Is Prosperity For All a pipe dream?
Jun 14, 2009
FOR the past three financial years, the central theme of the budget process has been “Prosperity for All†as envisaged in the 2006 NRM election manifesto. In her maiden Budget Speech on June 11, the finance minister, Syda Bbumba, said the theme of the
POST BUDGET ANALYSIS
By David Baliraine
FOR the past three financial years, the central theme of the budget process has been “Prosperity for All†as envisaged in the 2006 NRM election manifesto. In her maiden Budget Speech on June 11, the finance minister, Syda Bbumba, said the theme of the 2009/10 budget was “Enhancing strategic interventions to improve the business climate and revitalise production to achieve Prosperity for All.â€
This focus is expected to continue in the medium-term.
The minister also announced that the economy had grown at a robust rate of 7% in 2008/09, which was over the continental and regional averages, in spite of the global economic crisis.
I will attempt to provide an in-depth examination of the effect of the global financial crisis on the growth of our economy and its effects on the Prosperity for All programme the growth rates of the sectors underpinning the overall economic growth rate and how they impact on the programme. I will also examine the fiscal measures announced by the minister for the new financial year and their likely consequences for the ordinary people.
The Ugandan economy grew at a rate of 7% instead of the projected 8.1% because of, rather than in spite of, the effects of the global economic crisis.
A look at the individual sector growth rates indicates that the service sector was the most buoyant with financial services growing at 21%, transport and communication 20%, health 8.1%, manufacturing 8.3%, mining and quarrying 9.2%.
On the other hand, construction grew by only 2.2% compared to over 15% for the last four years. This has been directly attributed to a drastic reduction in remittances from abroad. Our Nkuba Kyeyos have in the past been remitting large sums to construct their own residential houses as well as those for letting.
Because of the crisis, this avenue has been closed. So, it would be self-defeating for anybody to try and downplay the effect of the crisis.
Moreover, as a direct result of the slow-down of the construction sub-sector, production of metal products grew by -20.3%, while bricks, tiles and other ceramics grew at -14.3%!
Agriculture, forestry and fishing grew at a modest 2.6%, but in particular, the coffee sub-sector, which accounts for 60% of our cash crop exports, grew by -3%.
The tea sub-sector grew by -11.3% due to reduced demand in Europe, the main importer.
You do not need to be a professor of economics to discern that the drastic reduction in demand was due to the lingering global economic crisis!
This suppressed growth in the agricultural sector also had adverse knock-on effects on the industrial sector with the following sub-sectors all growing at negative rates: fish processing -43.8%, coffee processing -13.7%, tea processing -26.7%, animal feed -27.2%, other food processing -13.4%, beer production -8.4%, and drinks and tobacco -2.9%.
The adverse exchange rate movements against major world currencies have been attributed to two major factors: foreign investors in government securities, that is treasury bills and bonds, have withdrawn from the economy and the decline in remittances from Ugandans working abroad, plus transfers to non-governmental organisations (NGOs). These factors have led to a drastic reduction of forex inflows thereby increasing demand for hard currencies locally.
Finally, high interest rates in our banking sector have partly been accounted for by increased corporate demand for locally available loanable funds as companies borrowed domestically due to non-availability of loan finance from the developed world because of the financial crisis.
The implications of the economic crisis on the Prosperity for All programme are two- fold.
The local households in Uganda cannot profitably market their cash crops to improve their welfare. Secondly, even those with children in the diaspora no longer receive hand-outs for up-keep as their benefactors are also struggling for survival.
One has to note that at least 80% of our population rely on agriculture for their livelihood, which was clearly acknowledged by the minister in her budget speech.
However, the share of agriculture in the gross domestic product has continued to decline from 15.7% in the 2007/08 fiscal year to an estimated 15.1% in 2008/09.
This does not mean that the percentage of people surviving on agriculture is drastically declining. That is, their share in the national cake is declining by the year, implying that the biggest beneficiaries of the robust economic growth are the 20% engaged in other activities.
Commercial banks have also continued to desist from lending to the agricultural sector, in spite of the generous tax incentives provided by the Government.
This financial year, commercial bank credit to the private sector grew by 40.1%, but credit to the agricultural sector grew by -16.3% with agricultural production posting a -5.5% growth rate, while crop finance posted a -23.7% growth. All this does not augur well for the Prosperity for All programme.
