Mayanja Nkangi presents 1993/94 budget

The Minister of Finance and Economic Planning, Mr. J. Mayanja-Nkangi, yesterday presented the national Budget for the year 1993/94 at the Kampala International Conference Centre.

Following is the full Budget Speech:

Mr. Chairman and Honourable members, as you may recall the main objectives of the 1992/93 budget were to: achieve a GDP growth rate of at least 5 percent; reduce the inflation, rate to 15 percent by end of June 1993 and stabilise the exchange rate; strengthen the Balance of Payments position by increasing foreign exchange earnings and reducing our external debt arrears; widen the tax base; and increase savings and investment so as to foster greater economic activity.

I am glad to report that these objectives have been achieved. Government's economic strategy will continue to emphasise the promotion of exports and efficient import substitution, prudent budget management and mobilisation of domestic and external resources for development.

The need to achieve high economic growth, raising per capita income whilst sustaining both internal and external equilibrium will con tin lie to constitute the main challenge ahead for Government as we move from rehabilitation to development.

Let me begin by reviewing some of the key indicators of macroeconomic performance.

The performance on inflation in 1992/93 has been the most outstanding economic success of the financial year. 

A year ago I reported to you an annual rate of inflation of 63 %, with only the beginnings of a downward trend in sight. At the end of last month, the annual growth in the consumer price index amounted to minus 1.3 %, well below the inflation target of 15% for 1992/3.

Indeed according to the combined consumer price for Kampala, Jinja, Mbale, Masaka, and Mbarara, for the eleven months since July 1993 the monthly change in prices has been negative (in August, November, December 1992, January 1993, February 1993, and March 1993) or below 1 % per month (for September 1992, April 1993 and May 1993).


In this period only October 1992 saw a monthly inflation rate of over 1 % per month. This is well below the inflation target of 15% for 1992/93.

The evidence available to us so far suggests that this rapid fall in inflation has not been accompanied by any major adverse impact on economic activity. Preliminary data indicate a GDP growth of approximately 7% for 1992/93, reflecting recovery from the drought constrained growth of just under 2% last year. 

Growth of the agricultural sector in 1992/3 is estimated to amount to just over 9% compared to a fall of 1.5% during the previous year. 

Broad exchange rate stability has been maintained over the last fifteen months or so since the introduction of the auction and the operation of open markets for all foreign exchange transactions. 

The bureau exchange rate, measured in foreign exchange terms depreciated marginally by about 2 % during the first 9 months of 1992/ 93.

The monetary food crops showed a more dramatic recovery as rising production levels allowed the surplus to be marketed. 

The industrial sector is expected to show modest growth of 3.8% for 1992/93 in contrast to the 19.4% of 1991/92. The construction industry is estimated to have grown by about fi.0% in 1992/93compared to 1.7% in 1991/92.

Ministers of Finance do not often get the opportunity to report a successful stabilisation exercise accompanied by renewed economic growth, so I beg your indulgence to allow me to make some commentary on these basic indicators.

We recognise that attaining economic stability is only the beginning of the more difficult task of sustaining it. 

However, I do not believe that our battle with inflation has met with only transitory success. Improved fiscal control was not achieved by the stroke of a pen in one round of unrepeatably draconian expenditure cuts. 

Fiscal and monetary control has come from fundamental improvements in the systems of economic management consistent and regular cash flow management on the fiscal side, closer scrutiny of expenditure decisions, greater coordination between the central bank and Ministry of Finance and Economic Planning and the restructuring of the management of monetary control.

For the Ministry and the Bank of Uganda, this has been a year of intensive restructuring and overhaul of our systems and I believe that the consequences will be enduring.

Mr Chairman and Honourable members, I think it may be helpful to expand a little on the data on inflation. 

We have recently developed a composite price index for Uganda,   composed as a weighted average of prices in five centres. 

This index demonstrates a fall in inflation from 66% at the end of 1992 to a rate of minus 1.3% p.a for the 11 months up to May 1993. 

The trend is identical therefore to the frequently quoted Kampala price index and, indeed, the evidence from regional data shows that the pattern is remarkably similar throughout the country as Honourable members will see from graphs which are being published in the Background to the Budget 1993/1994.

It is also important to note that the fall in food price been particularly steep owing to the strong recovery in food production after last year's drought. Food crop prices have fallen by about 20% over the financial year which has contributed significantly to the overall decline in the rate of inflation.

Assuming that the relative price of food crops has now stabilised, we can say that the underlying rate of inflation currently stands at 7.7% p.a which is half the target announced last year.

Many of you in this house will recall some remarks our President made on the occasion of the last budget: "There will be no inflation. If there is no money, let us walk or close down some ministries until we get the money. Inflation is in the discipline."

This commitment remains unaffected by the present favourable state of the price index. This is not to pursue our inflation objective for its own sake at the expense of all other concerns. 

Rather, we are impressed by the evidence from comparative economic development that the rapid growth and poverty reduction which are central to our objectives are most likely to be attained in an environment of modest inflation and a stable competitive exchange rate.

It is above all our commitment to long term economic development which has motivated the new seriousness with which we have tackled short term stabilisation.

Mr Chairman and Honourable members, the benefits of low inflation are many. It increases savers' and investors' confidence. It has implications for the level of interest rates. 

You recall that in November 1992, interest rates were about 40% but have now fallen to about 25%. This encourages businesses to take out loans for new investment. For the future, the government will continue to follow prudent policies to keep inflation under control. 

The prize of low stable inflation is too valuable to lose. Accordingly, the Government will maintain control over its spending and money supply to keep inflation in check. Consequently, this will lead to lower interest rates, stable exchange rate and sustainable growth in the future. 

Economic growth is not sufficient to ensure significant poverty reduction, yet without substantial high growth, efforts to reduce poverty are doomed to fail. 

Government's strategy is to stimulate rapid private sector-led growth through an appropriate policy environment and provision of economic and social infrastructure while focusing public expenditure towards the provision of basic social services of maximum impact for the poor.

Implementation of priorities for public expenditure is underway, as 1 shall shortly explain.

The distribution of gains from economic growth so far has not been uniform. Households dependent on production of non-tradable goods have benefited less than producers of export or import substitutes. 

Retrenchment and demobilisation have affected some. However, while some have benefitted less than others so far from renewed economic growth and the investment which is beginning to be attracted by the new economic stability, Government has no doubt that perseverance with the present strategy represents the best hope for improved welfare for all in the long term.

Broad money (excluding foreign currency deposits) is estimated to have increased by some 30 per cent over the fiscal year as against the original target of 21 per cent. 

The larger than targeted growth is due to the strong performance in net foreign assets, and the increased demand for Uganda shillings as inflation has fallen and exchange rates stabilised. Underlying this is stronger than anticipated repayment to the banking system by Government.

Interest rates were liberalised in November 1992 and since then have declined from over 40 per cent to the mid 20 per cent range, reflecting in part the reduced inflation. Liquidity management in 1992/ 93 has been active and has centred on Bank of Uganda's rediscount policy, weekly Treasury Bill auctions, and adjusting the reserve requirement on commercial bank deposits. 

This active management has been facilitated by improved surveillance of the banking system by the Bank of Uganda and improved coordination between the central bank and the Ministry of Finance.

Within a highly constrained budget, we have nevertheless maintained budget support to the priority expenditure areas identified in the Public Expenditure Review of primary education, primary health, feeder roads maintenance, agricultural research and water for the rural areas. 

Starting with this budget, we want to add to these priority areas support for the police, the Auditor General's Office, the judiciary and the Office of the Inspector General of Government. 

The domestic arrears of Shs 32 billion identified at the beginning of the fiscal year have been paid in full. 

During the financial year now ending, we financed retrenchment settlements for approximately 14,000 civil servants and about 23,000 demobilised soldiers. We estimate that domestic revenue collection rose by slightly over 50% in nominal terms in 1992/3 compared to last year. 

This is a little below the target we had set for the Uganda Revenue Authority but nevertheless offers some evidence of the improvements in tax collection which are underway. 

We will ensure that these improvements continue, while we explore other ways of expanding the tax base as we shall see later in the revenue measures.

We have met our obligations of external debt of about US$100 million in the fiscal year. Last year I reported to you on the very critical external debt payments we faced. Our external debt stock has remained at about 'US$2.6 billion, or 100% of our GDP.

Our arrears position is projected to drop dramatically to a level of about US$300 million as at the end of June 1993. Scheduled debt service reduced to about US$ 148 million for 1992/3 and is projected at US$ 157 million for 1993/4, representing a 90% debt service ratio.

