funds and commercial banks, to plug the gaps. They say the additional money will be used for electioneering.

“We will have a debt crisis; inflation will increase to levels beyond those that prevailed in the aftermath of the 2011 general elections,” says Geoffrey Ekanya, the Shadow Minister for Finance, Planning and Economic Development.

The country’s external debt is estimated to be $ 7.4 billion (about Shs 22 trillion). That is minus US$1.7 debt for Karuma and Isimba, US$12 billion for the oil refinery and pipeline, US$3 billion for the Standard Gauge Railway, and US$9 billion for other transport and energy sector projects. Together, these would push Uganda’s external debt to US$33 billion. That could push Uganda’s Debt: GDP ratio to over 50% which is the IMF threshold.

However, Muhakanizi recently told a policy dialogue on the budget which was organized by the Advocates Coalition for Development Environment (ACODE) that the government has the capacity to manage its borrowing through concession terms. Uganda’s debt is sustainable. The country shall continue borrowing for infrastructure development, he said.

Service delivery to suffer

In such an environment, Bategeka says the unrealistic projections in the budget could alter service delivery in some critical sectors.

“A lot is expected from domestic collection and this being an election year means a certain section of the population will shoulder the biggest obligation through taxes. But even with that, raising 80% of the budget will not be realized; therefore, budget cuts are expected,” he said.

The budget is running under the theme; ‘Maintaining Infrastructure Investment and Promoting Excellence in Public Service Delivery of Uganda’s Economy,’ prioritising ongoing infrastructure projects, embarking on new ones where feasibility studies have been completed and resources mobilized, and accelerate the preparatory process for various projects.

In its submission on the 2015/16 budget, the Privates Sector Foundation Uganda (PSFU) urged the government to ensure predictability in the tax regime while at the same time avoiding an increase in taxes to levels which could discourage production and consumption.

The PSFU pointed out that while the government’s efforts to expand the tax base are laudable, some of its proposals have in the past appeared insensitive and had negative implications. The PSFU named the tax on agricultural inputs announced in the past budgets.

Dr. Swaib Mbowa a researcher with the Economic Policy Research Center (EPRC) says Uganda has still not adequately catered for agriculture which, as the backbone of the economy, needs favourable policies.

Mbowa maintains that though agriculture employs the majority, government is reluctant to provide it with enough funding like it is with other countries which agreed to the Maputo Protocol and have had their agriculture budgets increased to as much as 6% of their total budgets.

Ronald Musoke, Agnes E. Nantaba, Patrick Kagenda, and Flavia Nassaka contributed to this report.