The abolition of 5% value added tax (VAT) on sale of residential houses sounds fantastic since shelter is one of the basic needs of man. However, an average Ugandan cannot afford a unit constructed by the registered property developers such as National Housing and Costruction Corporation or Akright. People prefer to construct their own houses on their ancestral land.
Even if this measure were to be beneficial, it would only favour the middle to high-income groups.
Houses are likely to become more costly as the VAT incurred by the developer on construction materials will be passed on to the final buyer since the developer cannot claim it.
The best solution would have been to reduce VAT on construction materials, or zero-rate them.
This measure is meant to encourage farmers to grow more sorghum and barley to sell to breweries bottling beer. It assumes that the consumption of locally bottled beer will increase as a result of the reduction in the duty. Last year, there was a similar reduction in duty, but we did not see an upsurge in demand for beer.
Actually, poor performance of excise duty from beer was one of the reasons advanced for Uganda Revenue Authority’s (URA) shortfall in revenue collection.
The demand for beer among the less privileged is still low since they cannot afford even the basic needs.
Exemption from tax on income from agro-processing is envisaged to encourage investment into agro-processing factories all over the country, which should create a ready market for agricultural produce.
This is merely an extension to last year’s proposal, which excluded Kampala from the incentive. My reading is that the minister did not see an increase in investment in agro-processing in rural areas. That is why Kampala has been included to see if the situation will change for the better.
Let us wait and see whether this gamble pays off. nvestment in transport and other infrastructure is a welcome development, but it can only bear fruit in the long-run.
The assumption is that the wanainchi have produce to sell and there is a ready market, but they can’t access it due to poor roads.
In some parts of the country, the land is so fragmented that people cannot produce anything for sale on a commercial scale.
In a nutshell, I do not envisage a big improvement in the standard of living of the ordinary Ugandans in the foreseeable future.
The economy will continue to grow but skewed towards the rich, meaning the gap between the rich and the poor will increase as the share of agriculture in GDP continues to dwindle. I wish to conclude with a message to the honourable minister in the shape of this famous quote:
“I am proud to be paying taxes in the US. The only thing is, I could be just as proud for half the money.†Arthur Godfrey, entertainer.
The writer is a senior tax manager at Ernst & Young Certified Public Accountants
David.Baliraine@ug.ey.com
The views expressed in this article are his personal views and those of of Ernst & Young.
By David Baliraine
FOR the past three financial years, the central theme of the budget process has been “Prosperity for All†as envisaged in the 2006 NRM election manifesto. In her maiden Budget Speech on June 11, the finance minister, Syda Bbumba, said the theme of the 2009/10 budget was “Enhancing strategic interventions to improve the business climate and revitalise production to achieve Prosperity for All.â€
This focus is expected to continue in the medium-term.
The minister also announced that the economy had grown at a robust rate of 7% in 2008/09, which was over the continental and regional averages, in spite of the global economic crisis.
I will attempt to provide an in-depth examination of the effect of the global financial crisis on the growth of our economy and its effects on the Prosperity for All programme the growth rates of the sectors underpinning the overall economic growth rate and how they impact on the programme. I will also examine the fiscal measures announced by the minister for the new financial year and their likely consequences for the ordinary people.
The Ugandan economy grew at a rate of 7% instead of the projected 8.1% because of, rather than in spite of, the effects of the global economic crisis.
A look at the individual sector growth rates indicates that the service sector was the most buoyant with financial services growing at 21%, transport and communication 20%, health 8.1%, manufacturing 8.3%, mining and quarrying 9.2%.
On the other hand, construction grew by only 2.2% compared to over 15% for the last four years. This has been directly attributed to a drastic reduction in remittances from abroad. Our Nkuba Kyeyos have in the past been remitting large sums to construct their own residential houses as well as those for letting.
Because of the crisis, this avenue has been closed. So, it would be self-defeating for anybody to try and downplay the effect of the crisis.
Moreover, as a direct result of the slow-down of the construction sub-sector, production of metal products grew by -20.3%, while bricks, tiles and other ceramics grew at -14.3%!
Agriculture, forestry and fishing grew at a modest 2.6%, but in particular, the coffee sub-sector, which accounts for 60% of our cash crop exports, grew by -3%.
The tea sub-sector grew by -11.3% due to reduced demand in Europe, the main importer.
You do not need to be a professor of economics to discern that the drastic reduction in demand was due to the lingering global economic crisis!
