Uganda’s inefficiency and corruption

By Agaba Rugaba

There is no paradox or contradiction with economic performance indexes

Andrew Mwenda’s “Uganda’s Incompetence Paradox” in his column The Last Word (The Independent June 28) makes for interesting reading. He fronts the unorthodox argument of how economic performance indexes contradict the underlying assumptions that we hold about corruption and ineptness of our government.

It goes without saying that there is no paradox and no contradiction here. It is all in black and white. Uganda’s economic performance indexes are directly related to the state inefficiency and corruption that continue to lock us down in a developmental downtown.

A look at Uganda’s export portfolio since 2008, indicates that traditional exports i.e. cash crops; coffee, tea, cotton, tobacco have had minimal growth with earnings from coffee fluctuating due to changes in global coffee prices. The Non- traditional exports e.g. fish, cocoa, hides, maize, petroleum products, sugar, animal/vegetable fats, cement and cellular phones, iron and steel have registered exponential growth over the last five years. The bulk of these non-traditional export commodities are either produced by a small formal manufacturing sub-sector under industry or they are re-exportation of imports e.g. fuel, phone etc. The small formal manufacturing sector also shoulders a huge proportion of taxes.

The paradox here is that the sectors at the heart of our exponential growth in exports are not the biggest employers on the market. Export growth has not translated into increased job opportunities for our youth. That is the contradiction. If the growth in exports was premised on production of goods and services that utilise resources, raw materials and intermediate goods produced by local communities, ordinary households and indigenous SMEs, the growth of exports would have a strong correlation with growth in employment opportunities, household incomes and GDP at large.

Gross Domestic Product as a flow of economic activity which may be measured by analysis of Income or Expenditure or Production, does not seem to have a strong correlation with our export portfolio today and that is the paradox.   The Background to the Budget FY 2013/2014 indicates that coffee, which is one of our biggest exports and is grown by the wider population, registered exports worth US$370 million in 2012. This is despite the fall in volumes to 162,000 tonnes last year compared to over 200,000 tonnes in 2008. In contrast, the total value of non-traditional exports has grown from US$1.2 billion in 2008 to US$1.8 billion in 2012. The big contributors in this non-traditional exports category are iron and steel products, maize, cattle hides, petroleum products , animal and vegetable fat/oil, sugar and confectionary, cement and cellular phones. Maize exports have grown form 66.7 tonnes in 2008 to 175 tonnes in 2012, vegetable oil from 37.7 tonnes to 73.5 tonnes, petroleum from 97 million litres to 128 million litres, sugar 89,000 tonnes to 158 tonnes, cement 350,000 tonnes to 556,000 tonnes for the same period. The expansion of a few formal manufacturing or production lines e.g. sugar factories, vegetable oil factories, steel plants or cement factories has not generated the inclusive growth in GDP or widening of tax bases.

Whereas corruption and state inefficiency have little or no effect on the production and expansion plans of private production firms, they still indirectly foster high business costs due to poor infrastructure, insufficient electricity supply and reliance on imports for intermediary goods.

Uganda’s GDP at the end of 2012 was at Shs53.2 Trillion at current prices, according to the Background to the Budget FY 2013/2014. Compared to the Shs13 Trillion budget for this financial year, indeed our budget to GDP ratio stands at slightly over 24%, the lowest in East Africa. Using the flows of Expenditure as a measure of GDP, this implies that for every US$100 spent in the Ugandan economy, US$24 is actually spent by government. The other US$76 is spent by the three other sectors in the economy namely; households that engage in consumption expenditure, firms that engage in investment or production expenditure and then finally the foreign markets that buy our exports (goods produced in Uganda). So what is our government spending on that would stimulate production or GDP growth for that matter?

