CSBAG warns fiscal indiscipline and runaway graft a threat to Uganda’s economic recovery

December 22, 2023 in Business, Policy by Editor

Despite making a strong comeback, Uganda’s sustained economic recovery is under threat, undermined by surging public debt, fiscal indiscipline and deviation from key policy objectives, says civil society budget and economic policy watchdog CSBAG.

Speaking to the media during at end of year briefing December 22, executive director Julius Mukunda described Uganda’s economic performance from January to December 2023 as “mixed” revealing “good Public Finance Management reform and economic performance, to fiscal indiscipline and misuse of public resources.”

While the Bank of Uganda’s monetary policy tools saw annual headline inflation contract sharply from 10.4pc in January 2023 to 2.4pc in November – the lowest in East Africa- the Purchasing Manager’s Index, increase to 53.4pc, the rate of loan approval improve from 53.5pc in September 2023 to 63.3pc in October and the trade deficit narrow by 37.5pc; the local currency slipped 0.7pc against the USD in November, the debt to GDP ratio was just shy of the ceiling at 46pc while 48pc of budget resources were allocated to debt repayment.

The UGX depreciated to UGX 3782.03/USD in November from UUGX 3755.63/USD in October 2023 driven by a combination of corporate demand and a contraction in inflows, triggered by higher interest rates in the United States, which triggered a reverse flow of investment portfolios. The local unit sank 2.8pc and 3.0pc against the Pound Sterling and the Euro respectively over the same period.

According to Ministry of Finance data, the trade deficit narrowed from USD 304.89 million in October 2022 to USD 190 million in October 2023, supported by an increase in export receipts which offset the increase in spending on imports.  Merchandise exports grew 96.65pc from USD 350.22 million in October 2022 to USD 688.69 million in October 2023, propelled by increased receipts from gold, maize, tobacco exports among others. Receipts from coffee also grew 17pc from USD 67.10 million to USD 78.96 million under the reference period, on account of an increase in the average unit price per kilo from USD 2.45 in October 2022 to USD 2.80 in October 2023.

“This is an impressive performance, and we commend the Government’s efforts in strengthening the overall domestic trade capacity, and only hope this positive trajectory continues. CSBAG will continue to monitor such variables for macro-economic stability,” Mukunda said.

The value of credit approved increased from UGX 1094.2 billion in September to UGX 1,384.5 billion in October 2023. The rate of loan approval also improved from 53.5pc to 63.3pc over the same period, indicating improved confidence by business.in October 2023. At 21.6pc, household loans dominated approvals, followed by trade at 20pc, building, construction and real estate at 20.0pc and manufacturing at 18.6pc.

But CSBAG raised the red flag on blatant abuse of the supplementary budget process which recently saw parliament approve a UGX 3.5 trillion supplementary budget, contrary to the provisions of the Public Finance Management Act (PFMA) 2015.

“Our scrutiny of the supplementary budget reveals a significant violation of these criteria, particularly in items totalling UGX 1.2 trillion. These expenditures, comprising Ushs. 885 billion in recurrent and Ushs. 407 billion in development, lack justification according to the PFMA (2015). We recommend that Parliament takes decisive action by dismissing and excluding these items from the approved supplementary budget,” Mukunda said.

He further warned that Parliament’s support for such fiscal indiscipline undermines the very law it enacted to enhance fiscal discipline.

“The question arises as to why Parliament would deviate from the principles it set forth in the PFMA (2015) by endorsing expenditures that do not meet the prescribed criteria. This raises issues of accountability and adherence to established legal frameworks, which are essential for maintaining fiscal responsibility and transparency.”

CSBAG is also concerned over the ballooning public debt, which had reached USD 23.66 billion (UGX 86,779.9 billion) at the end of June 2023. Of this, external debt was 60.2pc (USD 14.24 billion/UGX 52,206.1 billion), while domestic debt constituted 39.8pc (USD 9.4 billion/UGX 34,573.8 billion). While the bulk of external debt is concessional, the proportion of non-concessional debt is on the rise, and had reaching 25pc at the end of December 2022.

“The cost of servicing this debt continues to heavily burden the government’s fiscal capacity. Despite a projected increase in domestic revenue for FY2024/25, the available resources for allocation have decreased due to high debt servicing costs. As a result, the government’s resources for development have been significantly reduced. Furthermore, the current supplementary expenditure, which is financed through borrowing mainly from the domestic market, is pushing Uganda closer to a point of debt unsustainability. This poses a serious risk to the country’s economic stability and financial wellbeing,” Mukunda warned.

As of June 2023, Uganda’s domestic revenue and grants hade reached UGX 14,289.41 billion, while expenditure and narrowing stood at UGX 18,833.43, resulting in a primary deficit of UGX 4,544.02 billion. The result is that Uganda now needs more borrowing to cover spiraling expenditure.

“Unfortunately, this has led to a cycle of borrowing to meet our debt obligations, which further worsens the already existing debt challenges we face in Uganda. It is essential that we confront these fiscal realities head-on and prioritize prudent financial management.”

CSBAG drew attention to “a concerning evolution of corruption tendencies, reaching new levels of sophistication. It’s not just ghost workers anymore; now, we witness ghost service delivery units, exemplified by Ntungamo Ghost Health Centres, a problem persisting even in Butaleja. Our apprehension extends beyond the health sector, as signs of this malpractice appear in education, roads, and water sectors.”

Mukunda said parliament should reassert and apply itself as the primary custodian of prudent public finance management and take decisive steps to curb graft.

“To reverse this trend, a substantial display of political will is imperative. Adherence to prudent public finance management practices is non-negotiable. Enforcement mechanisms must be robustly implemented to curb fiscal indiscipline and ensure the judicious use of public resources,” he added.