Finance Minister Maria Kiwanuka

In the Budget speech on the 14th June 2013, Uganda’s Minister of Finance and Economic Planning alluded to revamping Uganda’s growth to 6% in this financial year and 7% in the medium. Notably, Uganda’s annual GDP growth averaged 7% in the 1990s, accelerated to over 8% from 2001 to 2008 and due to global and domestic challenges since the average growth has slowed; experiencing the worst growth rate in 20 years of 3.2% in FY 2011/12 and rebounding to 5.1% in FY 2012/13. While a full economic recovery (return to trend rate of 7% GDP annual growth) is feasible in the medium term, short term risks remain and should not be discounted.

From the date on World Bank ,  Uganda’s GDP per capita has grown by 112% from USD 258 in 1986 to USD 547 in 2012.  Uganda aims to achieve middle income level by 2017 i.e. USD 1000 (82.8% growth) from the current USD 547.  Uganda’s population currently at 35 million is projected to rise to 40 million in 2017, which implies that for Uganda to achieve USD 1000 per capita, the country would need to have grown its GDP stock to USD 40billion ( i.e per capita USD 1000 times 40 million) from its current GDP of 18Billion. Is this tenable in the next four years? No. I allude to some economic worries.

The annual population growth of 3.4% is one of the highest in the world. In addition, the rate at which poverty levels are reducing (for example, from 56% in 1990 to 25% in 2010) is almost at par with population growth. Absolute numbers living in poverty have thus remained almost the same. In 1990, we had 56% of 16 million people (9.1million) living in poverty while today we have 25% of 35 million (8.75 million) in poverty.

Uganda’s tax remains low by regional standards – its revenue to GDP per capita at only 13% is lower than that of Tanzania and Kenya. This is lower than the target set in the East African convergence Criteria of 25%.  Empirical studies highlight challenges, mainly the untaxed sectors, especially informal businesses and some agricultural activities, tax evasion and the tax incentives. In Uganda, while VAT is 18%, analysis shows that 15% of the VAT-able base is recoverable and paid. It is commendable that Government will carry out a VAT gap analysis in this current financial year. In many countries with a structure like ours, it is the biggest 5- 10% that pay the tax significantly. A question to be explored is whether SMEs and big taxpayers are paying taxes commensurately. 

Slow tax growth means high dependence on foreign aid or increased borrowing. The latter has been the case. Our latest budget document shows that the cost of debt is rising. Our interest bill is now almost 1 trillion. Notably, this is about 14% of the cumulative debt of about 7 trillion. The cost of debt should be a point of concern despite the debt sustainability analysis showing that debt is sustainable and that there is room for future borrowing given that debt is less than 30% of GDP.

In addition to the challenges of the supply side (revenue) of the fiscal policy, the fiscal side of expenditure has also been faced with challenges of budget credibility. The latest Auditor General’s report alludes to several cases of budget indiscipline related to nugatory expenditure, procurement flaws, unverified vouchers, and excess expenditure among others. The government has also relied on supplementary budgeting for the past consecutive four years. The FY 2009/10 saw a supplementary budget of Shs.500 billion (7.2% of the approved budget); Shs.753.6 billion (9.7%) for the year 2010/11; shs.700.1 billion (7% of the approved budget) for FY 2011/12 while FY 2012/13, the MoFPED the 1st supplementary schedule was about 5% of the approved budget.

The supplementary budgets are in most cases dominated by recurrent foreseeable expenditures for example on State House and Public administration. As much as the Public Finance Bill currently before parliament presents an avenue to address supplementary budgets through introduction of a contingency fund of 3.5% of the approved budget, the good laws in Uganda always remain on paper.

Needless to mention, the cost of corruption is high and the Auditor general in his latest report identified about 700bn to have been lost in FY 2011/12. This is 5-7% of the approved budget which is in line with the World Bank estimations of about 5-10% lost in corruption lost annual. With 10% of the approved budget getting lost annually, Uganda is losing a full budget year in 10 years.

Corruption is not the only constraint to doing to business in Uganda. In the Ease of Doing Business 2013, Uganda,  120 out of 180 countries with the areas under scoring being access to good infrastructure especially energy, ease of starting a business, protecting investors, registering properties, enforcement of contracts and trading across borders. Uganda’s infrastructure is among the worst in the world (Republic of Uganda 2010; World Bank 2007).

The National Development Plan identifies weak infrastructure as one of the key binding constraints in Uganda. Roads, power and railways are all below those of Uganda’s neighbors, with grave implications for the economy. It is a welcome move however that the current budget priorities key infrastructure projects in energy, works and transport sectors.

On top of the agricultural sector getting only 4% of the current budget proposal, we continue to see limited linkages with the banking sector Private sector Credit is largely skewed to construction, trade and salaried loans. The building and construction sector constituted the largest share of total credit, dominating at 23.3 percent. The share of the trade and commerce sector to total lending, which in the previous year constituted the largest share at 21.5 percent, increased slightly to 21.7 percent.  Personal and household loans constitute 21.1%, manufacturing at 8.9% and agriculture at 6.4%.

Low agricultural productivity arguably is linked to current account deficit which remains at over 10% of GDP. This implies we demand more forex to import than forex we get from exports thus leaving exchange rate vulnerable to volatility. The current account is not likely to ease in coming few years due to oil investment imports. Despite the diversification of its export base, Uganda remains heavily dependent on primary commodities. Diversification of the export base is of paramount importance. The factors that continue to constrain export diversification include the primary and low-value-added nature of Uganda’s exports, poor product quality, and poor regulation standards, which inhibit competition in marketing and export of primary commodities. The current account deficit could also dent the further accumulation of reserves the reserves are the main source of revenue for the central bank revenue but due to low rates on international markets, the central bank incurred operational losses in the last financial year.

Lastly, needless to mention is the bulging level of youth unemployment estimated at 32.2%. The education environment has seen about 400,000 graduates churned out every year from colleges and universities: the employment sector can only absorb about 20,000 per annum. The growing youth unemployment could fundamentally pose political and socio-economic challenges. 

Uganda will also face a number of other internal and external risks like  reduced reliance on foreign aid,   the nascent oil sector challenges, supply or structural shocks to prices/inflation, global fluctuations on oil prices as well as economic conditions in Europe, China and America.  To mitigate the ultimate effects, the monetary policy and fiscal policy have read from the same page. The oversight institutions have to be at their best helping in bridging the large implementation gap.

Uganda has a number of opportunities that it can capitalize on including the discovery of oil, growing private sector as well as the Potential to play a coordinating role and harmonize policies for the EAC, COMESA and non-EAC Great Lakes regional market, given its strategic location in the middle of EAC.

By Enock Nyorekwa Twinoburyo

Economist.

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