Uganda, Kenya miss targets, turn to domestic borrowing

A Bank of Uganda stand in a finance and insurance expo in Kampala. The government seems set to close the financial year with a huge revenue shortfall. Photo/Morgan Mbabazi  Nation Media Group

By JOINT REPORT The EastAfrican
 

 

In Summary

• Any increased borrowing in the local market by governments, given the high lending rates, is bound to raise fears of crowding out the private sector from credit

Kenya and Uganda look set to close this financial year with huge revenue shortfalls, as new data shows tax collections have trailed budgeted targets, putting pressure on the two governments to borrow more from the domestic market.

Any increased borrowing in the local market by governments, given the high lending rates, is bound to raise fears of crowding out the private sector from credit. Yet, the two governments will have to meet the spending plans for the remaining one month before the next fiscal year begins.

Uganda’s tax collections were behind target by Ush31.79 billion ($12 million) in April, grossing Ush582.53 billion ($222.5 million) in an environment clouded by weak economic recovery and modest turnover in several businesses, according to the Uganda Revenue Authority (URA), worsening the country’s funding pressures with still a month left to budget day.

Kenya, in its latest budget review paper said it was at least Ksh100 billion ($1.17 billion) short of its revenue target as at the end of March, pointing at the possibility of the government not meeting the budget for the year, which ends in June.

Treasury attributed the shortfalls to lower than expected tax collections. Treasury said revenue in the first nine months of the year hit Ksh564 billion ($6.63 billion), Ksh98 billion ($1.15 billion) below the targeted Ksh662.3 billion ($7.78 billion).

For Uganda, the revenue shortfall translates into a cumulative deficit of Ush157.08 billion ($60 million) for the period July 2012-April 2013, with total collections estimated at Ush5,726.54 billion ($2.2 billion) against a periodic target of Ush5,883.62 billion ($2.25 billion).

Faced with this troubling scenario, technocrats in Uganda’s Finance Ministry need to find ways to raise for higher domestic resources at a time of steep budget cuts.

Budget support is projected to fall by 93 per cent. So far, attempts to fill the tax gap have seen the shake up of various government departments with accumulated arrears.

“We are stepping up efforts to recover massive tax arrears registered by some government departments,” said Sam Serunkuuma, manager at URA’s Large Taxpayers Office.

Kenya and Uganda have since the beginning of the financial year been grappling with the twin problems of sharp revenue shortfalls and spiralling expenditure. This means the countries have had to reach out to the domestic credit market to finance their expenditure.

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For Kenya, local borrowing is not much of an option right now because the government has almost surpassed its borrowing target for the financial year.

Kenya’s total domestic debt increased by Ksh212.5 billion ($2.49 billion) (or 24.7 per cent) as at May 10, from Ksh858.8 billion ($10.09 billion) at the end of June 2012. The cost of servicing Kenya’s domestic debt rose 38 per cent to Ksh90 billion ($1.05 billion) between June 2012 and May this year, making it more urgent for the Treasury to source cheaper financing.

The private sector has lobbied the government to reduce borrowing from the domestic market over concerns that banks will shy away from lending to the private sector, instead preferring to buy government securities.

Kenya says it will slash its domestic borrowing by a third in the coming financial year, as the country takes measures to encourage local credit expansion.

The country’s budget estimates show that domestic borrowing will drop to Ksh106 billion ($1.26 billion) in the 2013/2014 financial year compared with Ksh164.9 billion ($1.96 billion) in 2012/13, with the government intending to increase borrowing from external sources.

The government plans to raise Ksh880 billion ($10.48 billion) — or half of its Ksh1.6  trillion ($18.82 billion) budget — from taxes, with the remainder expected to come from external sources as well as from receipts, penalties and licence fees.

“Sudden and massive government borrowing in the financial markets could lead to notable increases in yields earned on government securities because of some investors’ urge to capitalise on its hunger for money. This scenario might equally stimulate increases in time deposit rates,” said Stephen Kaboyo, Managing Director at Alpha Capital Partners, a forex trading and financial consultancy firm.

By Bernard Busuulwa and Peterson Thiong’o