This improvement has, to large extent, been the result of our implementation of a comprehensive debt strategy in which we received enhanced Toronto terms on our eligible Paris Club debt and a short term deferral of our post cut off date Paris Club debt

In addition, we implemented a debt buy-back of over US$150 million of commercial arrears in which every dollar was bought for 12 etc a discount of88%. We are grateful to all those donors who assisted us with this highly successful buy-back programme. 

Our major problem for the coming financial year is that US$ 68 million of our debt service is due to multi-laterals alone and an additional US$48 million of non-reschedulable arrears and maturities are due to the Paris Club. 

Together these two amounts represent a debt service ratio of approximately 60% even before we include moratorium interest on re-scheduling we agree with other creditors.

Further progress is being made to encourage an environment for vigorous private sector development. 

Financial sector development is progressing, and in this respect, I am grateful that you, Honourable Members, recently passed the Bank of Uganda and Financial Institution s Arts. The IDA has also approved a $125 m Financial Sector Adjustment Credit. 

The Transfer of Custodian Board properties has been greatly accelerated and Government has now set a deadline of 30th October 1993 for repossession applications. 

Nine parastatals have now been offered for sale and we expect further parastatals to be presented for divestiture following the enactment of the Public Enterprise Reform and Divestiture Bill presently under consideration by this House.

Mr. Chairman, the summary of the Budget out-turn is as follows. The revenue outturn is estimated at shs 287 billion, which is about 99 percent of the expected out-turn. Of this, tax revenue was only shs 266 billion, 97 percent of the expected while non-tax revenue was shs 21 billion. 

Tax revenue was 3 percent below target mainly as a result of the month long unilateral closure of Uganda's border with Kenya; and a brief interruption in the supply of petroleum earlier on this year.

Grants contributions amounted to shs 281 billion, 93 percent of the expected level, while financing from external loans amounted to shs 205 billion, 94 percent of the target. 

The expenditure out-turn for the year is shs 728 billion, 94 percent of the planned expenditure. Of this, recurrent expenditure was shs 350 billion, 95 percent of the total, while development expenditure was shs 380 billion, 96 percent of the total.

The overall budget deficit is estimated at 11.9 per cent of GDP. Net repayment to the banking system is estimated to be Shsl3.4 billion against the target of net repayment to the banking system of shs 14 billion.

The budget outlook for 1993/94 is determined by anticipated developments in the budget resource envelope and in particular the projected path of the national revenue effort.

In past budgets the 1992/93 Budget was no exception in this respect there has been a marked tendency to overestimate the level of budget resources that will be available to finance budget expenditures. 

The costs of failing to adjust during the financial year to the consequent shortfall in budget resources were abundantly evident in 1991/92. 

Even when appropriate adjustments to expenditure are made during the year, as was the case this year, the process of enforced adjustments to expenditure levels, in response to resource shortfalls in the budget cash flow, has a major cost in terms of inefficiencies arising from unplanned and unpredictable variations in the allocations to public expenditure programmes.

Consequently, a determined effort has been made in the current budget to base expenditure decisions on a realistic projection of the prospective budget resource envelope. This, in turn, has required a detailed assessment of the revenue potential in

1993/94, the potential for mobilising domestic savings to finance the budget and the availability (and capacity to absorb) external assistance. 

Longer run concerns about the dependency of the Budget on external assistance, particularly import support, have also been taken into consideration in the determination of the overall resource envelope. 

Consistent with such concerns budgetary reliance import support has been reduced in 1993/94. The ratio of import support to re-current expenditure is projected to decline from 50% in 1992/93 to 46 in 1993/94. The government aims to reduce this dependency ratio further over the years in step with the progress made to increase the revenue effort.

The allocation of resources must balance the competing claims on resources arising from domestic' and external obligations (for example debt service), other nondiscretionary amounts of expenditure (e.g Statutory Recurrent expenditure, counterpart funds for donor projects), existing Government policy commitments (for example wages and priority expenditure areas) as well as specific expenditure proposals submitted by individual Ministries.

Mr Chairman, Honourable members, in 1993/94, Government is expected to collect, shs. 384 billion in revenue of which shs. 360 billion will be from tax revenue and shs. 24 billion from non-tax revenue. 

Grants from external sources are expected to yield shs. 266 billion of which shs. 74 billion will be imported support and shs. 192 billion project aid.

The Government intends to spend shs. 430billion on recurrent expenditure. This includes shs. 89 billion for wages, shs. 105 billion for interest payments, of which shs. I 27 billion is interest on domestic debt and shs. 78 billion is interest on external debt and shs. 192 billion on non-wage recurrent expenditure. 

The balance represents expenditure under Statutory expenditure (shs. 19billion); a provision for the issuance of Treasury Credit Notes (shs. 11 billion) and a transfer to the Uganda Revenue Authority of shs 14 billion.

Total*p489Xexpera development budget is estimated to be shillings 419 billion of which shs. 369 billion is externally funded and shilling 50 billion is domestically funded.

A provision of shs. 2.8 billion has been made under net lending to provide for the retrenchment costs of the Uganda Commercial Bank.

The deficit for the year is estimated to be shs. 201 billion. External financing of the deficit is projected to be shs. 215 billion, comprising foreign borrowings of shs. 303 billion and external debt payments of shs. 125 billion. Net domestic repayment of shs. 14 billion is projected for 1993/94.

Mr. Chairman and Honourable members, in 1992/93 Government made payments of shillings 33 billion to reduce its indebtedness to the domestic creditors. This year, the Government intends to reduce its indebtedness to domestic creditors by a further shs.22bn.

It is proposed that Shs 89bn will be allocated to salaries and wages in 1993/4. This compares with Shs 65bn in 1992/3 and represents an increase of 37%. This is expected to yield an increase of approximately 33% in real terms.

The increase in wage levels achieved in 1993/4 is expected to be higher than this as a result of continuing reductions in civil service numbers. The Ministry of Public Service propose to implement a reduction of 68,000 in the combined teaching service and traditional civil service in 1993/4.

Implementation of this retrenchment programme will require substantial external funding to finance the proposed retrenchment costs. 

The balance of Ushs 32.4bn will have to be found from donor financing. Ail appeal for such funding was made at the Consultative Group meeting in May and some preliminary indications of support were received, especially for an initial tranche of retrenchments scheduled up to December, which will cost approximately $15m. 

This will be followed up with a more focused meeting with donors in Kampala shortly. Whatever the eventual level of donor support which is received, it is likely that delays in obtaining funds may cause some slippage from the programme indicated above.

It, therefore, appears necessary to exercise some caution in the implementation of the wage increase. An initial wage increase should be implemented on very conservative assumptions regarding retrenchment (i.e. no more than can be funded from the provision of Shs5bn included in the budget framework as the Government of Uganda contribution to the exercise).

A funding increase in wage levels could be made later in the year, depending on the pace and depth of retrenchment actually achieved.

Total financing for the year would be constrained to remain within the ceiling of Shs 89bn, but successful implementation of the retrenchment programme would permit a substantial 'additional pay increase in the second half of the year.

Detailed proposals for the first phase of the wage in-ii case will be announced shortly by the Ministry of Public Service.

Total expenditure on the development budget in 1993/ 94 is expected to be Shs.419.5 billion. 

Whereas over the last year, high priority has been given to counterpart funding of donor supported projects and automatic funding focused towards the already agreed on priority areas of agricultural research and extension, feeder roads rehabilitation and maintenance, primary health care, primary education and rural water, a greater effort to focus and to improve on the efficiency of utilisation of limited development resources is to be implemented in 1993/94 FY.

Building on the above priority areas and incorporating programmes and activities expected to improve on public expenditure efficiency and to support the economy's movement forward, a "Core Programme" of some 160 high priority projects has been identified and agreed on by Cabinet. 

This "Core Development Budget Programme" will account for at least 60 per cent of the entire development budget and will always have the first call on development resources,

Other RDP projects for implementation during 1993/ 94 with the exception of small components in projects in the agricultural sector, will be categorised as "Non-core". Government's contribution to these non-core projects, estimated at 20 percent, will be released depending on the monthly cash flow positions. 

Over the next year, the Public Investment Review (PIR) exercise started this year will continue, jointly with donors, to concretise the Core Programme and to identify projects for re-structuring/redesigning, project components for elimination and projects for postponement or total elimination.

The Government development activities in Part B, expected to account for the remaining 20 per cent, will continue to be processed on priority requisition and as permitted by the monthly cash flow positions.

