Next week is budget week. For the last six months, our planners and policy honchos have been plotting how to raise revenues and also spend in a manner that fosters economic growth. This is not an easy or enviable task, because of the several competing economic demands and fluid geopolitical variables that impact our resource envelope and spending priorities. What are the pain points to consider in next week’s budget speech? Remember most of the tax policies and the budget framework against which this budget is to be received are in place. Here are four key points of concern.
Top of mind will be the continued economic downturn caused by the Covid-19 pandemic. During the last financial year, we have seen economic growth fall below 3% from an estimated 6. 8% recorded in financial year 2019/20. During the financial which is about to close, economic activity stalled because of the lockdown that included border closures and a disruption in global demand and global supply chains. There was a significant downturn in public and private investment and this led to lower consumption and tax collections. Any planning going forward must take cognizance of the Covid-19 pandemic, for which a second wave is just starting. Another lockdown could cause far reaching devastation to the economy and welfare of our citizens.
A second budgeting concern would be the rapidly growing population. Depending on which statistics you read, the population of Uganda ranges anywhere between 38 million and 47 million! According to the latest Uganda Bureau of Statistics National Household Survey Report (2019/2020), Uganda’s population stands at 41 million people. However, www.worldometer.info puts this figure at 47 million as of June 02, 2021! The pandemic did not do us any good and we are certainly experiencing a baby boom which comes with a heavier dependency ratio. The key national budget challenge then is the attendant risk of rising poverty, following the reduction in the workforce and general output/productivity metrics. Many people remain vulnerable and this must be addressed in the budget. Increasing poverty can only lead to increasing security concerns.
A third budgeting challenge is the nature of spending priorities. Despite the economic growth and prosperity that comes with it, security expenditure has been rising faster, relative to other sectors. There are increased geopolitical and internal risks that inevitably lead increased security spending. Geopolitical risks arise from hostile relations with some of our neighbours and our involvement with peacekeeping efforts in various geographies. Internal risks arise from a restricted political environment and hard economic conditions brought on by the pandemic. Another aspect of the spending priorities that is of concern is the growth in administrative costs arising from the creation of more local governments and the need for staffing of these units. The wage bill is expected to continue expanding as a result of the creation of new cities, constituencies and special interest groups. All these require unconditional funding and that is going to continue being a significant strain on the budget.
A fourth challenge for our budget is debt, both domestic and foreign. While many pundits claim that debt is sustainable for as long as it is below 50% of GDP, that is not the elephant in the room. The real elephant in the room is debt servicing. Increasing national debt implies a need for increased debt servicing provisions. According to data in the National Budget Framework Paper for financial year 2021/22, out of a budget of Ugx. 45.7 trillion, about 56% of these collections will go towards external debt repayments, project support, domestic refinancing, arrears and recapitalization, whatever these mean. Effectively then, only 20.9 trillion shillings will be available for spending under the medium-term expenditure framework. Given these restrictions, the default position would be to acquire more debt. This remains a key sticking point in respect of sustainability and absorption capacity. We wait to see how the Minister of Finance will navigate these unsettled waters.
Samuel Sejjaaka is Country Team Leader at Mat Abacus Business School. Twitter @samuelsejjaaka