Kasaija’s Shs72 trillion heavy budget

Experts share mixed views relating to fiscal discipline, tax, growing debt

COVER STORY | JULIUS BUSINGE | As Finance Minister Matia Kasaija ascended the podium at Kololo Independence Grounds on June 13 to unveil the FY2024/2025 National Budget, the air was thick with anticipation. The nation waited with bated breath, eager to see how this financial blueprint would not only boost their incomes but also clamp down on the corruption sabotaging vital government development initiatives.

The theme of the new budget appeared to cover vital sectors of the economy: Full Monetisation of Uganda’s Economy through Commercial Agriculture, Industrialisation, Expanding and Broadening Services, Digital Transformation, and Market Access.

First, Kasaija said, the economy had fully recovered from various internal and external shocks that impacted performance in the past four years.

He said: “GDP is projected to grow by 6% this financial year 2023/24 compared to 5.3 percent in FY2022/23. This year’s growth of 6 percent is even more impressive when compared to Sub-Saharan Africa’s average of 3.8 percent, and the global average of 2.9 percent projected for the year 2024”.

As a result of this robust growth, Kasaija said, the size of the economy is now estimated at Shs202 trillion (US$53.3 billion) up from Shs 184.3 trillion (US$48.8 billion) in nominal terms.

If Ugandans agreed to share this GDP equally, he said, each citizen would enjoy a GDP per capita of US$1,146 compared to US$1,081 registered last Financial Year 2022/23.

He told the audience that the improved performance of the economy is on account of higher growth in all sectors – services, agriculture, and industry estimated to grow at 6.6%, 5.1%, and 5.8% respectively in FY2023/24.

As a result of the government’s fiscal consolidation agenda – which is intended to enhance revenue collection, limit borrowing for only critical and strategic investments, and control government expenditure, Kasaija said the government’s fiscal deficit has reduced to 4.5% of GDP this financial year from 5.5% of GDP last year.

The projected domestic revenue outturn for FY2023/24 is Shs 27.725 trillion against the target of Shs 29.672 trillion, leading to a revenue shortfall of over Shs 1.9 trillion.

“The Uganda Revenue Authority is working hard in the remaining days to reduce this shortfall. The revenue-to-GDP ratio is estimated at 13.6% of GDP in FY2023/24.

Kasaija said the new budget is anchored on four sectors to drive this growth – agro-Industrialisation, tourism development, mineral development, including oil & gas, and science technology and innovation (STI), including ICT.

“These are the ATMs that are going to mint money for Ugandans next financial year and in the medium term,” he said.

The resource envelop

The total resource envelope for FY2024/2025 amounts to Shs72trillion up from Shs52.7trillion in FY2022/2023. Out of the Shs72trillion, the total appropriation is Shs 37.56 trillion and statutory expenditure is Shs 34.756 trillion.

In the coming financial year, domestic revenues amount to Shs31.9trillion, of which Shs 29trillion will be tax revenue and Shs2.6trillion will be non-nax revenue; budget support is Shs 1.3trillion; domestic borrowing is Shs 8.9trillion; treasury bonds for settlement of government outstanding obligations to Bank of Uganda as at 30th June 2024 is Shs 7.7trillion. Domestic refinancing of maturing domestic debt is Shs 12trillion; Petroleum Fund drawdown is Shs 115.4 billion; project support (external financing) is Shs 9.5trillion and local government revenue collections is Shs 293.9 billion.

Wages and salaries are projected to amount to Shs 7.926 trillion, non-wage recurrent expenditure to Shs 17.454 trillion, development expenditure from own resources to Shs 6.152 trillion, external project financing Shs 9.584 trillion, appropriation in aid to Shs 293.9 billion, while external debt repayment will amount to Shs 3.149 trillion.

The new budget has been designed to target seven key priorities including, investing in the people through education, health and water, sanitation, and hygiene, for which the minister provided a total of Shs 10.204 trillion; peace and security of all persons is allocated a total of Shs 9.107 trillion, including a 25% enhancement of salaries of all security personnel at the rank of Captain and below.

