ACME ISSUE BRIEF No. 2
SPEND ONLY MONEY THAT IS BUDGETED INTRODUCTION
Uganda is one of 188 member countries of the IMF, having joined the Fund in September 1963. After the reading of the national budget in 2014, Uganda no longer receives money from the IMF the African Centre for Media Excellence (ACME) — it graduated from having a financial support hosted Ms Ana Lucia Coronel, senior resident rep- relationship. What Uganda has now is a PSI relaresentative and mission chief for Uganda Interna- tionship where the IMF writes a report twice a tional Monetary Fund Office. Ms Coronel spoke at year on the country’s met and unmet macroecoACME on the evening of Thursday, 19 June 2014, nomic targets. A surveillance relationship is where under our “An Evening With…” monthly speaker the IMF gives an opinion once a year. The IMF is a series aimed at getting primarily journalists to en- monetary institution (meaning if it lends money, it gage with a variety of subjects in an informal set- does so to central banks to stabilise aspects like ting. The talk sought to place the budget in the balance of payments) whereas the World Bank is a broader economy. development institution. Notes: The PSI is an instrument of the IMF designed for countries that do not need balance of payments financial support. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, signal to donors, multilateral development banks, and markets the Fund's endorsement of a member's policies. See http:// www.imf.org/external/np/sec/pr/2014/pr14563.htm See details about similarities and differences between the two Bretton Woods Institutions here https:// www.imf.org/external/pubs/ft/exrp/differ/differ.htm
Context The budget is an important tool the government has in its delivery of economic growth. It contains the government’s plans for the fiscal year ahead, in this case 2014/15, and how those plans will be implemented. It is an important tool for macroeconomic management. It contains information on revenues, expenditures, and over all it indicates what the economic position will be at the end of the year and how to finance it in the year. As the budget is prepared, officials in the Ministry of Finance and Bank of Uganda work with a set of assumptions with a focus on some key areas. For 2014/15, three elements informed budget-making. One is growth (real GDP): what it will be and how it will be achieved. Uganda’s growth is being led by the public sector through public investments in energy and transportation infrastructure. The private sector, which ironically accounts for a large number of economic activities, is growing at a slower pace than the public sector. The private sector is suffering partly because poor weather has affected agriculture, and regional shocks such as the South Sudan conflict has affected exports and remittances. Economic growth is thus projected at 5.7 per cent this coming year although it should be at least 6 per cent. So there is recognition that the private sector should contribute more and growth should be higher. Another objective of budget is to preserve low inflation and Uganda has been pretty successful on this front. The Bank of Uganda target is 5 per cent for the medium term. The
third is external position of the country — how solvent Uganda is in relation to the rest of the world. The current account deficit was small this year but is expected to widen a little, Ms Coronel said. With Karuma and Isimba hydropower dams, there will be many imports leading to the expansion the current account. It is not a bad thing: it depends on how you are going to finance it. The government will borrow from China’s Exim Bank at low interest rates and also use international reserves (savings) in the Bank of Uganda. In any case, Ms Coronel said, the reserves will still stay at a healthy 4.2 months of imports, yet for Uganda, 3.8 months of imports is okay.
Reporting tip 1 The private sector should contribute more to growth. PSFU’s Gideon Badagawa raises a similar point. And one hears the same thing often from policy makers too, including President Yoweri Museveni. So, beyond the weather and South Sudan, why is Uganda’s private sector not booming as all these people say it should and must? Reporting tip 2 Everyone who cares talks about the need for inclusive growth. Is that happening in Uganda? How severe is the situation of income inequality in the country? What are the trends saying? Who is, if anyone, addressing this particular issue?