Within the "Core Budget Programme" both in the recurrent and development budget, additional priority areas have been added to enhance observance of law and order, proper management and accounting for public funds and prosecution of offenders.

These include the Police Force, the Prisons Service, the judiciary, the Auditor General's Office and the Inspectorate of Government. The establishment of proper monitoring and accounting systems in Government is to be undertaken under the Budget Reform Component of the Economic and Financial Management project, to commence in August this year.

The final report on the three to five year Luwero Triangle Reconstruction Programme (LUTREP) has been submitted to Government and will soon be considered by Cabinet. 

The major objective of LUTREP is to restore the capacity of the communities to engage in normal economic and social activities as well as to catalyse the process of economic recovery and growth in the Luwero triangle.

It is also expected that the Programme will be presented to the donor community with a request for funding.

In the meantime in the 1993/94 Budget, I have provided additional resources to priority recurrent activities and to ongoing Core projects covering the Luwero Triangle in the areas of health, education, agricultural research, rural water and road rehabilitation and maintenance.

Early in the new financial year, I will convene a meeting to discuss with the various implementing ministries how to increase the effectiveness of these resources in Luwero triangle.

In addition, a new multisectoral project, the Masulita Development Project, within the "Core Programme", will start in August this year, under International Labour Organisation (ILO) assistance of almost $700,000. The project has components for community capacity building, rural water and sanitation .primary health care and rehabilitation of feeder roads.

It is vital for the economic development of Uganda that the financial sector is strong and vibrant. An efficient financial sector will mobilise internal resources to finance new investment, thus creating jobs in the economy and stimulating growth. 

Without effective intermediation, savings will remain unused, businesses will be starved of capital and economic growth will be greatly impaired.

The Government has given strong support to the financial sector. First and foremost, the Government has brought inflation down remarkably. 

This has boosted confidence in the financial sector and led to positive real interest rates prevailing in the economy. 

Thus the public is increasingly willing to deposit their savings with the commercial banks because they will receive a high rate of return and because their savings will not be eroded by inflation in the future.

In turn, the commercial banks have increased funds to finance new investment opportunities.

The Government has also strengthened the financial sector by using market-based interest rates to allocate credit efficiently in the economy. 

The reference interest rate is now determined in the weekly auctions of Government Treasury Bills. 

Thus it changes automatically to reflect fluctuations in the demand for and supply of liquidity. This provides a signal to commercial banks to alter their interest rates in line with market conditions and so they can attract deposits and undertake new lending more effectively.

Institutional reforms have also been undertaken by the Government to deepen the financial sector in Uganda. Using the Financial Sector Adjustment Credit that has been secured from the World Bank, the Government has initiated the restructuring of Uganda Commercial Bank and of Uganda Cooperative Bank. 

The changes in UCB are very large and will have major implications for the performance of the financial sector in the future. UCB is now being recapitalized and its non-performing loans will be removed from its books.

In the first stage, some Shs32.2 billion of bad and doubtful debts will be transferred from UCB to a Trust set up solely for the purpose of loan recovery. 

To compensate UCB for the loss of loan income, the government will issue a long term bond to UCB in an equivalent amount. In addition, the government will inject new paid-up capital of Shs4.3 billion. 

There have also been management changes in UCB and there is now a new focus on controlling costs.

Drastic action is also being taken to bring staff loans under control. With UCB becoming profitable again, other commercial banks will be forced to improve their own efficiency in order to compete successfully with UCB.

The Cooperative Bank will also undergo a programme of restructuring. It is hoped that financial assistance from USAID will meet the capitalization costs. These are estimated in the range of Shs 14 to 16 billion.

As part of efforts to restructure the financial system and encourage efficiency, the government will offer its equity shares, in part or in whole, in privately owned banks for sale to potential investors before the end of the 1993/94 fiscal year.

The restructuring of the Bank of Uganda has also been initiated. The central bank is being recapitalized and has been granted autonomy. 

Thus the credibility of the Bank of Uganda to pursue sound money policies independently of the Government has been enhanced.

The Government has also taken an active interest in the establishment of a stock market in Kampala. While the main initiative in setting up a stock exchange has come from the private sector, the Government has played a complementary role in supporting this effort.

Confidence, trust and integrity are crucial if a stock thus the Government is pursuing an evolutionary approach in which all the necessary prerequisites for a smoothly functioning market are in place before the stock exchange is fully operational.

A successful stock market requires special legislation to cover the workings of the exchange, the rules of transferring share ownership, the floatation of enterprises on the market, the licensing of brokers and dealers and the protection of individual investors. 

On behalf of the Government, the Commonwealth Fund for Technical Cooperation has drafted the necessary legislation and this will be used to cover the legal aspects of the proposed stock exchange.

To give brokers experience in dealing with securities, the Bank of Uganda is in the process of setting up a secondary market in Government Treasury Bills. 

Thus brokers will have an opportunity to compete for issues of securities, to sell securities for a profit and to build up extensive .client lists.

Thus when the stock market becomes operational there will already be experienced brokers who can act on behalf of existing customers and participate actively in share dealing.

It is envisaged that dealing in shares will initially be carried out through Over-The-Counter trading operations. 

In this interim arrangement dealers and brokers will conduct business at their own premises rather than in a centralised Stock Exchange. 

When the volume of transactions increases sufficiently, dealers will undertake to trade in one location which will be a physical Stock Exchange. This evolutionary approach will allow dealers time to gain more experience and give the public time to familiarise itself with securities dealing.

The Government has also been addressing technical issues that are vital to a successful stock market. These include possible fiscal incentives to issuers and investors, reforming the existing company law, upgrading accounting standards and strengthening the Registry Department at the Ministry of Justice.

To encourage leasing in the economy, lessors will be entitled to claim wear and tear allowances, regardless of who bears the burden of the upkeep of assets that have been leased. 

The tax laws will be amended so as to encourage the formation of leasing companies in Uganda. Leasing has become a significant source of finance in many other countries in Africa and will provide much needed medium and long term asset finance to businesses.

Under the Income Tax Decree, a Finance Leave Agreement will be defined as an agreement whereby a lessor undertakes to acquire a movable asset and lease it to a lessee who will use it for his own purposes against mutually agreed lease rentals over a specified period; the lessor retains legal ownership until the period of the lease has expired.

Sales tax on the resale value of leased assets at the end of the lease period will be based on the book value of such assets. 

Leasing transactions and payments will not be subject to CTL. For lessees who have qualified for incentives under the Investment Code, leased assets will be entitled to the same exemptions as assets directly repurchased. Insurance of leased vehicles will be the responsibility of the lessee.

Currently, the insurance industry is operating under a 1978 Insurance Law which clearly is out of step with the present economic realities in the country. In recognition of the relationship between financial growth and real growth, the NRC has already passed updated laws on financial institutions and the Bank of Uganda. 

During the coming financial year, the government will table before the NRC its proposals to amend and consolidate the laws relating to the operation of the Insurance Industry in the country. 

Under the new law, the function of supervising insurance will be transferred to a self-accounting Insurance; Commission that will be accountable to the Central Bank, although Government will retain residual powers to issue policy guidelines. 

This should bring the insurance sector in line with regard to supervision and control of financial institutions by the Central Bank. By doing this we hope to achieve the following:

Development of a strong, responsive insurance industry run along sound lines;

Promotion of investment opportunities in the insurance market for foreigners and Ugandans.

Creation of a reasonable retention base in national interests and capacity building to ease over-dependence on foreign insurers;

Ensure sustainability of solvency levels of insurance companies;

Investment of insurance funds in viable economic development projects in the country;

Ensure, smooth professional insurance activities in the country; and

Allow for fair insurance pricing and reasonable profit margins without eliminating the element of fair competition.

The net effect of this will be to have the Insurance Industry perform better and boost the national economy overall.

On the monetary programme for the coming fiscal year, the key parameters are an end-year inflation target of 7.5 per cent, and real GDP growth of 5 per cent Consistent with these, broad money (M2) growth will be restricted to 13 per cent The monetary programme allows for the buildup of official foreign exchange reserves of US$30 million and an increase in private sector credit of around 13 per cent. 

To ensure consistency, the programme requires that there be no change in net Government borrowing from the banking system.

On foreign exchange reserves, our medium-term objective is to increase the central bank's foreign currency holdings to four months of imports from the current level of three months.

In order to promote efficient monetary management, the Bank of Uganda will continue to actively promote the development of money markets and other financial instruments. I have already alluded to the development of the insurance sector, leasing and hire purchase finance and the Kampala stock exchange.

