Uganda will increase its domestic debt for the 2014/15 financial year to achieve its expenditure targets.

This comes at a time when the government is under intense pressure from the private sector to slash taxes that have rendered businesses uncompetitive in the East African Community Common Market.

The country’s external debt as at last December stood at $6.4 billion while domestic borrowing was at Ush2.2 trillion ($874.2 million).

Given the financial squeeze occasioned by aid cuts by some donors and revenue collection shortfalls, officials in the Ministry of Finance said Kampala will borrow more from domestic sources to plug the budget deficit.

The only option

In the current financial year alone, the government borrowed Ush1.7 trillion ($679.7 million), more than twice the amount it had planned to borrow at budget time in June last year.

But Uganda plans to borrow up to Ush2 trillion ($794.7 million) from domestic financial markets in the next financial year, a government economist said.

Dr Fred Muhumuza, economic advisor to the Minister of Finance, said although the international bonds markets are cheaper, payment can be cumbersome as institutions have to pay all the borrowed money at once, leaving domestic borrowing as the only option.

International bonds are cheaper as interest stands at between four and six per cent but lumpsum payment within a short time of about three years is not feasible for Kampala, while the fiscal bonds can be paid slowly at current rates of between 13 per cent and 14 per cent.

Increased government borrowing could push interest rates higher than the current industry average of 21.5 per cent.

“Lending money to the government is juicy as banks don’t have to worry about things like default,” said Dr Muhumuza. “But it crowds out the private sector.”

International Monetary Fund mission chief and senior resident representative for Uganda Ana Lucia Coronel has already cautioned the government against domestic borrowing.

“In particular, the mission urges the authorities to take steps to avoid incurring domestic arrears that weaken economic management by impairing budget planning, increasing costs for the government and negatively affecting those who conduct business with the government,” she said in mid May.

READ: IMF warns Uganda on economic risks

It is also anticipated that the taxman’s performance will not improve significantly as the government is promising the private sector it will slash some taxes, further impacting on URA’s revenue collections.

Secretary to the Treasury Keith Muhakanizi said the government had no objection to removing some taxes as long as this facilitated survival of local companies. Among these is the 10 per cent excise duty on cosmetics and perfumes, a tax that was introduced in 2012 in a bid to increase revenues.

Uganda, along with Kenya and Rwanda, agreed in May to a 20 per cent cut in tariffs on telecommunication companies so that the three countries can actualise the single area network.

This means Uganda will lose out on the $0.2-$0.25 levy per minute that was to be charged when SIM card holders are roaming within East Africa.

READ: No tax: Calling rates set to fall in four EA countries

While meeting business lobby Private Sector Foundation of Uganda on May 20, Mr Muhakanizi also said the government would strongly consider reducing the 13 per cent excise duty on soft drinks so as to bring the tax to the same levels as in Tanzania and Kenya, where it is seven and eight per cent, respectively.

Avalanche of tax pleas

Simon Lugoloobi, the chief executive officer of Crown Beverages, had argued that despite non-tariff barriers in EAC being removed, soft drinks from Uganda remained uncompetitive in the regional market. But Mr Muhakanizi also faced an avalanche of tax reduction pleas from businesses that primarily produce for the local market.

“The 10 per cent excise duty that you are charging us is killing businesses, especially when we have to compete with Chinese products that pay the same amount of tax,” said Emmy Tusaasirane, public relations officer of local cosmetics and perfumes firm Movit Products.

The Treasury hoped to generate Ush160 billion ($62.4 million) and Ush4.1 billion ($1.6 million) from roaming levies and excise duty on locally produced cosmetics.