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Why reducing Uganda’s budget deficit and debt could delay

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Added 31st October 2019 11:29 AM

The Bank of Uganda annual report 2019 indicates that the budget deficit (inclusive of grants) increased from Shs 4,902.3 billion in June 2018 to Shs 6,401 billion (preliminary data) in June 2019.

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The Bank of Uganda annual report 2019 indicates that the budget deficit (inclusive of grants) increased from Shs 4,902.3 billion in June 2018 to Shs 6,401 billion (preliminary data) in June 2019.

By Enock Bulime
 
The recent increase in Uganda’s debt to GDP ratio shows that the country is having short-run difficulties to reduce its budget deficit (excess spending over revenues) and debt.
 
The Bank of Uganda annual report 2019 indicates that the budget deficit (inclusive of grants) increased from Shs 4,902.3 billion in June 2018 to Shs 6,401 billion (preliminary data) in June 2019. On the other hand, the debt increased from Shs 42,435 billion in June 2018 to Shs 47,305.2 billion in June 2019. This suggests that the budget deficit is going to increase further even though it is apparent that it could have reduced earlier.
 
The most important question, however, is the question as to why the government has delayed efforts to reduce the budget deficit and debt. In addition, what are the implications of delays in reducing deficits and debt?
 
What is clear is that the budget deficit and debt have increased to levels that may jeopardise the sustainability of the public debt and deficits, necessitating their reduction in the medium to long term. Their reduction is desirable because they could negatively affect growth in the future, increase the risk for default and limit room for adjusting government expenditure in response to negative shocks to the economy.
 
The desired reduction in the deficit and debt could delay because of a number of reasons. These include the growing public sector (characterised by increasing expenditures), low tax revenues, the changing development finance landscape, reduction in grants, political economy factors, inefficiencies in government spending, increasing unemployment and delays in the production of oil, which is expected to boost domestic revenues.
 
Many stakeholders argue for a delay in the reduction of budget deficits and debt, which provides a policy dilemma for the Ministry of Finance on the possible implications of delay of such a policy action.  Evidence from other jurisdictions suggests that the delay in reducing the budget deficits and debt could be beneficial by way of enabling the economy to achieve high levels of inclusive growth characterised by increases in employment. This could imply that the government could be able to generate more tax revenues to pay off the debt and to finance government expenditures. In addition, delays in the reduction of the budget deficit and debt could enable the government to close infrastructure gaps and maintain social safety nets programmes (like the Youth Livelihood Programme and Uganda Women Entrepreneurship Programme) to protect low-income households.
 
Despite the potential benefits, delays in reducing the budget deficit and debt are particularly harmful in the long run. First, they may undermine people’s confidence in debt sustainability due to higher debt build-ups that are characterised by increasing debt-servicing costs. The increasing debt-servicing costs also crowd out the funding available for funding other social sectors. Second, they could also result in slower economic growth due to crowding out of private investment due to increased government borrowing from commercial banks. Third, delays also act as a signal to the citizens that the government may increase the tax rates in the future to repay the debt. Lastly, delays could limit the room for adjusting government expenditure in response to negative shocks to the economy such as interest rate and exchange rate shocks and natural disasters (like drought).
 
In conclusion, the need for reductions in Uganda’s budget deficit and debt is important in the medium to the long run. However, recent projections indicate that the budget deficit and debt will increase further indicating that their desired reduction might come later than anticipated.  Therefore, the onus is upon: (i) the government to make sure that it prioritises investments in areas that will enable the economy to achieve its growth potential; (ii) the public to demand for accountability from government especially concerning the ever-increasing expenditures; and (iii) the political leaders to support efforts towards effective deficit and debt reduction. Such investments by the government should aim at ensuring macroeconomic stability, access to credit, good infrastructure, a favourable regulatory environment and a skilled workforce. These would in turn support private sector expansion and enable business firms to overcome their specific challenges while creating jobs for the labour force.
 
The writer works at Economic Policy Research Centre
 
 

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