Finance minister Matia Kasaija will find himself between a rock and a hard place when he lays out his plans for Uganda's economy on national budget day during the second week of June.
On the one hand, Kasaija needs to raise taxes to generate the revenue that would be used to run the government and create wealth for households. But on the other hand, raising taxes on people struggling to make ends meet is to drag them to the brink, where many have already fallen off the cliff and into the poverty trap.
And the two options are being considered as a huge pile of debt hangs heavily on Kasaija’s shoulders, so much that the country is dangerously close to being unable to pay back its loans if nothing is done.
As if that is not enough, risks from global developments such as the war in Ukraine are being blamed for the increase in prices of commodities such as fuel, a key component that influences the change in the inflation print.
Also, as neighbouring Kenya — a critical transport corridor for much of Uganda-bound cargo — prepares for what could be tense national elections in the third quarter of the year, logistics companies are worried about the country being an unviable route should the electoral results be disputed.
Regardless, Kasaija projects domestic revenues — a combination of both tax and non-tax revenue — for the financial year 2022/2023 to be at Shs 25.5 trillion or $7.2 billion. This amount is higher than the Shs 22.4 billion or $6.4 billion in the current financial year 2021/2022, which ends on June 30.
Of the Shs 25.5 trillion, at least Shs 5 trillion — nearly 20 per cent — will go towards paying interest on the loans. The interest payment is higher than the Shs 4.6 trillion threshed out in the financial year 2021/2022.
To shore up the money needed, Kasaija will unveil a raft of tax measures targeting the usual suspects such as the beverage industry, scrapping some incentives, and cast his net wider to loop in those in the real estate sector, among others.
LOW GROWTH IN DOMESTIC REVENUE
However, domestic revenues are growing slower than the pace at which the economy is expanding. The government projects that the economy will grow to about six per cent in the financial year 2022/2023, up from 3.8 per cent in the financial year 2021/2022.
It says the growth is driven by the impact of its intervention during the Covid-19 pandemic where it pumped some money into the economy to resuscitate private businesses and stimulate demand for goods and services. According to official figures, the domestic revenue from the current financial year of 2021/2022 was estimated at 13.8 per cent of the Gross Domestic Product (the size of the economy).
For the next financial year of 2022/2023, which starts on July 1, the domestic resources are estimated at 13.6 per cent of the GDP, which means the Uganda Revenue Authority is facing administrative challenges to collect revenue.
Compared to its neighbour Kenya, whose domestic resources compared to GDP is above 17 per cent, Uganda has quite a bit of work to do. While Uganda’s ministry of Finance projects tax-to-GDP ratio to grow at an average of 0.5 per cent over the next three to five years, in the short term, the country has to depend on loans and financial support from the developed world.
Both those options appear to be tricky now. Let’s start with the loans. Uganda’s debt level —at just over 50 per cent of GDP— has wobbled over the agreed East Africa ceiling, moving worryingly close to unsustainable levels. Experts describe the situation as a “moderate risk of default”.
If Uganda defaults on its debts, the country will need to seek forgiveness from the lenders but commit to undertaking tough actions as it embarks on a tortuous journey back to financial sustainability. However, government technocrats do not see the country taking that direction and have pledged to knock down the debt to below 50 per cent of the GDP within the next three years.
Debt, many within government argue, is not bad; it is whether the economy is generating enough returns from which the government can service its loan that should be a point of discussion.
Using its instruments such as the nearly risk-free treasury bills and treasury bonds, the government — the biggest spender in the economy on which the private sector relies — intends to borrow Shs 2.8 trillion from the domestic market in financial 2022/2023, slightly lower than the Shs 2.9 trillion from last year.
The government’s decision of borrowing from the domestic market, which is dominated by commercial banks, tends to crowd out credit that would otherwise have been channelled to private businesses. Banks prefer to lend to the government through the purchase of securities than to lend to the riskier private sector.
Banks usually say they have enough money to invest in government securities and also in private sector players. However, government borrowing usually stimulates an increase in interest rates on commercial bank credit to the private sector. Other than the domestic market, the government will look to development partners for financial support.
BUDGET SUPPORT DECLINES
According to the National Budget Framework Paper for 2022/2023, budget support from the development partners will drop by more than 50 per cent, the biggest decline in the recent past, to Shs 1.29 trillion in the financial year 2022/2023, from Shs 3.58 trillion in the current financial year.
The paper does not offer a reason as to why the budget support has undergone a sharp decline, although there have been worries within the diplomatic circles on the quality of debt that Uganda has built up over the years, complaints of human rights abuses, and the execution of project support that has seen a reversal of some of the gains that the country had achieved years back.
And while there has also been a drop in the financial support that the development partners intend to offer specific government projects, the decline pales in comparison to that of the budget support. Project support from the development partners is estimated to be Shs 5.5 trillion in the financial year 2022/2023, down from Shs 6.8 trillion, according to the budget framework paper.
So, with the key sources of money for the budget — tax revenue and financial support from the development partners — not looking rosy, Kasaija finds himself in a delicate balancing act.
The budget framework paper notes that the government’s “overall fiscal strategy is to promote inclusive growth to increase household incomes and improve quality of life of Ugandans without compromising fiscal and debt sustainability”.
Under the current situation, Kasaija and his team know how tough this assignment is.
This story was undertaken in collaboration with the African Centre for Media Excellence. It first appeared on ACME’s website https://ugandajournalistsresourcecentre.com