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COVID-19 fiscal response: Let us pay more attention to the funding side

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Added 19th May 2020 10:07 PM

Unfortunately, the funding conversation has been eclipsed by the acrimony over appropriation and mounting demands. Yet funding is critical with the potential to destabilize the economy if not properly and transparently handled

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Elias Kasozi

Unfortunately, the funding conversation has been eclipsed by the acrimony over appropriation and mounting demands. Yet funding is critical with the potential to destabilize the economy if not properly and transparently handled

By Elias Kasozi

COVID-19 | ECONOMY

Countries have recorded slow growth and fears of unprecedented job losses and recessionary impact are gaining ground. In response, governments are committing huge resources to moderate the severity of the economic downturn at a time when the government revenue streams are dwindling.

The amounts required are simply staggering. The US treasury is to raise approximately $3 trillion.  Germany announced a Euro600billion package for the Economic Stabilization Fund while the UK unveiled 350 billion pounds to “support jobs, incomes and business” on March 17.

In Kenya, tax relief to cushion the economy from the pandemic’s fall-out was announced while in South Africa, a US $ 26.3 billion package was tagged.  The common challenge to all these programs, particularly those of developing countries, is funding.

In Uganda, Parliament passed sh304b COVID-19 2019/2020 response supplementary budget and the 2020/2021 budget, the later subject to review as the pandemic’s impact unfolds.  The challenge is identifying resources to finance the budget beyond government fiscal receipts which are also likely to decline as the economy contracts due to the pandemic. 

Unfortunately, the funding conversation has been eclipsed by the acrimony over appropriation and mounting demands. Yet funding is critical with the potential to destabilize the economy if not properly and transparently handled

The authorities will have to mobilize financing from either domestic or foreign sources or a combination of both to finance the fiscal deficit. Whichever option chosen by the Government, there are attendant costs that need to be understood by the general public.

Sourcing from the domestic economy takes the form of Government issuing treasury bills and bonds to the investing public.  However, there is a limit to what the market can take.  

Once investors know through the issue program that the government is in the market to raise funds aggressively, they demand higher rates at the auctions.  This has the impact of pushing up interest rates generally including the lending rates to the private sector.

At a time when the private sector is seeking facilities on soft terms, excessive financing of the government budget from domestic sources imposes additional costs on the private sector.  This is referred to as crowding out the private sector as the government becomes a competitor for financial resources from the financial domestic ecosystem. 

High-interest rates also result in an adverse selection where speculative activities out-compete honorable business which cannot generate the rate of return needed to service the credit facilities.  The output will be adversely affected and the revival of economic activity, in general, slowed down.

 The alternative to domestic financing is external financing. This may take the form of concessional and non-concessional financing to Government.  There is a strong case for the government to reach out to bilateral and multilateral sources to finance the budget.

However, external financing comes with the risk of worsening the debt ratios and placing a burden on the country to service the loans in subsequent years. The debt ratio may increase beyond sustainable levels and there is a risk of the country’s rating downgrade in international markets. If anything, the Government should seek debt restructuring and write off to ease the debt service burden on the country.

At the balance of payments level, the pandemic is global and many of Uganda’s traditional sources of inflows are also facing challenges.  Uganda is likely to suffer a contraction in remittances, Foreign Direct Investments, and other short-term flows. 

Appropriation is a very important public function vested in parliament. Equally important is the funding of the budget. Perhaps inadvertently, the discussion in parliament, the press, and the general public have tended to focus on how much to spend and on what.

Related to identifying sources of funding, there is a deeper discussion on debt ratios and the debt sustainability that must be addressed. 

The inordinate attention on expenditure became more pronounced during the recent COVID-19 supplementary budget and the 2020/2021 budget.

This is a weakness because it is during such debates and discussions that pertinent questions on the funding side can be raised, adequately discussed and transparency served. 

The writer is a consultant

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