When the 2010/11 financial statement was presented, it was duly decried by analysts as a “populist election budget.”
It is only now that the gravity of that statement is dawning on the country: Public finances have been drained to fund election campaigns.
The treasury is clueless on how to clean up the mess; and economists are predicting tough times ahead for the economy as inflation soars.
By December 2010, the midway point of the Ugandan financial year, Ush6.4 trillion ($2.75 billion) had been appropriated of the Ush7.3 trillion ($3.14 billion) 2010/11 national budget and of this, Ush3 trillion ($1.29 billion) had been spent.
In January, parliament approved a supplementary budget of Ush602 billion ($260 million), pushing the total figure to Ush8 trillion ($3.4 billion) following additional budget allocations for State House, the Electoral Commission, the army and the Inspectorate of Government.
Within a few weeks, Finance Minister Syda Bbumba admitted that the government was broke, a statement that invited uproar and scrutiny of the government’s fiscal discipline.
It turns out, instead, that the money was channelled into the National Resistance Movement’s campaign.
“The money has gone into the campaigns and not productive sectors. If it were for capital development, it would be known. It is being consumed and to recoup it will take us about three years. This means the cost of living is going to go up while the standard of living will go down,” said Nandala Mafabi, chairman of parliament’s Public Account Committee.
On closer scrutiny of public finances, it turns out that 85 per cent of the entire budget has been spent, but more importantly, Ush3.2 trillion ($1.3b) was blown in January alone, an official at the Ministry of Finance said.
In the short term, economists further warn, various projects will stall as there will be a squeeze in development spending.
“The money will be going into administrative spending. These are areas that do not produce goods and services. In the long run, it will affect the growth of the economy,” said Dr Evarist Twimukye, senior research fellow at the Economic Policy Research Centre.
This is crisis time; Treasury is left with only Ush1 trillion ($432 million) to spend over the next five months.
The puzzling question is how it intends to fix the mess left by NRM’s rapacious feeding on the public purse.
A raid of the reserves will not do as these are negligible — only enough to support the country’s import bill for five months.
Printing more money would run foul of Central Bank officials desperate to keep inflation at bay.
Keith Muhakanizi, Deputy Secretary to the Treasury, has ruled out both the money printing and debt options.
But Bank of Uganda research director Adam Mugume said the Ministry of Finance cannot escape the debt option.
Hence the government will either take on more debt or Ms Bbumba and her team go back to the drawing board and decide which projects are of less importance and should have their funding cut.
The two options are not mutually exclusive and despite Mr Muhakanizi’s assurances to the contrary, the government is indeed going to have to borrow to fund supplementary expenditure.
“Because of the supplementary budget, the level of domestic borrowing is going to rise from the budgeted Ush400 billion ($172.4 million) to Ush1 trillion ($432 million),” said Dr Mugume.
But with non-concessional borrowing set at a limit of $500 million and a myriad other financing rules, the new borrowing figure seems too close to the limit for comfort.
Besides, international lenders willing to lend under terms favourable to Uganda are starting to cut back so as to clean their own house.
The other option, of a spending freeze and cutbacks, is already in place.
Officials at Treasury have already done some creative accounting to move resources from some sectors to others.
“We are going to cut spending in non-priority areas and divert those savings to priority items. For instance, we needed to beef up security for the elections hence we gave more money to the police,” Mr Muhakanizi admitted.
Priority areas for the 2010/2011 budget are infrastructure (roads and energy); promotion of science and technological innovation to create value addition and employment; enhancing agricultural productivity; private sector development; and improving public service delivery.
Treasury will cut back on allowances, travel and workshops.
The government is also going to carry out cuts in development expenditure due to its high import content, and the unforeseen exchange rate depreciation.
“It means that development budget plans as of June 2010 cannot be met. Finance is therefore reviewing all the development expenditures to see which ones can easily be staggered,” Dr Mugume said.
BoU Governor Tumusiime Mutebile would not comment on the state of affairs at the Finance Ministry, emphasising that he is not responsible for public finances, but he has in the past warned, “The government needs to maintain fiscal discipline in order to avoid borrowing. It is through such discipline that we successfully brought down inflation to single digits.”
Currently, inflation is at 5 per cent, a level that Central Bank is desperate to maintain or lower.
As the government is the biggest spender, reducing its injections into the economy impacts on the liquidity position and leads to an increase in interest rates.
By January 2011, official government expenditure had underperformed by about 14 per cent.
The resulting higher bank rates would mean commercial banks lose interest in lending to retail customers, preferring to invest in government paper.
Because it is more profitable and less risky for banks to invest in Treasury-bills, the private sector’s access to credit is reduced; it is more expensive to borrow because they have to pay a premium above the T-bills, resulting in higher prices throughout the economy.
“At the micro level, some agencies will not spend as expected while at the macro level, aggregate demand will most probably go down, which means economic growth prospects shall suffer,” said Lawrence Bategeka, a senior research fellow at EPRC.
Dr Mugume agrees, but believes Uganda will reach the projected level of GDP growth by the end of the fiscal period.
“The economy is quite strong. first quarter GDP figures indicate a very high growth and if it were to be maintained, we could achieve growth rates of above 10 per cent. But the need to tighten monetary policy, which ultimately reduces credit to the private sector, government cutting back on its expenditure and external shocks currently hitting the economy suggest that in the second half of the year, growth will be subdued, but overall GDP should be around 7 per cent. All of this obviously depends on future political stability,” he said.