Ahead of the reading of the national budget by the minister of Finance on June 15, 2023, as required by the Public Finance Management Act 2015, Section 13(3); the minister, on behalf of the president, is obligated to present the proposed annual budget to parliament by the April 1 each year.
This year, the rite was fulfilled on May 18, when the parliament of Uganda considered and approved the annual budget for the financial year 2023/24. Out of sheer serendipity, this presentation of the budget to parliament brought to the surface the actual state of the economy of Uganda.
The glaring highlights of the Budget Committee report on the annual budget estimates for financial year 2023–24 are: The budget for FY 2023/24 has been projected at 52.74 trillion shillings [$13.9 billion], an increase of 4.606 trillion shillings [$1.2 billion] from the previous financial year, which was 48.134 trillion shillings [$12.8 billion].
This budget is going to be financed by domestic revenues, budget support [loans, grants], domestic borrowing, interest payments, local government revenue, and project support [external].
In the presentation of this report by the budget committee in parliament, it came to light that Uganda’s nominal debt to GDP fell from 53.1 percent for FY 2022/23 to 52.4 percent for FY 2023/24, a drop of 0.7 percent. This dip in debt in relation to GDP is a result of economic growth: rise in GDP, which can be attributed to inflation.
Inflation swells GDP as more money in circulation translates to more spending, which then triggers demand that ends in more production, which implies growth. In Uganda, inflation as measured by the Consumer Price Index for the 12 months to August 2022 was 9.0 percent (Uganda Bureau of Statistics).
Globally, inflation reached a 27-year high of 9.6 percent by October 2022. This hike in prices, had a ripple effect on the GDP, dwarfing the public debt. Therefore, the drop in debt as a ratio of GDP is in no way a result of increased productivity; rather, it’s a butterfly effect of inflation.
Explicitly, the report reveals that Uganda’s public debt increased from $20.98 billion [78.7 trillion shillings] to $21.74 billion [80.7 trillion shillings] in the first half of FY 2022/23, and interest payments rose by 1.42 trillion shillings [$375.8 million] to 6.112 trillion shillings [$1.6 billion] in 2023/24 from 4.69 trillion shillings [$1.23 billion] in FY 2022/23.
Out of this stock, 47.7 trillion shillings [$12.85 billion] is external debt, while 33 trillion shillings [$8.89 billion] is domestic debt. In short, Uganda’s public debt has increased by $760 million [2.8 trillion shillings] in the previous financial year to date.
The money approved to service debt obligations for FY 2022/23 amounted to 15 trillion shillings [$3.9 billion] by the end of December 2022. Of that, 6.5 trillion shillings [$1.7 billion] has been spent thus far. For the financial year 2023/24, a total of 17.1 trillion shillings [$4.5 billion] has been proposed to service the country’s debt, an increase of 2.1 trillion shillings [$553.7 million] from the previous financial year.
This clearly implies that, as a country, Uganda is borrowing more, and the money it spends on servicing its debt goes up each year because the national risk of defaulting is high.
During the first half of FY 2022/23, revenue from exports amounted to $2.2 billion [8.4 trillion shillings], an improvement of 24.2 percent from $1.7 billion [6.8 trillion shillings] recorded in the first half of FY 2021/22, mainly due to the resumption of gold exports.
Even so, the first half of FY 2022/23 raked in merchandise worth $4,095.0 million [15.5 trillion shillings] in imports, which is 23.1 percent higher than what was shipped in the first half of FY 2021/22.
The document revealed that the twelve months leading to November 2022 saw a widening deficit in the BoU’s current account to $3,968.6 million [15 trillion shillings]. As a result, the overall balance of payments deficit was $676.5 million [2.5 trillion shillings].
A current account deficit indicates that a country is importing more than it is exporting. It shows that Uganda is spending beyond its means. A deficit of the current account will depreciate the shilling, making imports expensive and inadvertently causing inflation and a drop in incomes.
What’s more, the current account deficit will lead to the raising of interest rates by the BoU to get money to fill the gap caused by the deficit. A rise in interest rates leads to expensive loans, and less currency in circulation. All in all, current account deficits reflect low productivity and low investment in an economy.
The budget committee report disclosed that Uganda’s international reserves dropped by 2.9 trillion shillings [$775.9 million] from $4,346.0 million [16.3 trillion shillings] at the end of November 2021 to $3,570.1 million [13.4 trillion shillings] in November 2022.
The outcome of this dip is that as the reserves reduce, so does the value of the shilling, implying that BoU’s ability to back up the shilling in case it crashes is stretched thin. It also slurs the image of Uganda internationally, as trading partners can’t be sure their payments will be honoured; this defers foreign trade. Diminishing reserves play a key role in determining Uganda’s unfavorable credit rating.
The report also revealed a deficit of 94.8 billion shillings [-$25 million] in cumulative revenue collected for the half year FY 2022/23, and an international trade tax deficit of 114.04 billion shillings [$30.3 million] during the first half of FY 2022/23. Tax revenue as a percentage of GDP is 12.90 percent, as attested by the National Budget Framework Paper 2022–23, which is below the World Bank’s advised minimum limit of 15 percent.
A low tax revenue-to-GDP ratio means that a country doesn’t collect enough resources to spend on improving its infrastructure, health, and education sectors.
In similar fashion, deficits in the BoU’s current account and in revenues collected, together with a slump in international reserves; an economic growth exaggerated by inflation, and an increasing national debt/interest payments, spell dark times ahead for the economy of Uganda.
On a brighter note, the report revealed a 6.03 billion shilling [$1.5 million] surplus after the reopening of the economy in the tourism/hotel industries, existing side by side with a surplus of 1.36 billion shillings [$358,662] in real estate. Seeing as this year’s proposed estimates for the national budget place external financing at 8.26 trillion shillings [$2.1 billion].
And an additional 2.78 trillion [$734.8 million] in grants and loans, which make up 21 percent of the proposed budget, that’s directly under the control of aggrieved external players/ donors who have been raffled by the recent signing of the anti- homosexuality bill by President Museveni, even threatening sanctions and other penalties.
It is my prognosis that it’s going to be a long and hot financial year, and climate change has nothing to do with it!
Source: The Observer