Whilst these markets are being promoted, the key financial market for the present is that in treasury bills. Further deepening of the Treasury bill market, including the development of a secondary market, is essential to facilitate monetary policy, and is, therefore, a priority area. 

In this context, the Bank of Uganda is in the process of raising public awareness of the full transferability of treasury bill certificates between owners. The Bank of Uganda will also consider measures to promote an interbank money market

Given the strong performance on inflation and the expectation that prices will continue to be stable, interest rates should drift lower over the coming year. The restructuring of problem banks will support this decline in interest rates as their financial viability is restored.

Furthermore, the Bank of Uganda will take steps to allow vault cash to be an eligible reserve asset. Bank of Uganda will also, after careful evaluation of its own financial position, consider paying a rate of return on reserves held at the Central Bank. 

These measures should improve the liquidity and lower the costs of the financial sector, and thereby contribute to a decline in interest rates. 

As efficiency in the system improves, the Bank of Uganda will consider removing the remaining limits set on interest rates with reference to the treasury bill market.

Mr Chairman, as you and members of this House are well aware, this Government has largely completed a major programme of reform of foreign exchange management in this country. 

This programme is now widely regarded as highly successful and of some relevance to other developing countries pursuing economic reform. 

The stability in the open market exchange rate over this financial year is a remarkable tribute to the viability of our reforms in this area. 

The central measures within the programme, such as the introduction of the forex bureaux and the auction, were designed and implemented by this Government at its own initiative without the constraint of donor conditionality, formal or informal.

Donors have supported and continue to support adjustment programmes in several other countries in Africa, where more tentative exchange rate reforms are being pursued at a much slower pace.

A final step is needed to complete our reforms in this area and achieve a fully unified market system of foreign exchange management. The government will shortly introduce measures to achieve this unification by the termination of the existing foreign exchange auction and introduction of a unified interbank market in foreign exchange. 

A smooth transition to the new system with uninterrupted support from donors balance of payment financing will require significant improvement in the present procedures for import monitoring, especially in Customs administration. 

Under the new system, we will be relying primarily on Customs administration for appropriate documentation of imports, rather than the existing controls associated with foreign exchange auction. 

I shall announce later this afternoon the specific administrative measures to be implemented now, which should improve revenue collection as well as ensuring adequate documentation of imports as a basis for donors' disbursement of the balance of payments support

In order to minimise the costs of adjustment to the new system, the existing foreign exchange auction will be retained until Government is convinced that these measures have been satisfactorily implemented, as evidenced by approximately two months of the successful operation of Development of a strong, responsive insurance industry run along sound lines;

Promotion of investment opportunities in the insurance market for foreigners and Ugandans.

Creation of a reasonable retention base in national interests and capacity building to ease over-dependence on foreign insurers;

Ensure sustainability of solvency levels of insurance companies;

Investment of insurance funds in viable economic development projects in the country;

Ensure, smooth professional insurance activities in the country; and

Allow for fair insurance pricing and reasonable profit margins without eliminating the element of fair competition.

The net effect of this will be to have the Insurance Industry perform better and boost the national economy overall.

On the monetary programme for the coming fiscal year, the key parameters are an end-year inflation target of 7.5 per cent, and real GDP growth of 5 per cent Consistent with these, broad money (M2) growth will be restricted to 13 per cent The monetary programme allows for the buildup of official foreign exchange reserves of US$30 million, and an increase in private sector credit of around 13 per cent To ensure consistency, the programme requires that there be no change in net Government borrowing from the banking system.

On foreign exchange reserves, our medium-term objective is to increase the central bank's foreign currency holdings to four months of imports from the current level of three months.

In order to promote efficient monetary management, the Bank of Uganda will continue to actively promote the development of money markets and other financial instruments.

I have already alluded to the development of the insurance sector, leasing and hire purchase finance and the Kampala stock exchange.

Whilst these markets are being promoted, the key financial market for the present is that in treasury bills. Further deepening of the treasury bill market, including the development of a secondary market, is essential to facilitate monetary policy, and is, therefore, a priority area. 

In this context, the Bank of Uganda is in the process of raising public awareness of the full transferability of treasury bill certificates between owners. The Bank of Uganda will also consider measures to promote an interbank money market

Given the strong performance on inflation and Development of a strong, responsive insurance industry run along sound lines;

Promotion of investment opportunities in the insurance market for foreigners and Ugandans.

Creation of a reasonable retention base in national interests and capacity building to ease over-dependence on foreign insurers;

Ensure sustainability of solvency levels of insurance companies;

Investment of insurance funds in viable economic development projects in the country;

Ensure, smooth professional insurance activities in the country; and

Allow for fair insurance pricing and reasonable profit margins without eliminating the element of fair competition.

The net effect of this will be to have the Insurance Industry perform better and boost the national economy overall.

On the monetary programme for the coming fiscal year, the key parameters are an end-year inflation target of 7.5 per cent, and real GDP growth of 5 per cent Consistent with these, broad money (M2) growth will be restricted to 13 per cent the monetary programme allows for the buildup of official foreign exchange reserves of US$30 million, and an increase in private sector credit of around 13 per cent To ensure consistency, the programme requires that there be no change in net Government borrowing from the banking system.

On foreign exchange reserves, our medium-term objective is to increase the central bank's foreign currency holdings to four months of imports from the current level of three months.

In order to promote efficient monetary management, the Bank of Uganda will continue to actively promote the development of money markets and other financial instruments. I have already alluded to the development of the insurance sector, leasing and hire purchase finance and the Kampala stock exchange.

Whilst these markets are being promoted, the key financial market for the present is that in treasury bills. Further deepening of the treasury bill market, including development of a secondary market, is essential to facilitate monetary policy, and is, therefore, a priority area. In this context, the Bank of Uganda is in the process of raising public awareness of the full transferability of treasury bill certificates between owners. The Bank of Uganda will also consider measures to promote an interbank money market

Given the strong performance on inflation and the expectation that prices will continue to be stable, interest rates should drift lower over the coming year. The restructuring of problem banks will support this decline in interest rates as their financial viability is restored.

Furthermore, the Bank of Uganda will take steps to allow vault cash to be an eligible reserve asset. Bank of Uganda will also, after careful evaluation of its own financial position, consider paying a rate of return on reserves held at the Central Bank. 

These measures should improve the liquidity and lower the costs of the financial sector, and thereby contribute to a decline in interest rates. As efficiency in the system improves, the Bank of Uganda will consider removing the remaining limits set on interest rates with reference to the treasury bill market.

Mr Chairman, as you and members of this House are well aware, this Government has largely completed a major programme of reform of foreign exchange management in this country. 

This programme is now widely regarded as highly successful and of some relevance to other developing countries pursuing economic reform. 

The stability in the open market exchange rate over this financial year is a remarkable tribute to the viability of our reforms in this area. 

The central measures within the programme, such as the introduction of the forex bureaux and the auction, were designed and implemented by this Government at its own initiative without the constraint of donor conditionality, formal or informal.

Donors have supported and continue to support adjustment programmes in several other countries in Africa, where more tentative exchange rate reforms are being pursued at a much slower pace.

A final step is needed to complete our reforms in this area and achieve a fully unified market system of foreign exchange management. Government will shortly introduce measures to achieve this unification by termination of the existing foreign exchange auction and introduction of a unified interbank market in foreign exchange. 

A smooth transition to the new system with uninterrupted support from donors balance of payment financing will require significant improvement in the present procedures for import monitoring, especially in Customs administration. 

Under the new system, we will be relying primarily on Customs administration for appropriate documentation of imports, rather than the existing controls associated with foreign exchange auction.

 I shall announce later this afternoon the specific administrative measures to be implemented now, which should improve revenue collection as well as ensuring adequate documentation of imports as a basis for donors' disbursement of the balance of payments support

In order to minimise the costs of adjustment to the new system, the existing foreign exchange auction will be retained until Government is convinced that these measures have been satisfactorily implemented, as evidenced by approximately two months of the successful operation of the revised customs procedures.

Mr Chairman, in 1993/4 we will promote a greater degree of competition in this sector by removing the present system of foreign exchange allocation for oil imports. Starting next week, oil imports will be eligible for financing from the weekly foreign exchange auction, without the current restrictions based on existing market share.

Before embarking on a discussion of revenue measures, I wish to propose that debate on these matters should precede the resolutions of this House on expenditure. Members will recall that in our Budget debate last year, a number of modifications to the proposed revenue measures were agreed after expenditure proposals had already been debated. 