Source of revenue The government has to think about the source of the revenue, collection of the revenue, and its distribution in the economy. This is crucial given that Uganda is not a tax-heavy economy. Tax-toGDP ratio of 13 per cent is too low even by regional standards where the range is 15-19 per cent. The East African Community objective is 25 per cent. If Uganda collected several taxes — which were hitherto exempted, for example commercial banks were not paying tax on interest they make on loans to the agricultural sector — it would instantly grow its taxto-GDP ratio by 0.5 per cent. Reporting tip The question of expansion of the tax base is perennial. Was there anything in the 2014/15 budget to suggest the government is beginning to move aggressively to rope more individuals and businesses into the taxable pool? Was there anything innovative to make Ugandans richer so they can be taxed? What are the compliance and enforcement issues? Is there simply lack of a culture of paying taxes? As Ms Coronel said, “There is no magic formula to increase revenues if people don't want to pay taxes.” Are people reluctant to pay because they think the government cannot deliver value for money? What kind of consequences should those who don't pay taxes face?
The Uganda budget cycle
Supplementary budgets New needs arise during the fiscal year, and so the government ends up with a supplementary budget. But this is not a good idea. It is better to have some appropriation in the budget to cater for contingencies, Ms Coronel said. For this to work, she added, the government must resist spending pressures. It is important to adhere to the budget/monitor the budget account closely, and any adjustments in expenditure should be related to availability of actual revenue. The budget now has a contingency budget line as a way to say no to supplementaries. Everything in the budget is what has to be implemented, she said. No more than that. Otherwise the government is tempted to borrow, including borrowing domestically. But borrowing domestically should occur with knowledge that external and domestic debts need to find a balance. High domestic debt means commercial banks instead of lending decide to buy government debt in form of treasury bills and bonds. This crowds out the private sector
i.e. private sector credit doesn’t increase because a lot of resources are devoted to finance public sector needs. “This has started to happen in Uganda,” she said. The next budget should take corrective action so that this does not become a practice. Uganda’s debt is 33 per cent of GDP and is “very sustainable”. The issue is what rate debt is going up.
Reporting tip What is the state of domestic debt? Will the government actually behave and avoid resorting to supplementary budgets? What are the factors behind budget indiscipline? As a result of corruption, wastage and constant recourse to supplementary budgets, donors channel a good amount of money toward projects (away from direct budget support). This has made it hard to know the whole off-budget sector and its impact on the economy. This is worth robust journalistic inquiry.
Good economic prospects Things look pretty good for Uganda over the 10year horizon underpinned by prospects for oil, regional integration, and closure of the infrastructure gap. If these three things are done in a good way, the IMF official said, they will have a positive effect. For oil, full transparency is key in management of revenues. For EAC integration, Uganda has to prepare, harmonise everything. If each country does a good job, she said, there will be positive externalities. For infrastructure, projects need to be commercially viable to benefit the economy. Reporting tip 1 Oil — if Ugandan officials have stolen big monies meant for Aids patients, for vaccination of children, for rehabilitation of northern Uganda in the wake of a devastating 20-year conflict, for the Commonwealth Summit in 2007, what will stop them dipping their hands into the petroleum fund? Reporting tip 2 EAC integration — President Museveni is arguably the foremost proponent of regional political integration. But thus far, how much has Uganda gained from being an active participant in the East African Community? What are Uganda’s minimum interests that must be met for it to continue membership?
The budget and elections The way to go is for the minister of finance to say no to electoral pressures to spend unbudgeted money. Money for elections should be budgeted for normally. This means money not in the budget cannot be spent. But citizens must have a say as well. Reporting tip How is Uganda actually going about financing of the 2016 elections? Will all expenditure be provided for within the budget as Ms Coronel would like to see? Will electioneering have inflationary impact on the economy? If so, how will that come about?
Reporting tip 3 Infrastructure — Governor Tumusiime Mutebile of the Bank of Uganda and former Minister of Finance Maria Kiwanuka have said variously that Uganda has a problem designing, costing and implementing large projects. Given the controversies swirling around roads such as Katosi, railways such as the standard gauge, and dams such as Karuma, is anything changing? What is it?
African Centre for Media Excellence Plot 124 Nanjala Road Bunga Soya, Kampala P.O Box 11283 Kampala, Uganda Tel: +256 312 202 351 Email: info@acme-ug.org www.acme-ug.org