Slow private sector

The best insight on this is from the monthly “Performance of the Economy Reports” by the Ministry of Finance, Planning and Economic Development. According to the April 2013 Report (at 10 months into the FY 2012/2013), Shs6.76 Trillion had been received in Revenue and Grants. Revenue from both Uganda Revenue Authority tax revenue and Non- URA revenue amounted to Shs5.73 Trillion and Shs 160 billion respectively. Grants for both budget and project support totaled Shs878 billion for the 10 months in the financial year.  However the government consolidated expenditure for the first 10 months in FY 12/13 was to the tune of Shs8.21 Trillion thus a fiscal deficit of Shs1.45 Trillion. As has been the wont of government, it addressed the fiscal deficit using both external financing (net) and domestic borrowing to the tune of Shs856 billion and Shs749 billion respectively.

This is not any different from the outlay of the FY 13/14 budget. There are major resource shortfalls in the budget that will require borrowing from both the external market and domestic markets. With the latter approach, we risk “crowding-out” the private sector players since banks always prefer government debt to private loans due to the risks associated with private sector lending.   In effect growth of private sector credit shall slow down thus less finance available for production investments and business expansions. The projections in the FY 13/14 budget are not any different from last year’s. Shs1.905 Trillion has been allocated to the Local Government with Wages and Recurrent expenditure taking over 80% of the total allocation to the sector. The BTTB 2013/14 further indicates that over 50% of total budget allocations (as indicated in the Medium Term Expenditure Framework) shall cover wages and recurrent expenditure at Shs 2.33 Trillion and Shs 3.90 Trillion respectively. Only Shs4.2 Trillion and Shs2.23 have been allocated and allowed for domestic development expenditure and donor funded projects.

Furthermore, we may want to look at GDP in terms of production to establish what sectors contribute the bulk of value addition in this economy. According to the Background to the FY 13/14 Budget, the value of economic activity in the Agriculture, Forestry and Fishing for the calendar year 2012 amounted to Shs11.789 trillion which is 22% of Nominal Gross Domestic Product. Food Crops production  account for more than 50% of the value of economic activity in Agriculture, Forestry and Fishing, and more than 50% of the Food Crops production is non-monetary economic activity. Close to 10% of GDP is non-monetary. It is no wonder that Uganda’s tax to GDP ratio is at the low end compared to peers in the region. A large proportion of the production cannot be taxed. Further to note is that the contribution of Food Crops to Agriculture had doubled in the last four years, from Shs3.35 Trillion in 2008 to Shs6.57 Trillion at 2012.   The Industrial sector’s value of economic activity amounted to Shs 13.67 Trillion for the calendar year 2012 thus contributing 26% of GDP indicating that for every US$100 worth of goods or services produced, US$26 is from the industrial sector e.g. manufacturing, mining, water and electricity supply etc. The manufacturing and construction sub-sectors aggregately contribute 84% and 20% of the Industrial Subsector and GP respectively. The services sector accounts for 47% of GDP with the Whole Sale and Retail Trade subsector contributing 36% to the whole Services sector and 17% of GDP. The other big players in the Services sector are Hotel, Transport and .Communication, Banking, Real-estate services and Education each accounting for averagely 4% of GDP. It is clear that the bulk of the value of economic activity in our economy is concentrated around, Manufacturing, Construction, Wholesale and Retail Trade and Food Crops Production. The former two are dominated by a few formal players while the latter two sub-sectors, which engage the majority of Ugandans in both retail trade and food production, are dogged by informality in the retail trade sector and the fact that more than 50% of economic activity under food production is non-monetary. This offers insight to our low tax to GDP ratio.

The role of the state in such circumstances ought to be designing and implementing an approach that stimulates production and capital accumulation that create opportunities for both earning income and wealth creation for a wider society. This argument is best fronted by Andrew Rugasira in his “A Good African Story”. Both Western Countries and the Asian Tigers utilized the strong mix of both indigenous capital and state intervention in developing economic systems that foster capital accumulation and wealth creation for the indigenous people. The suggestion that Uganda and Africa at large shall do it any other way is where the ideological debate is