The consequent shortfall on revenue necessitated subsequent administrative adjustment of the expenditure proposals. 

I am sure that Honourable Members will agree that it is preferable that the consequences of any modifications on revenue should be fully considered by this House in our debate on expenditure and I, therefore, urge that revenue proposals be discussed first.

Honourable members will recall that last year, I promised to review the whole system and structure of taxation.

I am pleased to say that we have benefitted from a large number of studies this year, which have made a significant contribution to the design of taxation policy in the 1993/94 Budget.

The revenue effort in the economy remains a major source of concern. It is clear that, despite the strong performance for revenue projected in 1993/94, Uganda's revenue performance will still be relatively weak.

Clearly, the taxable capacity of any economy is a function of the structure of that economy. 

This structure materially determines both the absolute level of taxable income and the ease with which it can be accessed for purposes of taxation. The presence of large retail establishments, large manufacturing units and a high percentage of the labour force informal employment considerably enhance the taxable capacity of the economy.

Similarly, the presence of a large, predominantly smallholder agriculture sector reduces the taxable capacity of the economy, particularly if a large percentage of the economic activity is of a non-monetary nature, that is to say, the degree of the monetization of the economy is also crucial. 

If the structure of other sectors of the economy is also biased towards small scale activity, with a large percentage of the labour force being self-employed the problems are obviously compounded. Unfortunately, our economy is currently beset by these features.

But while all this is true, there are a number of countries which do have significantly higher revenue than Uganda, which can't obviously be discounted either on grounds of peculiarities in their revenue or differences in the structure of their economy. Countries such as Tanzania, Kenya, Malawi and Ethiopia have all managed to achieve high ratios of revenue to GDP despite having the disadvantages of low levels of per capita income and relatively large agriculture sectors. 

Obviously, therefore, such features of the economy do not constitute an absolute prohibition on achieving much higher ratios of revenue to GDP Ulan Uganda is currently achieving. 

What is the problem in our case? It is the lack of positive tax culture and worse still, the tendency to corruption on the part of both or some of the tax collectors and some of the taxpayers. We shall not lament these; we shall fight them.

Determined and persistent efforts will continue to be made in 1993/94 to effect a material improvement in our revenue effort a number of measures for boosting the economy's revenue effort have already been implemented and these have resulted in a rising percentage of revenues to GDP since 1986. In 1986/87 the ratio of revenue to GDP was 5.1 %. More importantly, the revenue to GDP, excluding export taxes on coffee, which we were subsequently to lose, was only 3.4% of GDP. 

This year, the ratio of revenue to GDP excluding coffee export receipts will be approximately 8% of GDP this percentage gives no comfort, but the situation is improving. 

The main reasons for the increase in the ratio of revenue to GDP have been the taxation of petroleum in 1986/87 there was no tax on petroleum), the elimination of an overvalued exchange rate which boosted the import tax base and the increase in revenue from "excises" products such as beer and cigarettes.

In the coming financial year, further measures will be taken. Tax rates on excise products, after the reductions in November, are still below their revenue maximising potential. The loopholes in the tax of rental income have effectively eliminated any revenue from this source. 

Tax exemptions in the customs tax base have not only undermined the development of potential domestic industries producing raw materials, but have also undermined the revenue base. 

The cost of these exemptions in 1992/ 93 has been estimated to exceed shs. 50 billion, approximately 2.5% of GDP. Obviously not all of this revenue would be recoverable if all exemptions were abolished, but the figure serves to illustrate the magnitude of the problem. 

I shall soon indicate the specific measures in this regard.

Furthermore, there is a need to rehabilitate the tax system as a whole and this will be undertaken. This appears to be the crucial difference between Uganda and other countries with higher revenue effort Our base and system of taxation were destroyed over a period of two decades, undermining not only the then growing industrial base but also the institutional infrastructure for collecting taxes and more importantly the development of a tax culture within the private sector. This is why the smuggling and other forms of tax evasion are still endemic and are increasing the cost of tax administration. But the struggle continues.

The primary objective of the strategy to increase the economy's revenue effort will be to broaden the tax base to reduce the current reliance on a very narrow range of products. Currently, revenue collected on five products (petroleum, beer, cigarettes, soft drinks and spirits) accounts for close to 50% of total oil revenue collections.

The essence of the strategy will be to expand the direct tax base, improve administration (including rationalisation of exemptions) of the taxation of imported goods and develop a broad-based tax on consumption. 

The success of the strategy will depend to a significant degree on the rehabilitation of the culture of "voluntary compliance" to the process of taxation.

Personal Income Tax:

The objective of the Government's long term strategy for taxation is to create a broad-based system of direct taxation with relatively low rates of income tax in order to increase the take-home pay of individual taxpayer to minimise any distortions to labour/consumption/saving decisions in the economy.

The government's strategy to broaden the tax base will focus on the following key areas:

Improved administration to increase the effective coverage of the PAYE tax net. Pertinent measures include intensified auditing of major institutions and the development of a Tax Identification Number (TIN) system;

Measures to increase the coverage of the income tax base. Currently, a large percentage of the remuneration received by wage earners is effectively untaxed.

The treatment of allowances as part of taxable income has not been enforced adequately in the past. 

As a result, employers have been encouraged to devise elaborate and inefficient schemes to pay their employees, using a wide assortment of allowances and benefits, in order to reduce their labour costs by eliminating the tax liability of their employees. 

Henceforth, the statutory requirement to incorporate as part of taxable income all allowances and benefits accruing by virtue of employment will be rigorously enforced. 

To ensure consistency with the Government's civil service reform and salary enhancement strategy, a transition period will be allowed to complete the process of converting civil service compensation to a fully monetized basis.

A reduction in the burden of taxation to encourage the development of a widespread culture of tax compliance and to reduce the aforementioned incidence of economic distortions.

Consistent with the above strategy, the following measures are proposed:

All allowances and benefits accruing by virtue of employment will be taxed as part of personal income;

The threshold for personal income tax will be increased from shs. 600,000 to shs. 840,000. 

The increase in threshold has taken into consideration Government's commitment to alleviate the tax burden on a number of allowances, for example as housing, lunch and transport allowances, provided to workers at the lower end of the income scale.

A reduction in the number of tax brackets from four (4) to three (3); and

A reduction in the top marginal rate of tax from 40% to 30% for income above shs 4,200,000. 

Further details are provided in the Finance Bill.

The new Tax on rental income tax law for rental income passed by the NRC in July 1992 provided for a 20% tax on net rental income, with complete exemption from taxation during the first five years after completion of the building. 

As it currently stands the law has effectively eliminated tax on rental income as a source of revenue for the Budget. In the first 9 months of, the financial year total revenue collections from this source only amounted to shs. 0.2bn.

In principle the tax on net rental income should be assessed on the same basis as income from any other source. 

It would also be desirable to retain the principle of vertical equity in the taxation of income, i.e the principle that those with larger incomes contribute a larger share of tax than those on lower incomes.

Exemptions and consequently the introduction of distortions into the taxation system should only be considered as a last resort, in those instances where Government wishes to promote activities which will bring significant economic (or social) benefits. 

The construction of luxury housing, the main beneficiary of the current exemption, does not fall into this category. Moreover, by severely complicating the administration of the tax it has contributed significantly to the current erosion of the tax base.

As it stands, therefore, the tax on rental income flouts nearly all the major principles of a sound taxation system: rental income is currently effectively untaxed, the incentive provided (and consequently the revenue foregone) is not encouraging an activity with major economic or social benefits, the administration of the tax is complex and the beneficiaries of the untaxed income are property owners who fall in the higher income brackets.

In order to introduce a more equitable and effective tax on rental income, the tax on income from properties rented out by individuals will continue to be disaggregated from the personal income tax schedule.

However, the tax levied will be applied at a rate of 20% on 80% of gross rent paid in excess of shs. 840,000. The 20% deduction provides an allowance for any expenses incurred.

I also propose to abolish the tax exemption on properties which are less than five years old. The rent on all properties, irrespective of age, will now be liable to the above tax.

Property. Though the taxation of property is a local government tax, it is important for the Budget because if local government revenues can be enhanced, they will be able to undertake their responsibilities more effectively, reducing some of the strain on the Budget. 

In the context of the decentralisation process the capacity of local government to increase its revenue generating capacity takes on an added importance.

Property rates represent a potentially large source of revenue for local government. Currently, this source of revenue is severely undermined by the fact that the present property rates are based on seriously outdated valuations.

