Improve management of borrowed funds

By Byiringiro .C. Ayebazibwe

The Minster for Finance, presented a FY 205/16 Budget sh23.9trillion almost a month ago during which he acknowledged that public debt is increasing rapidly compared to the past trends.

That currently, 40% of Uganda’s debt stock is domestic while 60% is external attributed to increased borrowing to finance infrastructure development which is bound to continue.

Unfortunately, the management of borrowed resources remains questionable especially in light of gaps during loan implementation some of which are noted by the Auditor General in his June 2014 annual report to include poor performance of some loans which is attributed to lack of land titles for large infrastructure projects inter alia.

Some of the loans have even reached the closing date without fully disbursing which undermines the attainment of development targets and renders commitment charges paid in respect of undisbursed funds nugatory.

With specific reference to the Project for Financial Inclusion in Rural Areas (PROFIRA) loan, its disbursement in the absence of a legal framework (the Microfinance Bill, 2014 not yet passed into law) poses risks and the likelihood of SACCOs charging high interest rates in the absence of regulation which, contrary to the project objective, may not increase access to financial services especially in the rural communities.

In FY 2015/16, domestic resources are expected to finance up to 76.4% of the National Budget. However the narrow local tax base as a source of revenue collection may frustrate the efforts of executing the rosy budget.

Government loses local revenue partly due to some of the existing tax policies which exert a bigger burden on a small section of the population. If these local resources were effectively mobilized, external borrowing and spending on loan repayment would be reduced.

Therefore, Uganda Revenue Authority should review tax exemption policies to bring on board all potential tax payers to generate revenue for financing public financial requirements. This is because tax exemptions distort tax administration and encourage the risk of non-compliance causing loss of revenue.

On the other hand, prior to the abolition of graduated tax in 2005; it was the primary source of Local Governments revenue which constituted over 50% of local revenue that sustained the operations of districts.

The replacement of graduated tax with local hotel tax inter alia, does not yield a commensurate amount especially for new districts. Since its abolition, effective service delivery by most Local Governments has been crippled and these have inevitably become heavily dependent on the meager yet conditional Central Government transfers.

The re-introduction of graduated tax would generate a considerable amount of revenue since the distribution would be across a bigger section of the population. It would also empower Local Governments and enable them implement their own development agendas.

However, the observance of strict punitive measures in the event of human rights violations during tax collection should be instituted and effectively operationalized.

Merging unproductive districts back with their original districts would save the thinly spread out funds for improved service delivery.

Nevertheless, as we devise means of generating more local revenues, debt resource implementers and managers must exercise frugality in the management of such externally acquired resources.

An integrated multi-sectoral approach should be adopted where a loan is contracted for a specific project with a multi-beneficial factor for several sectors as opposed to having a single project for each sector, to minimize costs.

Secondly, borrowing for several projects should be done under one lender to minimize associated costs in terms of financial spending during loan appraisal, time and labour. Lastly, Government should adopt the promotion of usage of local content where foreign contractors sub-contract local companies to undertake manageable tasks as a skills development venture for employment, maintenance and continuity.

As the national budget increases in size every year, local revenue mobilization must also increase to a comfortable position and support its implementation.

With the increasing trend of borrowing and low revenue base, national debt stock could drift into unsustainable levels hence exposing the country to debt restructuring modalities which have their complications.

The writer works with Uganda Debt Network