The other areas include, maintenance of all roads, construction of a few strategic roads, as well as rehabilitation of the Metre Gauge Railway and construction of the Standard Gauge Railway which will all consume Shs 4.989 trillion.

Kasaija said the government is keen to invest in wealth creation initiatives, including commercial agriculture, value addition (through Uganda Development Bank and Uganda Development Corporation), the Parish Development Model (PDM), Emyooga, Agriculture Credit Facility, tourism, science-based research, and youth skilling, export promotion programme, and the GROW Project. All these programmes have been allocated a total of Shs 2.641 trillion.

Meanwhile, Shs982.6bn is allocated to facilitate electricity transmission, distribution, and utilisation of existing energy stock. Additionally, a contingency fund of Shs146.1bn has been catered for in the budget to respond to natural disasters and the government’s international commitments for regional and global partnerships have been allocated Shs. 31.1 billion.

Speaking at a post-budget dialogue organised by absa Bank on June 14 in Kampala, Ramathan Ggoobi, the permanent secretary and secretary to the treasury described the new budget as ‘good’ and that it would be funded by Ugandans through tax.

He said tax paid by Ugandans (projected at Shs32trillion) is the primary source of financing the budget, in addition to budget support, domestic borrowing, petroleum funds, local government revenue & projects.

Ggoobi said the above sources account for about Shs52trillion, adding that the balance of about Shs20 trillion on the Shs72 trillion budget is not money to spend – it includes the Shs7.8 trillion for Bank of Uganda debt to be settled through issuance of bonds to mop up excess liquidity in the market and Shs12 trillion for debt refinancing of maturing debt (debt rollover) which will only require payment of interest.

“This is a smart way of managing macroeconomic stability,” he said.

Skeptical experts

Stephen Kaboyo, an economist and former top executive at Bank of Uganda described Ggoobi’s views as ‘persuasive’ and quickly added, that the new budget is debt-ridden. “45% of the budget is for debt repayment and servicing which is huge,” he said, “my calculation shows that we have reached the most popular point of debt to GDP – we could be at around 53.5% which is worrisome.”

Kasaija said as of the end of December 2023, Uganda’s total public debt stood at Shs 93.38 trillion, equivalent to US$24.69 billion. Of this amount, external debt was Shs 55.37 trillion equivalent to USD 14.64 billion while domestic debt was Shs38.01 trillion equivalent to US$10.05 billion. The public debt is projected at Shs97.638 trillion, equivalent to US$25.716 billion by June 30, 2024.

In nominal terms, he said the country’s public debt to GDP was estimated at 46.9% in June 2023 and is projected to end at 47.9% this financial year ending June 2024. This is below the 52.4% threshold provided for in the Charter for Fiscal Responsibility for the financial year 2023/24, and less than 50% of GDP Government policy target for debt sustainability.

“Although our debt has increased, it is still sustainable and the government is committed to keeping it sustainable. Most importantly, the money we have borrowed has been invested well and these investments have started to give good returns,” he said.

Some of the debt has been invested in critical infrastructure and energy projects, industrial parks, agro-industrialisation, and more.

Speaking at a live television talk show on June 13, Ibrahim Ssemujju Nganda, the Shadow Finance Minister, criticised the government’s debt strategy, arguing that it was fundamentally flawed. He pointed out that the government was borrowing money and letting it sit idle instead of investing it in projects. This idle money was accumulating interest without being put to use. Additionally, he highlighted that rampant corruption, delayed project delivery, and substandard execution were jeopardising the borrowed public funds.

Kaboyo said, “We have to be mindful and work very hard not to default. We need to avoid a debt trap which some countries like Zambia, Ghana, Ethiopia have found themselves in before.”

“What is our game plan,” he asked. He said the government needs to borrow for investment not consumption and that it has to improve the institutional performance to curtail corruption.

