By: Alinda Ronnie Kyamureku
Introduction
The National Budget reading is one of the most anticipated events in Uganda’s economic calendar because it outlines the Government of Uganda’s priorities for the coming fiscal year. The Budget for the fiscal year (FY) 2024/25 has generated a lot of interest among financial observers for various reasons. First, is its size compared to previous years. The FY2024/25 budget is Ushs. 72.1 trillion, compared to the expenditure of Ushs. 52.7 trillion as at the end of May 2024[1] for the previous FY2023/24. This is a 36.8 percent increase in the expected expenditure of the Government of Uganda in one fiscal year.
Secondly, the Budget was noted to be well aligned with the National Development Plan 2019/20 – 2024/25 (NDP III)[2]. The Budget focuses on the four key growth areas which the Government established in the NDP III as having the highest potential to generate employment and economic growth, and improve living standards[3]: agro-industrialisation, tourism development, mineral development (including oil and gas), and science, technology, and innovation (including information and communication technology (ICT)).
This article explores how the Government’s planned activities outlined in the National Budget FY2024/25 will affect the financial conditions and economic livelihoods of individuals, households, and businesses alike.
How Does the Government Expect to Afford the Increase in Planned Expenditure?
The FY2024/25 Budget, at Ushs. 72.1 trillion, comprises recurrent expenditure of Ushs. 18.9 trillion and development expenditure of Ushs. 34.7 trillion, as well as interest payments on the outstanding national debt balance. The Government anticipates a large portion of the Budget with domestic revenue – tax and non-tax revenue (e.g. fees, penalties, fines, and charges). The total domestic revenue for FY2024/25 is projected at Ushs. 31.98 trillion, which is less than half of the expected expenditure. In economic terms, the balance that is not covered is referred to as a fiscal deficit. To put this into context, the Government collected domestic revenue of Ushs. 27.7 trillion in FY2023/24, so even at its current projections[4], it would still be able to fund only 44.2 percent of the FY2024/25 expenditure using domestic resources.
The remainder of the Budget is to be financed with debt in the form of grants and loans. Grants are classified as financial aid that is either interest-free or does not require repayment,[5] while loans are to be paid back with interest within a certain time period. For the FY2024/25 Budget, the Government plans to source grants and loans amounting to Ushs. 10.98 trillion from foreign parties, while domestic borrowing will amount to Ushs. 28.8 trillion. While grants and loans help to close the fiscal deficit, they have implications for Uganda’s debt burden and other various aspects of the domestic economy, which we will discuss in the next section.
How will the Government’s Planned Expenditure Affect Ugandans?
1. Increased Taxation
Taxation is the oldest form of government revenue, where rulers would charge citizens a percentage of their harvest to support the activities of the jurisdiction[6]. The Uganda Revenue Authority is in charge of collecting taxes for the Government of Uganda. For the FY2024/25, the Government is aiming to collect taxes of Ushs. 29.4 trillion[7]. This will potentially be achieved by, among others, the introduction of excise duty on construction materials such as adhesives, grout, white cement and lime, and on fuel products and imported wines. Taxes have also been introduced for financial services and products, including excise duty of 0.5 percent on the value of withdrawals of money from other platforms other than mobile money except agent banks or banking halls, and a 10 percent withholding tax on commission paid to banking agents and payment service providers. The additional taxes on financial services are a direct cost to financial consumers and will likely make these services more expensive.
Overall, the hike in tax rates will translate into higher prices on the affected goods and services, which in turn will reduce households’ disposable incomes. For businesses, there is likely to be an increase in the cost of doing business and, hence, reduced profits.
