Aid cuts slow economic growth to 4.2%

By Ibrahim Kasita

Uganda’s economic growth is bound to slow down following suspension of aid by international donors this financial year, Ugandan authorities and the International Monetary Fund (IMF) have predicted.

Aid was suspended due to the large scale corruption in the Office of the Prime Minister.

The finance and economic planning minister, Maria Kiwanuka, said the suspension of budget support equivalent to 1.3% of the gross domestic product (GDP) by several development partners will impede economic recovery in 2012/13.

“The Government will not have sufficient budgetary resources to implement the fiscal stimulus in the amount it had hoped to provide to the economy,” she noted in a letter to the IMF recently.

Donors suspended aid worth $282m.

The minister predicted that the real GDP growth will rise to 4.25% up from 3.4% registered in the financial year 2011/12 even though the easing of monetary policy will provide support to domestic demand because of the smaller fiscal stimulus and weak external demand.

Denmark, Ireland, Norway, Sweden and the UK suspended donor aid worth $282m to Uganda and demanded for satisfactory agreements on the amount, timing and methodology of repayment of all the misappropriated monies.

“Unfortunately our growth-enhancing efforts have been negatively affected by the suspension of budget support by our development partners following a regrettable mishandling of public resources,” Kiwanuka noted.

 “We are committed to restoring fiduciary assurances and rebuilding confidence, and have already started taking action against the involved officials and to strengthen our financial management systems.”

Response to donor cuts

In order to accommodate the shortfall in the budget resources, Uganda has responded by cutting expenditure and additional domestic funding.

Expenditures will be cut by 0.8% of GDP, most of it in development spending while recurrent spending will only be cut moderately because it already dropped from 11.2% of GDP in FY 2011/12 to 10.3%of GDP for this fiscal year.

Domestic borrowing will be increased by 0.7% of GDP. The latter will involve additional issuance of government securities through primary auctions.

It is expected that such actions will increase the fiscal burden to Government due to higher interest rates which will translate into a higher cost of borrowing to the private sector.

This will slow down economic recovery in the short term, but will still allow Government to prioritise spending. The current account deficit is projected to remain broadly unchanged at 11.25% of GDP in FY 2012/13.

The trade balance in goods and services is expected to benefit from lower government imports and continued strong performance of the tourism industry.

The capital and financial account surplus, however, is projected to fall in 2012/13, mainly because of much lower short term net private capital inflows and the suspension of budget support loans. While the overall balance is projected to remain in surplus in 2012/13, the surplus will be lower than that in 2011/12.

Because of the suspension of budget support by development partners, the Central Bank has scaled back its target for the accumulation of foreign reserves in 2012/13 from $221m to $70m.

Bank of Uganda is also pursuing a flexible exchange rate policy which will support the adjustment of the real exchange rate to a more sustainable level, but will take appropriate action to dampen short term volatility.

Government hopes that development partners will restore budget support by June 2013 and thereby allow for an expansion in the budget resource envelope in the 2013/14 fiscal year and beyond. This will enable Government to address critical constraints to growth over the medium term.

This calls for satisfactory progress in investigating and prosecuting persons and firms indicted for fraud and corruption in the prime minister’s office.

But more important is the fast tracking of the introduction of the treasury single account system to help consolidate the currently fragmented scheme of government receipts and payments, improve oversight of all cash flows and strengthen budget control.