Another way forward, he said: “We need to start a conversation with our creditors to lengthen maturities of our debt, ask for discounts and forgiveness where necessary.”

Supporting measures

Kasaija listed several measures that are in place to ensure that the budget meets the set objectives including strengthening domestic revenue mobilisation by providing adequate funding to revenue-generating entities; strengthening public finance management to ensure accountability and frugality, and avoiding misuse of public resources; repurposing of budget towards high impact economic growth areas; improving efficiency in the execution of projects and other public investments; and borrowing for only strategic high impact interventions.

“Starting FY2024/2025, Accounting Officers of revenue-generating entities will sign commitment contracts against the agreed revenue performance targets upon which budget allocations have been made, in addition to the performance contracts they sign annually,” Kasaija said.

Tax measures

Kasaija said his new budget made modest changes in taxes that were approved by Parliament to raise more revenue and/or improve the budget environment.

The new budget imposed excise duty on powdered beer at Shs 1,000 per kilogram, a rate of 0.5% of the value of withdrawals of money from other platforms other than mobile money. There is an increase of excise duty on petrol by Shs 100 per litre; an increase of excise duty on diesel by Shs 100 per litre; increase in excise duty on imported wines from 80% or Shs 8,000 per litre to 100% or Shs 10,000 whichever is higher. There is imposition of excise duty on adhesives, grout, white cement, and lime.

Under VAT, the supply of electric motorcycles, vehicles manufactured or fabricated in Uganda, and their respective charging stations and batteries for electric motorbikes, charging stations, and related services are exempt from tax.

The objective is to facilitate the growth of e-mobility and affordability of electric cars and motorcycles and protect the environment. The provision of taxable goods/services by an employer to an employee will attract VAT.

On income tax, Kasaija’s budget has exempted investors from tax capital gains arising from the sale of holdings in private equity or venture capital funds regulated by the Capital Markets Authority. The intention is to incentivise private equity or venture capital investments in Uganda; provided tax holidays on the income of a person who manufactures and fabricates electric motor vehicles, electric motorcycles, electric batteries and electric vehicle charging equipment, as well as the income of a person who develops, establishes or operates a medical facility or hospital facility.

Government is also extending the waiver of penalties and interest on arrears outstanding by June 2023. This waiver will apply when the taxpayer pays between July and December 2024; it has also introduced a 10% withholding tax on commissions paid to the banking agents and fintech agents (payment service providers).

“We must raise more revenue and reduce reliance on borrowing and external grants,” Kasaija said.

Kasaija said the anticipated additional revenues will be generated from compliance measures undertaken by the Uganda Revenue Authority which include; expanding URA presence and coverage by opening up five liaison offices across the country, strengthening the enforcement and use of Electronic Fiscal Receipting and Invoicing System (EFRIS) and Digital Tax Stamps (DTS) and the rental tax solution; strengthening the exchange of information with other tax authorities to combat illicit financial flows and under-declarations; and strengthening enforcement interventions.

Fred Muhumuza, an economist said, the government’s tax policy needed to look at the demand side of business by increasing Pay As You Earn (PAYE) to a threshold of Shs500,000 from the current Shs235,000 to boost demand.

“This money will come back to the private sector and government will benefit by getting more taxes,” Muhumuza said.

Economic growth outlook

Going forward, Kasaija said Uganda’s economic outlook is optimistic that next financial year, the economy is projected to get back to Uganda’s steady-state growth potential of between 6.4 and 7%, and double-digit over the next five years.

Private sector leaders, including Allan Ssenyonga of the Uganda Manufacturers Association and Sarah Kagingo, Vice Chairperson of the Private Sector Foundation Uganda, praised the government’s growth projections but emphasised the need for the government to avoid competing with the private sector in credit markets. Instead, they urged the government to focus on creating a more favorable investment environment to stimulate growth.

HERE IS THE FULL BUDGET SPEECH (click to read) Budget Speech FY2024