Uganda’s priority sectors funded despite debt risk

Monday June 25 2018

truck, manufacturing

A truck hauls an industrial boiler to a factory in Uganda. Manufacturing has been flagged as one of the priority sectors in this year’s budget. FILE PHOTO | NATION  

More by this Author

The government says all is well, but domestic borrowing and modest forex reserves stoke fears over Kampala’s ability to repay its ballooning debt in the future

Uganda‘s huge allocations to the works and transport, education and health sectors in 2018/19 appear to reflect service delivery ambitions, but the absence of growth benefits tied to heavy sectoral expenditure has raised questions on budget implementation amid increased and worrying debt levels.

The latest budget proposals unveiled on June 14 indicate a steady pattern of large allocations offered to the three critical sectors since 2015.

These allocations are mainly inspired by ambitious infrastructure investment goals outlined in the second National Development Plan for the period 2015-2020, though recent budgetary performance assessments done by the National Planning Authority show the budget underperformed on various goals.

According to the NPA’s budget assessment report for 2017/18, the current budget achieved a compliance score of 54 per cent, an outcome deemed unsatisfactory by the planning body. The macroeconomic segment registered the poorest score at 41.9 per cent while sectors, ministries and departments scored 53.2 per cent.

Overall budget performance for 2016/17 was rated at 58.8 per cent, the report shows.

Budget proposals show the works and transport sector is to receive Ush4.8 trillion ($1.24 billion) in 2018/19, taking the lion’s share of the Ush32.7 trillion($8.44 billion) budget envelope.

Education was allocated Ush2.8 trillion ($722.4 million), a chunk of which is meant for construction of new primary and secondary schools and equipping existing ones with various learning materials. About Ush2.3 trillion ($593.4 million) was allocated to the health sector.

While the economy is projected to grow by 5.8 per cent in 2017/18 compared with 3.9 per cent in 2016/17, the direct contribution of highly funded sectors remains unclear despite ambitious growth forecasts by government officials.

The Ministry of Finance, Planning and Economic Development projects the economy to grow by seven per cent over the medium term but economic activity appears low in many sectors, largely because of limited government spending, weak credit growth and a slowdown in foreign direct investment inflows, observers say.

Boda boda

“There is a lot of money lying in government hands that can be used effectively in neglected but more productive areas. For example, the Youth Livelihoods Programme has about Ush200 billion ($51.6 million) in its account every year but most of this money is lent to youth to acquire boda bodas (motorcycles) and incurs high interest rates,” said Charles Mubiru, a Uganda Manufacturers Association board member.

“Part of these funds could be channelled to the UMA for low cost machinery suitable for light manufacturing in the agro processing and metal products sub-sector that bring in higher returns than boda boda,” Mr Mubiru added.

Rising debt levels have similarly triggered concerns among financial experts over Uganda’s future business competitiveness ratings.

Though the government insists that the debt situation is sustainable, with a debt to GDP ratio of 38.1 per cent — a figure well below the EAC monetary convergence ceiling of 50 per cent, the sharp growth in domestic borrowing, debt financing costs and modest foreign currency reserves have raised fears over its ability to clear future debt obligations.

A higher debt burden faced by a country usually leads to higher tax rates, increased business licensing fees and cuts in government spending in an effort to raise more money needed to settle growing debt repayment costs, economists claim.

By end of March, Uganda’s total public debt stood at $10.53 billion, with foreign debt accounting for $7.18 billion while domestic debt amounted to $3.35 billion, according to the latest government data.

Widening deficit

The domestic borrowing target increased from Ush612 billion ($157.9 million) in 2016/17 to Ush950 billion ($245 million) in 2017/18. But actual domestic borrowing surged to Ush1.69 trillion ($436 million), representing an increase of Ush740 billion ($190.9 million) — attributed to a widening tax revenue deficit and emergency political-related spending.

The country’s tax revenue deficit is projected to hit a record Ush600 billion ($154.8 million) by the close of 2017/18.

“Whenever a country borrows more money than investors believe it is capable of repaying, its debt levels are considered less sustainable. Under these circumstances, foreigners are reluctant to invest money here because they do not feel there is enough consumer demand to generate high turnover and profit.

“Higher domestic borrowing in the next financial year will inevitably increase the ‘crowding out’ of the private sector due to steep interest rates and less money available in commercial banks for lending to local consumers and businesses,” said John Jet Tusabe, a tax expert at KPMG Uganda.

The government’s domestic borrowing target for 2018/19 stands at Ush1.78 trillion ($459.2 million) while domestic debt repayments are estimated at Ush5.272 trillion ($1.4 billion), a figure higher than the budget allocations made to the top three priority sectors.

“Slow absorption of funds has been a problem because of procurement delays but we have tackled these problems through tightening budget controls and creating a project portfolio review team in the Ministry of Finance that tracks project implementation in all sectors.

“As a result, absorption of funds in government projects has risen from an average of 40-50 per cent in 2016/17 to 60 per cent this financial year,” Dr Albert Musisi, commissioner for macroeconomic policy at the Finance Ministry, said.

“Raising tax collections and government borrowing targets is a delicate balancing act,” Dr Musisi added.