2. Government Borrowing – Treasuries, Loans, and Grants
The Government of Uganda borrows both domestically and from foreign governments and agencies. Domestically, the Government borrows mainly through government securities which are issued by the Bank of Uganda (BOU) for both Ugandans and foreigners to invest in. Government securities include treasury bills which mature within 365 days, and treasury bonds with maturity terms ranging from two to 20 years. The BOU issues these securities monthly, borrowing various amounts each time and with varying tenures, as the Government’s spending needs arise. Foreign borrowing, in the form of loans and grants, is usually negotiated with various lenders like the World Bank, the International Monetary Fund (IMF), or nations like China, the United States, the United Kingdom, and the European Union. The effects of increased government borrowing to the domestic economy are summarized below.
a) Increased Debt Burden, Diminished Service Delivery
As the Government borrows more, this increases Uganda’s national debt levels and the costs associated with servicing that debt. Debt servicing costs, which refer to repayments of interest and principal on the loans, account for 30.3 percent of the FY2024/25 Budget at Ushs. 21.85 trillion. This means that approximately 68.3 percent of the anticipated domestic revenue will be spent on debt servicing, with far-reaching implications on service delivery and national investment. The Government is likely to be constrained to deliver on the development of vital infrastructure like roads, the railways, and telecommunications, and the provision of public services like health and education. Going forward, the more Uganda depends on loans, the more heightened the risk of default by the Government becomes. The high borrowing rate may also signal potential distress in the Ugandan economy to foreign investors, which means that many Ugandan businesses will be viewed less favourably to receive foreign private investment.
b) Higher Lending Rates
One anticipated effect of the increased domestic borrowing required to fund the 2024/25 budget is higher borrowing rates for local individuals and businesses. The biggest domestic lenders to the Government are commercial banks who use customer deposits to invest in government securities. As at end-March 2024, total deposits in the banking sector stood at Ushs. 34.2 trillion. The national budget FY2024/25 proposes new domestic borrowing of Ushs. 8.9 trillion, which will be approximately 26 percent of total deposits, depending on how they evolve during the budget period. The effect of this is that the Government and private sector (individuals and businesses) will have to compete for this money, which will be felt through increased interest rates on loans. As banks generally consider the Government to be a more credible borrower than businesses and individuals, they will offer the Government preferential rates. Banks’ lending to private sector borrowers will mostly be to bank customers with more reliable income streams and proven ability to make repayments – ideally corporate clients and large-value small and medium-sized enterprises (SMEs). Other borrowers will then be subject to higher interest rates as banks aim to maximize profits.
The increase in lending rates is usually accompanied by an increase in deposit rates to attract more long-term deposits with which banks can invest to take advantage of the high interest rate environment. The implication is that several businesses, households, and individuals will only be able to access loans at high interest rates if at all, while investors in interest-earning fixed deposits and government treasuries will earn higher returns.
c) Grants: Uncertainty Affects Businesses
While grants do not require repayment or accrue any interest, they are often short-term and are subject to conditions that may influence domestic policies and potentially conflict with the national priorities of the recipient country. In this way, they are not a dependable source of funding for government programmes and do not provide sustainable solutions for long-term fiscal deficits. Dependence on grants can lead to the failure of government projects if donors suddenly reduce or withdraw their support. A recent case was the withdrawal of significant support by the United States government and World Bank[8] for new projects in Uganda when the Anti-Homosexuality Act was passed by the Ugandan Parliament in March 2023. The implication is that contractors and service providers who may have borrowed in anticipation of these government projects may be disrupted. This may lead to unemployment of staff, loan defaults as anticipated payments are not received, and timelines being derailed.
Conclusion
The Government of Uganda has set ambitious goals to achieve the NDP III but will need to bridge the fiscal deficit through aggressive taxation, increased borrowing, and greater dependence on external financing. For Ugandans, this is likely to translate into higher living costs for households, increased business costs and reduced investment flows for businesses, and reduced access to affordable loans for the economy as a whole.
Sources
– The Budget Speech Financial Year 2024/25, Ministry of Finance, Planning, and Economic Development
– Third National Development Plan (NDPIII) 2020/21 – 2024/25, National Planning Authority
–The United States Response to Uganda’s Anti-Homosexuality Act and Persistent Human Rights Abuses
Footnotes
[1] Budget Speech 2024/25
[2] https://www.npa.go.ug/wp-content/uploads/2023/03/NDPIII-Finale_Compressed.pdf
[3] Budget Speech 2024/25
[4] Budget Speech 2024/25
[5] AID definition and meaning | Collins English Dictionary (collinsdictionary.com)
[6] History of Taxes | TaxEDU | Tax Foundation
[7] Budget Speech 2024/25
[8] FACT SHEET: The United States Response to Uganda’s Anti-Homosexuality Act and Persistent Human Rights Abuses | The White House