This suppressed growth in the agricultural sector also had adverse knock-on effects on the industrial sector with the following sub-sectors all growing at negative rates: fish processing -43.8%, coffee processing -13.7%, tea processing -26.7%, animal feed -27.2%, other food processing -13.4%, beer production -8.4%, and drinks and tobacco -2.9%.
The adverse exchange rate movements against major world currencies have been attributed to two major factors: foreign investors in government securities, that is treasury bills and bonds, have withdrawn from the economy and the decline in remittances from Ugandans working abroad, plus transfers to non-governmental organisations (NGOs). These factors have led to a drastic reduction of forex inflows thereby increasing demand for hard currencies locally.
Finally, high interest rates in our banking sector have partly been accounted for by increased corporate demand for locally available loanable funds as companies borrowed domestically due to non-availability of loan finance from the developed world because of the financial crisis.
The implications of the economic crisis on the Prosperity for All programme are two- fold.
The local households in Uganda cannot profitably market their cash crops to improve their welfare. Secondly, even those with children in the diaspora no longer receive hand-outs for up-keep as their benefactors are also struggling for survival.
One has to note that at least 80% of our population rely on agriculture for their livelihood, which was clearly acknowledged by the minister in her budget speech.
However, the share of agriculture in the gross domestic product has continued to decline from 15.7% in the 2007/08 fiscal year to an estimated 15.1% in 2008/09.
This does not mean that the percentage of people surviving on agriculture is drastically declining. That is, their share in the national cake is declining by the year, implying that the biggest beneficiaries of the robust economic growth are the 20% engaged in other activities.
Commercial banks have also continued to desist from lending to the agricultural sector, in spite of the generous tax incentives provided by the Government.
This financial year, commercial bank credit to the private sector grew by 40.1%, but credit to the agricultural sector grew by -16.3% with agricultural production posting a -5.5% growth rate, while crop finance posted a -23.7% growth. All this does not augur well for the Prosperity for All programme.
The abolition of 5% value added tax (VAT) on sale of residential houses sounds fantastic since shelter is one of the basic needs of man. However, an average Ugandan cannot afford a unit constructed by the registered property developers such as National Housing and Costruction Corporation or Akright. People prefer to construct their own houses on their ancestral land.
Even if this measure were to be beneficial, it would only favour the middle to high-income groups.
Houses are likely to become more costly as the VAT incurred by the developer on construction materials will be passed on to the final buyer since the developer cannot claim it.
The best solution would have been to reduce VAT on construction materials, or zero-rate them.
This measure is meant to encourage farmers to grow more sorghum and barley to sell to breweries bottling beer. It assumes that the consumption of locally bottled beer will increase as a result of the reduction in the duty. Last year, there was a similar reduction in duty, but we did not see an upsurge in demand for beer.
Actually, poor performance of excise duty from beer was one of the reasons advanced for Uganda Revenue Authority’s (URA) shortfall in revenue collection.
The demand for beer among the less privileged is still low since they cannot afford even the basic needs.
Exemption from tax on income from agro-processing is envisaged to encourage investment into agro-processing factories all over the country, which should create a ready market for agricultural produce.
This is merely an extension to last year’s proposal, which excluded Kampala from the incentive. My reading is that the minister did not see an increase in investment in agro-processing in rural areas. That is why Kampala has been included to see if the situation will change for the better.
Let us wait and see whether this gamble pays off. nvestment in transport and other infrastructure is a welcome development, but it can only bear fruit in the long-run.
The assumption is that the wanainchi have produce to sell and there is a ready market, but they can’t access it due to poor roads.
In some parts of the country, the land is so fragmented that people cannot produce anything for sale on a commercial scale.
In a nutshell, I do not envisage a big improvement in the standard of living of the ordinary Ugandans in the foreseeable future.
The economy will continue to grow but skewed towards the rich, meaning the gap between the rich and the poor will increase as the share of agriculture in GDP continues to dwindle. I wish to conclude with a message to the honourable minister in the shape of this famous quote:
“I am proud to be paying taxes in the US. The only thing is, I could be just as proud for half the money.†Arthur Godfrey, entertainer.
The writer is a senior tax manager at Ernst & Young Certified Public Accountants
David.Baliraine@ug.ey.com
The views expressed in this article are his personal views and those of of Ernst & Young.