On the 14th of June 2018, Uganda's finance minister read the budget for the financial year 2018/19 and so did his counterparts of the other East African states. Being part of several post-budget engagements I listened in while the experts discussed away. I pride myself of being a disciplined tax accountant who does not cross lanes. I have always left economics for the economists.
However in the eyes of the majority, an accountant should also have answers to questions directed to economists. I got several calls seeking my comments on the 2018/19 budget especially the debt, so I have seized the opportunity to provide an economist's opinion. To simplify our discussion let us define some concepts.
GDP (Gross Domestic Product)
Gross domestic product is the total value of everything produced within the boundaries of a country in a financial year. The nationality of those in production does not matter as long as the production is within the country. Economists say that GDP is the best way to measure the size of a country's economy.
Public Debt (National Debt)
If government spending in a financial year is greater than what it collects in revenue, the difference is normally financed by debt which in some cases accumulates over the years. The amount outstanding at any one moment is what is referred to as public debt
According to the finance minister our public debt is seated in the neighborhood of UGX 38 Trillion and the Gross Domestic Product (GDP) at UGX 102 Trillion or there about. In the minister's view debt in absolute terms even if bigger than our annual budget (about UGX 33 Trillion), does not call for worry.
In his remarks after the budget reading, the president resonated with his delegate but in a different fashion. According to him the debt as a percentage of GDP (about 38%) is a ratio we should only worry about if it goes to the 50% zones.
Compared with the other East African states whose debt to GDP ratios are in the 40-60 percent range, and also since I have learned that for some of the world's biggest economies this number was even higher than 90, I will agree with the president and the finance minister that indeed there is no cause for panic. However there is concern about Uganda's acceptance of loans with high interest rates with no or very short grace periods (non-concessional loans).
My feelers signal a climbing trend of taking on more expensive debt than previously. The non-concessional debt as a percentage of total public debt is growing year on year while the part of the pie representing concessional borrowings is on the decline. I would definitely have more sleepless nights if this less cautionary stand continues.
Interest payments in the new financial year is estimated at about a quarter of a trillion if not over. This can finance our agriculture budget in about 3 folds or the entire current education budget. I think government should begin to regard concessional lenders' conditions so as to be able to access more concessional borrowings for our long term infrastructure projects as this would give us access to less costly debt in terms of interest.
Another interesting number is the Revenue to GDP ratio. In simple terms it is revenue collected as a percentage of GDP. Uganda's has been below 15% for the past years; for every UGX 100 of our annual national income, the URA collect below UGX15 in revenue. Kenya and Tanzania should be the envy of Uganda's revenue collectors because the two neighbours very nearly touch 20%.
If this number is improved through revenue collections, we shall definitely have less deficit to call for debt and of course less interest payments. The 5% difference between our neighbours' ratio and ours, in my opinion represents revenue potential not realized due to smuggling, under-declaration and having many potential tax payers outside the tax web. We are yet to see the impact of the new revenue measures such as container scanning at the frontiers, the electronic tax stamps and other enforcement measures.
There are hundreds of cases where a professional drops a UGX 10 million job in the private corporations for a UGX 2.0 million position within the government departments. So the unrestricted corruption, the huge waste within public spending, embezzlement and abuse of resources also magnify the problem.
Even if all is not bad, the model to combatting our debt concerns has 3 silver bullets; reduce non-concessional loans, improve revenue collection and eradicate resource abuse.
SK Mugisha; a Fellow of the ACCA is the Director of Tax Services at Ligomarc
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