Donors to Meet 40 Percent of Uganda's Budget
The East African (Nairobi) via AllAfrica.com
by Abbey Mutumba-Lule and David Kaiza
The success of Ugandan Finance Minister Dr Ezra Suruma budget will largely depend on President Yoweri Museveni's relations with Western countries and international lending institutions.
The government expects donors to contribute Ush839 billion ($479.4 million) - about 40 per cent of the expenditure - in budget support, which usually flows in tandem with the pace of implementation of agreed reforms and conditions. Another Ush1, 016 billion ($580 million) of donor money will fund specific projects.
Unlike in Kenya, where the government did not factor donor pledges into its economic agenda, any major interruptions of aid flows will badly disrupt Uganda's spending plans and precipitate unpredictability in interest rates, the exchange rate and inflation.
Reality may in the coming months force the administration to tone down the anti-donor rhetoric that has been on the rise lately, especially in the wake of the raging and divisive debate about Museveni's plans for a third term.
While unveiling his Ush3,799 billion ($2.1 billion) budget, the minister said his priorities would be to deliver economic growth, so as to rapidly increase the average standard of living; to demonstrate macroeconomic management, by promoting economic order and stability, and controlling inflation; and to provide public goods, being services vital to the country.
Dr Suruma appeared in many ways to sacrifice fiscal discipline for what is politically popular, with the general election due next year and the third term issue looming on the horizon. The budget made huge concessions to influential groups and extended goodies to major constituencies and key voting blocks in the country.
Standing out in this regard is the allocation of Ush2.7 billion ($1.5 million) to the creation of new districts and another Ush4 billion ($2.3 million) to a completely new political structure known as "regional tier," clearly in response to the Buganda demands for a federal system.
Under this system, a cluster of districts may decide to become one administrative "state" rather than a semi-autonomous political entity, making it a handy political machine at the beck and call of the political elite, especially during disputes such as constitutional reform.
Dr Suruma said that the central government would also take over the responsibility of paying the salaries of district chairmen from the cashstrapped local authorities. Popularly elected, the district chairmen are important local pointmen in electioneering.
Dr Suruma increased the salaries of teachers and university lecturers, compounding problems for an administration already burdened by a crippling wage bill, which consumes a disproportionate share of tax revenues.
Although no major turbulence is expected on the economic front, a new shift in monetary policy announced by Dr Suruma is likely to introduce new uncertainties in the financial markets.
Inflation is projected to remain below 5 per cent and reserves to be kept at a level of six-and-a-half of imports, with stability in the exchange rate guaranteed through official interventions in the market.
It is a major point of departure because over the past few months, the Bank of Uganda has literally suspended foreign-exchange sales even when flows from donor receipts required it to intervene to sterilise the flow of hard currency into the market.
With the bank choosing to sterilise hard currency inflows by increasing Treasury-bill sales, the impact has been to exert upward pressures on domestic interest rates and dampen private-sector borrowing.
In his speech, Dr Suruma lamented that the previous policy had shifted the burden of sterilisation to interest rates, a view expressed by President Museveni on the eve of the budget in his address to the National Assembly.
It is not certain when the Bank of Uganda will resume aggressive sales of foreign exchange in the market given fears that the foreign exchange market cannot absorb more sales without causing an excessive appreciation of the shilling.
At 9.2 per cent of the gross domestic product, Dr Suruma's budget rates better than the previous budgets, which had two-digit deficits. But the level still represents a risk of inflation and reduction of credit to the the private sector.
Reactions to the budget were mixed, with Jack Sabiti, Member of Parliament on the economy committee, saying it would not work.
"The people are poor, you cannot increase taxes at this time, this will cripple businesses," he said.
With a narrow revenue base, and the level of taxation at 13 per cent of the GDP, compared with 22 per cent for Kenya and a sub-Saharan average of 18 per cent, the taxman in Uganda is lenient, appearing to favour increasing taxes that are easy to collect, such as indirect taxes, air time, fuel and sugar.
Dr Suruma raised taxes on air time, from 10 to 12 per cent, and on petrol and diesel by Ush70 and Ush50 respectively. Other increases were in the prices of sugar by Ush50, vehicle licences fees and in VAT from 17 to 18 per cent.
The increases in indirect tax are, however, likely to lead to reduced demand for products, and also pressure on profits," noted Russell Eastaugh, director of tax services at Price WaterhouseCoopers.
President Museveni's description of the budget as pro-poor was arguable, said tax experts, depending on the definition of the poor.
For instance, on a pro-poor side, there are increased allocations for access to water, healthcare, education, expansion of agriculture and availability of premises and equipment for artisans.
The fact that excise duty on kerosene was not increased is also pro-poor. The abolition of graduated tax will be welcomed, particularly by the poor. The proposed expansion of microfinance initiatives in rural areas, and of tax exemptions for interest on loans to the agricultural sector are certainly pro-farmer, which could include the rural poor.
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