Uganda’s current account deficit increased to an estimated $3.037 billion by close of 2018/19, from $1.23 billion as at the end of 2017/18, on account of rising imports and growing pressures on the exchange rate and core inflation. But its impact on import tax revenues appears modest.

The current account deficit is a measure of trade where the value of the goods and services a country imports exceeds that of its exports.

The country’s trade deficit was projected to widen by $489 million to $2.581 billion by the end of June this year, according to the latest Central Bank data.

The swelling trade deficit is blamed on increased private imports dominated by machinery, base metals and oil coupled with weak export earnings between July 2018 and May 2019.

Total export revenues, excluding gold receipts were forecast to drop by $191 million by close of the financial year 2018/19.

While ongoing road construction projects, civil works being undertaken on mini hydro power dams and final technical works carried out on the 600MW Karuma power station are closely linked to significant volumes of imported equipment, new investments being made in the industrial and agricultural sectors have equally boosted the current account deficit.

Century Bottling Company Ltd, the local producers of Coke products for example, installed a $10 million mineral water production line imported from Germany last year while Cipla Quality Chemicals Ltd is executing a $7 million expansion programme that includes a new $2 million drug testing laboratory and a warehouse.

More than 10 foreign-owned factories were commissioned last year in the Namanve Industrial Park and Nakaseke Industrial Park comprising of electric cables, electrical transformers and ceramic tile manufacturers.

Strong pressures arising from the current account deficit were felt by the exchange rate between May 2018 and May 2019, the data shows.

The Uganda shilling fell by 1.1 per cent against the US dollar from March-May 2019 in contrast with a two per cent gain registered in the previous quarter.

Intense pressure

The shilling declined by one per cent to Ush3,763.3 against the US dollar on a yearly basis by close of May under intense pressure from manufacturers and fuel companies seeking to execute import orders and dividend payments to foreign shareholders, amid lower dollar flows among exporters and non-governmental organisations.

Core inflation, a measure of price movements driven by changes in the cost of imported items rose from 4.6 per cent in May to 4.9 per cent in June as the shilling’s weakness fed into various import items, particularly household products like baby diapers, perfumes and washing detergents.

“Our current account deficit may lower towards election day after the completion of Isimba and Karuma power dams alongside stalled progress on the standard gauge railway project. But government infrastructure spending could pick up after the election season, putting pressure on the forex market as we mobilise dollars for government imports,” said the director for financial stability at the Bank of Uganda Kenneth Egesa.

Mr Egesa said that interest rates on government bonds could also rise as government seeks more debt to finance infrastructure projects.

Total import duty revenues grew by 10.85 per cent to Ush6.87 trillion ($1.8 billion) at the end of 2018/19, representing a surplus of just Ush0.34 billion ($91,058) according to latest Uganda Revenue Authority figures. This outcome is partly explained by tax exemptions offered to large infrastructure projects.

“The current account deficit is likely to grow bigger because of rising car imports alongside certain consumer items. Many people are eager to buy cars as a status symbol and tend to take advantage of any sign of appreciation in the exchange rate to make car purchases.

“A rise in import duty on certain items are bound to boost Customs revenues in the current financial year,” said Jet Tusabe, a tax director at audit and accounting firm BDO Uganda.

The import duty rate levied on honey products was raised to 60 per cent from 25 per cent as per the 2019/20 budget statement, and that on granite, marble and ceramic tiles to 35 per cent from 25 per cent.

The import duty charged on tomato paste and other preserved tomatoes was increased by 10 per cent to 35 per cent while that on processed juices was raised to 60 per cent from 25 per cent.

The import duty charged on television sets was also raised to 35 per cent from 25 per cent with effect from July 1.

“Uganda Revenue Authority’s decision to switch to a digital Customs declaration system has created inefficiencies in the import value chain and raised the cost of doing business due to delays clearing goods caused by weaknesses in the system and as Customs officials get aquinted with it, said Dick Wadada, a hardware dealer.

“The new taxes particularly ceramic tiles are also very frustrating for importers. In the short term, URA might beat tax collection targets but at the expense of the private sector and that is not sustainable.”