Uganda could exceed borrowing limit after House allows advance spending

Social sectors could suffer spending cuts in favour of infrastructure and defence, say experts. Photo/FILE/TEA Graphic 

By JOINT REPORT The EastAfrican

In Summary

• Uganda risks piling up a huge fiscal deficit with serious implications on interest rates and national debt after parliament allowed the government to spend a half of the 2014/15 budget in the first four months of the financial year.
• Economists warn that the decision is a high-risk gamble that could throw the budget into deficit if the Uganda Revenue Authority (URA) fails to collect sufficient taxes to meet its targets.
• Uganda runs a current account system where money is spent after URA has collected it.

Uganda risks piling up a huge fiscal deficit with serious implications on interest rates and national debt after parliament allowed the government to spend a half of the 2014/15 budget in the first four months of the financial year.

 

While the executive is allowed to spend a third of the budget without appropriation, the House last week caved in under pressure to approve unappropriated expenditure of $2.6 billion.

Coming against a background of uncertainties — ranging from aid cuts to a shaky export sector and threats by parliament to reject some of the proposed tax measures — economists warn that the decision is a high-risk gamble that could throw the budget into deficit if the Uganda Revenue Authority (URA) fails to collect sufficient taxes to meet its targets.

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“The assumption is that URA will collect money to match the expenditure but, if it fails, you will have a high fiscal deficit that will in turn drive up interest rates and you will be back to firefighting,” said Prof Augustus Nuwagaba of Reev Consult.

With legislators threatening to reject some of the new taxes announced by Finance Minister Maria Kiwanuka in the June 12 budget, experts predict borrowing is likely to shoot past the projected ratio of 39.8 per cent of GDP that the finance minister committed to in her budget speech.

That excludes pending borrowing for the Karuma and Isimba power stations and the standard gauge railway.

READ: EA Govts could sink deeper into debt to fund ambitious plans

In the circumstances, the alternative way to achieve a balanced budget would be to impose spending cuts in sectors such as education and health as the government seeks to plug the resulting resource gap, tax experts say.

Whereas public administration costs would be a soft target for fresh spending cuts, the likely impact in this area remains unclear due to growing political pressure ahead of the 2016 General Election, according to Peter Kyambadde, tax services manager at KPMG Uganda.

“Social sectors such as education and health could suffer more from spending cuts because of deeper emphasis on infrastructure projects and defence needs,” argued Musa Mayanja, an economist at the Economic Policy Research Centre in Makerere University.

“As a result, salaries and wages in the education and health sectors will remain stable for fear of political backlash but development items such as construction of new classrooms, health centres and vehicles are likely to be shelved in order to control expenditure.

“Nevertheless, the budget was primarily designed to spur growth after three years of underperformance of the economy and this renders parliament’s decision unsustainable.”

On June 24, the government requested for an advance of $2.6 billion before parliament could scrutinise and appropriate the 2014/15 budget. But Members of Parliament refused to approve the amount, arguing that it would be illegal.

They caved in a day later after government officials claimed that 35.7 per cent of the money requested did not need appropriations anyway.