The staff of the International Monetary Fund (IMF) who were on the recent mission to Uganda have accused government of deviating from approved budgets, which they said alters expenditure.
“The budget process is not providing sufficient top-down guidance for resource allocation. Budget execution has systematically deviated from the approved budgets, altering expenditure composition,” they say in their latest summary of preliminary findings on various aspects of the Ugandan economy.
They also note that government’s capital spending is under-executed, while current expenditure allocations have typically been higher than budgeted.
They urge government to strengthen public investment management to address difficulties in costing and the lack of comprehensiveness in original estimates. “Plans to contain current spending would require specific identified measures to be adopted with the budget but must protect social sectors,” the preliminary summary of the findings says.
It says government’s spending pressures have led to domestic arrears which have contributed to non-performing loans in the banking sector. The unanticipated large issuances of domestic securities have surprised the market, leading to jumps in yields, for example in June 2018.
Both channels hold back private sector credit or exert upward pressure on lending rates. The authorities’ domestic arrears strategy, including the settlement of validated arrears, is welcome. A predictable issuance calendar for government securities that spells out the targeted auction volumes can contribute to lower interest rates.
Against this background, they argue that financial year (FY) 2019/20 budget should set a path to ensure that public debt stays below 50 percent of GDP.
The 2019/20 budget is estimated at about Shs34.3 trillion, higher than Sh29.274 trillion for FY 2018/19.Total budgeted government expenditure for FY 2017/18 was Shs22 trillion, an increase from the previous budget of Shs20.5 trillion.
And that to accommodate the increase in infrastructure investment planned for FY19/20, measures to raise an additional ½ per cent of GDP in tax revenue are required. “In this regard, the authorities should finalize and adopt their five-year Domestic Revenue Mobilization Strategy. The strategy is expected to include tax policy reforms, including a rationalization of exemptions, and tax administration reforms to improve compliance,” the summary of the findings says.
Meanwhile IMF officials report that Uganda’s fiscal deficit widened to 5 percent of GDP in FY17/18 while revenue collection improved by 0.3 per cent of GDP, less than the government’s objective of raising tax revenues by ½ percent of GDP each year. Infrastructure spending increased by over 1 percent of GDP. “Current spending exceeded the budget, triggering additional domestic borrowing. Still, the deficit was largely financed externally. Public debt went up by 3 percentage points to 41 percent of GDP,” they say.
Meanwhile, they say current account deficit increased to 6.1 percent of GDP in FY17/18 as imports of goods and services grew by 17 per cent—mostly capital goods associated with the large infrastructure projects, outweighing the 9 percent growth of exports.
They note financing came from foreign direct investment, public-sector debt disbursements, and a decline in international reserves. Reserves amounted to US $3.2 billion at end FY2017/18.
Missions are undertaken as part of annual consultations under Article IV of the IMF’s Articles of Agreement.
Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
An IMF mission visited Uganda January 29 to February 12, 2019 to hold discussions for the 2019 Article IV consultations.
The mission met with Minister Matia Kasaija, Bank of Uganda Governor Emmanuel Tumusiime-Mutebile, Permanent Secretary/Secretary to the Treasury Keith Muhakanizi, Deputy BoU Governor Dr. Louis Kasekende, Commissioner General Doris Akol, Acting Director Uganda Bureau of Statistics Imelda Atai Musana, senior government officials, civil society, unions, and the private sector.