To regenerate this source of income for local government the following is proposed:

A quick valuation exercise will be undertaken in the near future to ensure that the valuation of all urban property is adjusted to a single base period.

The rate law will be amended to allow for annual adjustments to valuations to take into account inflation and other general factors. 

Agriculture income

One of the reasons why the revenue effort in Uganda is so low is that the coverage of the direct tax base is very limited. It is particularly limited by the fact that income from the agriculture sector, which represents over 50% of GDP, is effectively not taxed.

The application of the traditional income tax system to the agriculture sector has a number of particularly intransigent administrative problems. Accordingly, it is proposed that agricultural income be taxed via a number of proxies which have the advantage of combining administrative simplicity with the Government's overall objectives of efficiency and equity.

Specifically, the following is proposed to enhance the taxation of agricultural income:

The maximum graduated tax levied by the local authorities will be increased from shs. 40,000 to shs. 80,000. The difference between shs. 40,000 and shs. 80,000 will be collected by local authorities under the auspices of the Ministry of Local Government and the proceeds will be shared between local authorities and the central government in proportions to be agreed upon by the Ministry of Local Government and the Treasury. 

Any payments made by taxpayers under this scheme will be the result of joint assessments made by the Ministry of Local Government and the Uganda Revenue Authority. 

The Ministry of Local Government will be responsible for remitting the portion of the central government to the Treasury. Appropriate mechanisms are being put in place. 

The measures will take effect from October 1, 1993 in order to coincide with the accounting year of local authorities.

A 10% customs import duty will be imposed on agricultural inputs, including agricultural machinery and tools, but excluding fertilizers, pesticides and Corporation Tax and the Investment Code:

The government provides a range of incentives intended to smooth or reduce a company's tax liability. The incentives currently provided under the Finance Bills and the Investment Code include: (i) carryover of losses; (ii) accelerated depreciation; (iii) tax holidays on both corporate profits and dividends.

These incentives bring a number of benefits to the investor. They remove the bias against risky projects inherent in standard corporate taxation, they increase the post-tax returns on individual investments and they improve the liquidity situation of enterprises.

There are, however, a number of problems with the current system on incentives provided by Government.

First, the effectiveness of the system of incentives may be more limited than had originally been drought. 

It is now clear that in the absence of any complementary tax holidays with the home countries of foreign investors, the revenue foregone by reducing a company's tax liability in Uganda represents a revenue gain by the Ministry of Finance in the investors home country. 

The incentive provided by tax holidays is also limited by the fact that most serious ventures do not make profits in the early years of their investments. 

The incentive may therefore only be attractive to investors seeking to make "quick" profits in Uganda. For serious long term investors, the post-tax rate of return obtained over the life of the investment is the important criteria when judging an investment.

Second, the current design of the incentive system makes it very expensive relative to the benefits that can be expected from it. 

The main reasons why the system is so expensive is that as it currently stands the tax holidays are extended not just to new investments but also to additional investments made by existing enterprises.

In principle, the incentive is only meant to apply to the additional profits generated by the additional investment. 

In practice, of course, it is administratively impossible to distinguish between normal profits and additional profits. As a result of this loophole, not only is Government foregoing potential revenue from new investments, there is a real risk that it will also lose corporate tax from ongoing (and profitable) enterprises.

Despite the problems with the system of incentives provided under the 1992 Finance Bill and the Investment Code, the incentives do play an important role to compensate the investor for some of the additional costs of investment in Uganda. 

Nevertheless, the system of incentives needs to be rationalised and made more effective.

Accordingly, it is proposed that:

The tax holiday provided under the Investment Code will be limited to new investment. Henceforth applications for incentives for additional investments will no longer be eligible; However, consideration is being given to give these investors a lower corporation tax rate.

To ensure that the effectiveness of the current incentives is not eroded by the absence of complementary tax credits in the home countries of foreign investors, the Ministry of Finance and Economic Planning will embark on negotiating double taxation agreements with identified major trading partners.

There has been concern, for some time now, that foreign exchange losses incurred by companies on loans used to procure various capital assets have not been an allowable income tax deduction. 

After careful review, these foreign exchange losses will now be capitalised and will qualify as depreciation under' the income tax law. 

However, it must be stated that proof of the losses having been incurred on the financing of capital assets rests with the taxpayer.

Trade taxes customs duty. A number of recent studies commissioned by Government to analyse the investment climate in Uganda have revealed some disturbing findings. 

The main thrust of the reports is that the combined impact of the tariff structure, import bans, exemptions and poor customs administration has resulted in an investment climate which is highly distorted, thus encouraging inefficiency, with a strong anti-export bias and a discrimination against activities that seek to further the horizontal integration of the economy in accordance with the Government's policy of creating an integrated, self-sustaining and independent national economy.

The distortion in incentives has resulted in some sectors of the economy being provided with very high levels of protection, indeed so high in some instances that we are likely to be supporting productive activities which are grossly inefficient, even value subtracting in that the value of the output produced is less than the value of the foreign exchange inputs used in the processor production.

Other sectors, on the other hand, have negative protection, because their output is relatively lightly protected whilst their costs are significantly increased as a result of the protection afforded to other producers.

Furthermore, because the effects of tariff protection, import bans and exemptions interact with each other and affect each sector differently, the structure of incentives implicit in the investment climate is less than transparent and not always fully consistent with our basic economic objectives.

The bias against exports and agriculture, the two areas of economic activity most important for the progressive development of the economy and the improvement of the 'welfare of the population, works through a number of channels.

Exporters get negative protection because there is no tariff protection-on their output to offset the inflated input costs they have to bear as a result of the protection afforded to other domestic industries. Secondly, because the protection of the domestic market raises both the domestic price of both importables and non-tradable relative to the price obtained by producers in an export market, protection acts as an implicit tax on exports. 

Lately, by increasing tin-price of good in the domestic market, relative to the price that same good would get in an export market, production for export markets is discouraged.

The combination of relatively high levels of protection on the output on consumer goods combined with very low (or zero) tariffs on imported inputs discourages the development of a horizontally integrated economy. The present structure of tariffs has a number of effects. 

First, it favours those producers who have a relatively import dependent production process. Second, it encourages producers to use an imported input rather than a domestic substitute.

Third, it discourages those producers or investors who ate trying to develop a domestic capacity to supply intermediate goods and raw materials.

Apart from these unproductive distortions in the investment climate, the presence of widespread exemptions in the tariff structure, by undermining the revenue base, severely constrains the ability of Government to tackle the fundamental causes undermining the competitiveness of the domestic industrial sector. 

The major obstacles encountered by manufacturers trying to establish competitive enterprises are:

(i) inadequate infrastructure and basic utilities; 

(ii) (ii) inadequate investment in the development of Uganda's human resources through poor education and health facilities and;

(iii) (iii) the cost of working capital. The responsibility for tackling these obstacles lie within the Government's domain. 

Public investment in infrastructure, basic utilities and human capital will reduce obstacles from those sources.

The restructuring and recapitalisation of institutions in the financial sector combined with a reduced public sector borrowing requirement will enable interest rates to decline from their current levels and so reduce the borrowing costs of manufacturers. 

However, all of these Government activities depend on the ability of government to raise its revenue effort. 

Tackling the web of exemptions, which currently undermines the revenue base is a major element of the strategy to raise the economy's revenue effort.

Accordingly, the following amendments are proposed to the structure of Customs tariffs and exemptions in the economy to ensure that they are consistent with the Government's strategy to create a dynamic, integrated, export oriented economy:

The tariff structure for Customs duty is being rationalised from the present rates of 0%, 10%, 20%, 30%, 40% and 50%, to a four rate structure of 0%, 10%, 20% and 30%. 

In other words all goods mat have attracted rates above 30% will now attract duty of 30%. Luxury goods which had previously been subject to a high tariff rate will now be subject to a compensating surtax. 

For example a motor vehicle with an engine capacity exceeding 3000 cc which currently is subject to a Customs duty rate of 50% and a Sales (ax of 100%, will now be subject to a Customs duty rate of 30%, a sales tax rate of 30% and a surtax of 50%. Further details are provided in the Finance Bill.

A 10% Customs duty on all raw material imports will be reimposed;

The exemption of Customs duty on construction materials provided under the Investment Code will be abolished.

To ensure that exporters, who do not benefit from any protection on their output, are not adversely affected by the increase in duty on their inputs, all manufacturers registered for Sales Tax with the Customs and Excise Department of (the Uganda Revenue Authority, who export their finished product will have the Customs duty paid on raw materials reimbursed using the duty drawback system. 

