Following last week’s budget speech, we were hosted to a budget review gathering by Absa Bank Limited. After the events of 2020 in which the corona pandemic struck home with frightening consequences and the country went into an unprecedented lock down, it is obvious that there are going to be hard times and we need to tighten our belts to face the shakedown.
As we discussed the financial year 2021/22 budget pronouncements, it was evident, except for the uninitiated, that there is no easy way out. It is easy to criticize the players, until you are asked to play yourself. Our panel, which included the Ministry of Finance’s Director of Budget, The Commissioner General of the Uganda Revenue Authority and the CEO of Absa Bank, among others had no illusions as to what lay ahead. For once, there was more to agree about than disagree with the money guys.
So what are those things on which we agreed? First was the fact that because of the pandemic, the economy had contracted by 2.1% in 2020 as a consequence of a slowdown in business due to the COVID-19 pandemic and the lockdown. Tourism and hospitality were most severely hit by the worldwide travel restrictions and containment measures. Other sectors which were affected, included manufacturing, trade, and education. Second, our total debt as a percentage of GDP had grown to 49.8% and there was little headroom for maneuvre. On this one, public officials put on a straight face and assured us that they did not intend to increase domestic debt by more than 1% of GDP. We wait to see. Third was the fact that as a result of the contraction in economic activity, tax revenue collections had also been affected, despite increasing demands on the resource envelope to fight the pandemic. These issues should concern us all.
We then turned our attention to the tax policy pronouncements in the budget and how these were going to impact the financial sector. What were the key issues here? In general, we noted that the financial sector will come under increasing pressure as a result of the aforesaid economic contraction. As a result of this contraction, many small to medium enterprises are under stress and nonperforming loans had risen to about 6-7% of private sector credit (about Ugx. 7 trillion). In order to prevent a meltdown, Bank of Uganda had put in place credit relief measures that allowed for up to three restructurings of this debt. This was akin to kicking the can down the road. We would only know the true extent of the problem come October 2021!
In relation to tax policy we also noted the following. On the plus side, capital gains tax exemption for venture capital funds had been allowed, and for group companies, shared services (provided across different geographies) were now also VAT exempt. For financial institutions eyeing venture capital and group companies, this was a boon. The proposed parish development model also offered possibilities for financial intermediation, if it did not become a byword for similar poverty alleviation schemes which had come to naught in the past.
On the down side, potential minefields included the 12% excise tax on digital data that was going to replace OTT. This was likely to increase operating costs of financial institutions that were trying to implement digital strategies in the post pandemic era. A reduction in wear and tear allowances was also likely to increase direct tax incidence.
All said, it this was an intense and riveting review of the 2021/22 budget. A key area that we all omitted to mention in our review was the continued failure to implement a national health insurance system. If this pandemic had showed us anything, it was the paucity of our emergency response system and the incapacity to provide a health safety network for all citizens. In this respect then, this was another missed opportunity. In these uncertain times, we can only watch and wait to exhale.
Samuel Sejjaaka is Country Team Leader at Mat Abacus Business School. Twitter @samuelsejjaaka