Raw materials in this context refer to those inputs which are converted either singly or in a mixture with others into an intermediate or final product.

In February this year, Government applied a temporary surcharge of 18% on Kenyan imports while it was investigating claims by local manufacturers that the Kenya Government was unfairly subsidizing Kenyan exports to Uganda via their export rebate system.

It is not now believed that the Kenyan export rebate system, which is similar in impact to our own rebate system, fell into this category. 

Either way, the Kenyan Government announced in its recent Budget that their export rebate system was to be abolished.

The surtax of 18% that was imposed on certain imports goods is, therefore, be abolished. Nevertheless, the Government will continue its policy of protecting local industries from unfair competition. 

Government, therefore, reserves the right to reimpose surcharges on imports where necessary to ensure that the trading community plays on a level field.


In order to raise sufficient revenue to finance our expenditure requirements next year, the taxation of petroleum products has had to be reviewed.

In order to avoid placing an unfair burden on the rural poor as well as any possible undesirable environmental consequences, the tax on Kerosene will not be increased.

 The tax on petroleum at 175% is also close to the maximum that can currently be levied.

However, the rationale for a differential tax on diesel, on equity grounds, is weaker in Uganda than in many other countries because of the predominance of petrol-fueled public transport vehicles. Accordingly, it is proposed that the tax on diesel be raised from the current level of 115% to 130%.

One of the priority objectives of Government, in its effort to improve the economy's revenue performance, is to develop a broad-based system of taxation on goods and services. 

The main elements of the strategy are to develop a two-tier system of taxation which will be applied equally to both imports and domestic production-the differential tax treatment of imports and local products will be the function of customs duty taxes. The first tier will aim to provide a broad-based tax, with a relatively uniform rate of taxation. 

In this respect, we are monitoring with interest in the initiatives by our neighbours in the region to develop a VAT system of taxation. 

The second tier will seek to apply a surtax on a limited range of commodities either because those commodities are consumed disproportionately by the wealthy in society or because their consumption should be discouraged on economic or social grounds. 

This function will be taken up essentially by applying excise taxes to those goods or Services.

In the process of transition to a simplified structure of taxation on goods and services, a third factor will have to be taken into consideration. 

The taxation on petroleum and products liable to excise tax account for almost 50% of current revenue collections. 

It is clear therefore that these products will need to continue to bear a disproportionate burden of taxation Just as the coffee sector did in the past until a broader based system of taxation is in place and fully operational. 

This means that for the time being the tax on these products will have to be based on revenue maximising principles, in preference to broader economic or social considerations.

In accordance with the above principles, the sales tax structure is being rationalised and reviewed from the present 0%, 10%, 20%, 30%, 40%, 50%, 70%, 80%, and 100% to a four rate structure of 0%, 10%, 20% and 30%. 

All items that have had rates of sales tax above 30% will now attract a 30% rate. This measure applies to both locally manufactured and imported goods. 

As an example, the sales tax rate on cigarettes is being revised downwards from 40% to 30%. Other changes in the sales tax rates appear in the Finance Bill.

Secondly, the following basic rules will apply to the sales tax paid by manufacturers who are registered for Sales Tax.

The sales tax on inputs will be charged but not collected. This means that the Sales tax will be remitted or waived. For this purpose inputs will be defined to include industrial packaging materials;

It will be a requirement for the manufacturer to record the movement and use of inputs on which sales tax has been remitted and to account periodically for their use in the manufacture of Sales taxable outputs;

The sales tax paid on disposition of the manufactured output shall not be less than that remitted on the material inputs;

The remitted sales tax on materials which are used for purposes other than making sales taxable outputs or exports shall be payable by the registered manufacturer at the end of the accounting period in which they are so used.

In order to gain from these measures, all manufacturers in whatever category are urged to register or renew their registration with the Uganda Revenue Authority and to maintain books and stock records in order to gain meaningfully from this measure.

As was mentioned above, the tax on excise products must, for an interim period, be based on revenue-maximising principles. 

In December this year, we reduced the tax on beer, cigarettes and soft drinks in the hope, encouraged by the manufacturers, that as result of the decrease in rates there would be a sufficient increase in sales to ensure that budgeted revenues from these areas would not be affected.

Unfortunately, developments since December in both the trend in sales and domestic prices of the affected goods have not lived up to expectations. 

As a result revenue collection on these three products is expected to be some shs. 9.3bn below the budgeted level.

As a result of this shortfall in revenue and because of the rationalisation of the Customs tariff and Sales Tax schedules it has been necessary to review the Excise Tax to ensure that they are consistent with the both the Government's revenue objectives and its broader economic and social objectives.

Accordingly, the following measures are proposed:

The excise duty rate structure is being revised from the current 0%, 30% and 50% to a five rate structure of 0%, 10%, 30%, 50% and 70%.

The excise tax on cigarettes, beer and spirits, will be raised to a new rate of 100%;

The excise tax on soft drinks will be raised to 50%;

Furthermore, as mentioned above, the Customs tariff on the number of luxury goods has been reduced in order to rationalise the system of protection. The sales tax rate on some products has also been reduced under the new rationalised Sales Tax structure".

In order to ensure that domestic consumption of luxury goods is taxed at an appropriate rate a compensating Excise tax will be applied to such products. 

As with any domestic tax, the Excise tax rates will apply equally to both imported and domestic luxury goods. 

The law is being amended to provide for this. Details can be found in the Finance Bill. Commercial Transactions Levy

In the financial year 1992/ 93, the CTL on drinks in bars, restaurants and other eating and entertainment establishments was placed at the factory point. 

However, given the reforms that are taking place in the taxation system, and the need to place the levy at its proper point of the catchment, CTL on drinks is being reintroduced at all bars, restaurants and eating houses, and at entertainment establishments. 

CTL will also apply to those shops-turned bars which should actually be off-licensed establishments. Further, in order to give explicit cognisance to the service element provided by construction companies, the CTL charge on construction is being limited to all other items in the construction bill other than the materials used for construction.

In the 1992/93 financial year, the schedule for motor vehicle fees and licences was rationalized. As mentioned before, revenue collection from this area was dealt a blow when NRG revised the charges from a gross to net weight base.

The rationale behind the practice of charging fees at gross to net weight was to cater for the wear and tear of the roads by laden vehicles. 

As a result of these considerations, I propose to reinstate the charging of these fees on a gross-weight basis with effect from midnight tonight.

The rate of transfer fees for motor vehicles is being reduced from 3% to 2% in recognition of the concern that most people are buying vehicles but are not transferring them into their names because they consider the transfer fee rather high. Administrative measures are being taken within Uganda Revenue Authority to enforce compliance for transfer of vehicles and the details will be announced by Uganda Revenue Authority. 

The law is also being amended to impose better control on garage number plate owners effective from midnight tonight.

I am also proposing to reduce Stamp Duty from 3 % to 1 % with effect from midnight tonight.

Honourable members will recall that last year, Government declared its intention to licence private agencies to operate lottery schemes. 

The progress so far made will enable the identified private agency together with the National Lottery Board to start operations in the very near future.

It has been noted with concern that the issuance of exemptions from duty and sales tax using various statutes, some of which are out of date, has deprived the country of much-needed revenue. 

In order to stem the tide and abuse of the exemption facility, all exemptions except those that are under bilateral agreements with foreign countries and agreements with accredited international institutions are abolished herewith. 

However, exemptions granted to investors under the Investment Code will still be honoured.

The case of any institution or individual wishing to claim for exemption will have to be presented in the first instance, to a committee to be set up in the Ministry of Finance and Economic Planning for consideration. 

Anyone not satisfied with the Committee's decision can always appeal to the Minister of Finance. 

I wish to make clear however that the Committee will not consider exemptions for the following items:

Mineral waters and alcoholic beverages;

Tobacco goods;

Petroleum products;

Toiletry and cosmetic goods;

Woven fabrics including carpets and textile floor coverings;

Television receivers, both coloured and black and white and satellite dishes;

Motor vehicles of cylinder capacity 2,000 c.c. and above.

In the case of exemptions granted under the provisions of the Investment Code, the case of individual investors will be presented by the Uganda Investment Authority.

In those instances where approvals for exemptions are granted, the approved exemption will be provided in the form of a treasury credit note.

In relation to exemptions granted for imported goods, I would like to clarify that where an imported good has been granted exemption from import duty, it will also automatically be exempt from the payment of import commission.

To reinforce Government commitment to the control of exemptions the following measures are proposed:

Government will abolish the duty-free status of the army shop. Those exemptions currently being enjoyed by the army are being rationalised into the army's wage bill;

Government will pay tax on all project imports;

The Uganda Investment Authority will be putting in place measures to restrict the importation of luxury goods which would otherwise be imported under the incentive schemes but which do not have a major bearing on the investment

I wish now to turn to the improvement of revenue administration. Taxpayer Identification Numbers (TINS!

The Government has decided to introduce a Tax Payer Identification Number (TIN) system. The Ministry of Local Government and the Uganda Revenue Authority are embarking on an exercise to put in place a comprehensive taxpayers' database in which each business enterprise, institution, and every individual taxpayer will be allocated a permanent unique identification number. 

Behind this number, which is really an account number, there will be details of the business/institution or individual referring, amongst other things, to business/institution or individual name, physical location, business/ professional activity, employer, in the case of individuals, and taxes the taxpayer is eligible to pay.

When the TIN system has been established, the Tax-payer will be referred to by mainly quoting their TIN, and with this system, in place, it will be easier to run the taxpayers ledger and keep track of different economic activities a taxpayer may be involved in. 

An initial batch of TINS will be issued to limited liability companies by September 1, 1993.

All businesses and institutions will be required to produce their TINS on demand by end March 1994, and all graduated taxpayers by end June 1994, the intervening period being used for voluntary registration. 

Modalities for putting these systems in place are at an advanced stage and will be published through the Ministry of Local Government in the very near future. 

In order to facilitate the implementation of this scheme, and the need to make local authorities the control centre for the update of taxpayers, the law is being amended to require all operating entities, whether Government, NGO, professional or any organisation to obtain operating permits from the local authorities within whose geographical area they operate.

There has been an outcry from the taxpaying public, especially those paying deposits, that although they would like to pay their taxes, it is not always possible to clear the amounts in one instalment. 

Provisions do exist in the law for the Commissioner General of the Uganda Revenue Authority to allow payment of taxes in installments. 

In order to ease the cashflow problems of taxpayers, I have instructed the Uganda Revenue Authority to invoke the provisions of payment of taxes on an instalment basis. Any abuse of this provision by taxpayers will necessarily lead to severe sanctions being imposed.

In the Budget pronouncements of 1992/93, Government announced the intention of introducing competition in the pre-shipment inspection services. 

The Government will soon announce another company which, together with Societe Generate de Surveillance (S.G.S.), will carry out pre-shipment inspection services in Uganda on a contractual basis under the management of the Bank of Uganda.

As a result of this measure, and for the purpose of strengthening Customs administration, all goods consigned to Uganda in excess of US$2,500 will require pre-shipment inspection.

Goods which arrive at the border without pre-shipment inspection will be required to undergo post-shipment inspection. 

Effective August 1, 1993, no goods will be cleared through Customs unless this requirement is complied with. Furthermore, effective from the same date, the following documentation will be required for Customs purposes before goods are cleared:

Bank of Uganda Form E, Preshipment Inspection, Clean Report of Findings; Certified Final Invoice or Certified Proof of Payment; Bill of Lading; e. Certificate of Origin; and Customs Bill of Entry.

The Uganda Revenue Authority will publish details of the modalities to be followed and all importers are asked to take heed.

With the introduction of the new Customs arrangements, I propose that the limit on the sale of foreign exchange for imports by the foreign exchange bureaux will be eliminated subject to the requirement that the purchaser fills out a Form E to be used for Customs clearance.

In this financial year 1993/94, further measures are being taken to strengthen revenue collections on customs goods. 

A computerized system of customs accounting and control called ASYCUDA will be introduced with the objective of proper control and accounting of goods passing through the various customs regimes, and speeding up the process of clearance of goods through Customs.

Further, effective July 1, 1993, a new customs description and the coding system called, The Harmonized Commodity Description and Coding System, commonly called the Harmonized System is replacing the Customs Cooperation Council Nomenclature (CCCN). 

Details of the new coding system are in the Finance Bill, and arrangements have been finalised to produce and sell enough copies of the new code to the affected users.

In the same vein of the introduction of a new coding system, effective September 1, 1993, a new Customs Bill of Entry is being introduced. This bill of entry rationalizes and combines a number of Customs Bills of Entry that have been in use. 

This document will be printed and controlled by the Uganda Revenue Authority given the widespread abuse of the existing documents by importers. 

In effect, these documents will be value documents traceable to specific importers or clearing agents. 

The Uganda Revenue Authority will hold seminars and briefing sessions for the importing public to explain the use of these new documents. 

Great emphasis is being placed on improved administration of Customs and Excise given its pivotal role in Uganda's economy.

Members are aware that Uganda is losing revenue through rampant smuggling. Some measures have already been put in place to combat smuggling and these have met with some success. 

However, in order to strengthen the law regarding Customs offences, a number of provisions are being introduced to allow the following:

Introduction of a grade of penalties, which would increase in severity; and

Introduction of a provision to detain a vehicle or vessel for a period of time as a penalty to the owner of that vehicle or vessel for having carried uncustomed goods with repeated violations leading to confiscation.

Other measures including the introduction of boats for customs enforcement on Lake Victoria will be introduced.

The law is also being amended to allow the Uganda Revenue Authority to purchase goods from importers at the declared value plus interest if, in the opinion of the Uganda Revenue Authority, the goods have been under-valued and could be sold inclusive of taxes at a price much higher than the valuation.

Honourable members will agree that in all taxation matters, the taxpayer must be treated fairly. Accordingly, I have instructed the Commissioner-General of the Uganda Revenue Authority to set up a unit to handle complaints from the general public. 

With effect from today, any taxpayer who has his/her papers delayed for more than four (4) days at the Customs and Excise Department or the motor vehicle licensing section of the Internal Revenue Department is encouraged to send a complaint to that unit. 

Furthermore, if any staff of the Uganda Revenue Authority is found to be in dereliction of duty will be severely disciplined, those found to have requested favours in return for prompt action, (which is corruption) will be dismissed and prosecuted.

I would urge members of the public to take this opportunity to assist us to ensure that Uganda Revenue Authority Staff gives a level of service which is commensurate with the enhanced remuneration and conditions that we have given them.

As a result of the above measures I hope to raise the following revenue:

Revenue Item      Estimates

1993/94

Shs Billion 

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Income tax 52.3

Export Taxes (Coffee) 0.0

Customs Duty 158.3

Excise Duty 19.5

Sales Tax on Imported Goods 57.2 

Local Goods 59.3

Other taxes (e.g C.T.L.) 13.6

Non Tax Revenue 24.5 

TOTAL          384.6 

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Mr. Chairman, the following additional measures are being taken to promote efficiency in the management of the economy:

Given that there has been a general improvement in the administration of taxes by the Uganda Revenue Authority, I am abolishing the requirement for income tax clearance before travelling outside Uganda as from 1st July 1993.

In order to reduce delays in the process of administration, I have instructed the Uganda Revenue Authority to establish capacity for processing inputs at the border to enable the system of escorting inputs to its inland facility for clearance to be phased out.

Honourable members will remember that it was the original intention of the Investment Code to establish the Uganda Investment Authority as a one-stop shop. With this in view, all existing laws which are in conflict with this objective will be amended during the year.

Requirements under the Exchange Control (Forex Bureaux) Order 1991 that visitors residing in hotels settle their accommodation costs in foreign currency are hereby abolished.

In 1993/94, the Government will review the present monopoly exercised by Transocean with regard to the clearance of Government imports with a view to the early implementation of more competitive arrangements.

To avoid inconvenience to travellers at Entebbe, the number of checks carried out at the airport will be reduced to two (2), covering Immigration/Health and Customs/ Security.

Government vehicle purchases in 1993/94 will be restricted to critical or emergency cases, approved only on the basis of detailed justification. The co-ownership scheme will be reviewed with the objective of moving towards the re-introduction of a hire-purchase scheme.

The abolition of road tolls in the last Budget was not well understood. That abolition was meant to cover roadblocks erected by local authorities. The local authorities must, therefore, comply with this policy.

From midnight, in order to simplify handling of passengers passing through the Airport, CTL on Airport tax is hereby abolished;

Finally, Mr Chairman, the Ministry of Finance and Economic Planning has been considering the bureaucratic delays and impediments to economic activity arising from the Fish and Crocodiles Act and will seek a review of measures to streamline the existing licencing arrangements.

Thank you Mr Chairman 

For God and My Country.