1999/2000 budget: GDP grows by 7.8%

Yesterday, the Minister of Finance, Mr. Gerald Ssendaula, presented the 1999/2000 budget in which he said that contrary to speculation, that there was a recession, the economy has continued to grow at a rapid rate. Following is his speech

 

 

Mr. Speaker, Sir, last year I ended my budget speech by stating that Ugandans could be confident that our economy would continue to grow at a rapid rate. I am pleased to report that, despite the pessimism about our economy that has been expressed recently in some quarters, the economy has rebounded strongly during the current fiscal year. The past year has not been easy for the economy, but we have successfully overcome a series of adverse shocks during that course of the year, in particular, the instability in the foreign exchange markets, problems in the banking industry and low coffee prices on the world market.

 

There has been a lot of ill-informed speculation to the effect that our economy is in recession. We have heard several complaints in recent weeks about poor sales in one or another industry, but in any large and diversified economy there will be cases of firms or industries which are not doing very well at any point in time, co-existing with other firms and industries which are doing well.

 

I do recognize that some industries have suffered a temporary slackening of sales in the last two months, but that does not by itself, indicate that the whole economy is in recession. On the contrary, there is firm evidence to indicate that, for the economy as a whole, demand has been very buoyant during the current fiscal year.

 

This financial year, private investment expanded in real terms by 13%. Coffee exports rose in volume by 24%. In volume terms, sales of sodas for the first ten months of the current fiscal year rose by 10% compared with the same period last year, sales of beer were 19% higher, sales of fuel were 21% higher and sales of spirits were 25% higher.

 

Increases of this magnitude, Honorable Members, are definitely not consistent with an economic recession

 

This year the Gross Domestic Product in real terms is projected to have increased by 7.8%. This is more than twice as fast as the average for all developing countries, which is estimated by the IMF at only 3.3%.

 

That we have managed to accelerate our growth rate in the current year, at a time when other developing countries have suffered slowdowns, is a testimony to the underlying strength of our economy and the progress we have achieved since we began implementing economic reforms over a decade ago.

 

Economic growth in the current fiscal year was led by agriculture and manufacturing. Agricultural production bounced back very strongly after two consecutive years in which production was hit by bad weather. Production of cash crops rose by 14% in the current year.

 

Production of food crops rose by 10%. In both the cash crop and food crop sectors, output was higher this year than at any time this decade.

 

 

The expansion of the agricultural sector continued at a vigorous pace, with output growth projected at 11%. However, economic growth has not been confined to agriculture and manufacturing but has been broadly based, with most of the major sectors of the economy achieving real growth rates exceeding 5% in the current fiscal year.

 

The construction sector expanded output at a rate of 8%, the wholesale and retail trade at 9%, the transport and communications sector at 7%, and electricity and water at 5%.

 

The high rate of growth is easily explainable by the very strong rebound in agricultural production after the setbacks that farmers suffered as a result of very bad weather in the two previous fiscal years.

 

However, even if the weather-related effects of food production are removed from the GDP growth rates for the three-year period, 1996/97, 1997/98, 1998/99, the underlying GDP growth rates, of 6.4%, 5.7% and 5.7% respectively, are still remarkably high. In addition to the recovery of agriculture, however, there were other reasons for the strength of the economy in the current fiscal year.

 

First, private investment increased from the already buoyant level attained in 1997/98, as I have already mentioned. This is proof that the private sector remains very confident about the future prospects of our economy and is prepared to back this confidence by investing its own money in long term productive investments. Secondly, the depreciation of the exchange rate boosted the competitiveness of our tradable goods sectors; that is, sectors that produce goods which are exported of which compete with imports on the domestic market.

 

 

While economic growth accelerated in the current fiscal year, we maintained tight control over inflation as a result of budgetary discipline and prudent monetary policies. The headline inflation rate, which includes the volatile food crop prices, was actually negative for most of the fiscal year, because food crops prices were falling back from the abnormally high levels attained in 1997/98, when production was hit by drought and El Nino.

 

The average annual headline inflation rate for the first 11 months of the fiscal year was negative 0.7%. The average annual underlying inflation rate, which excludes food crop prices and is therefore less volatile, was only 3.5% in the first 11 months of the fiscal year.

 

The fact that we have kept inflation under control, despite the depreciation of the exchange rate, demonstrates how our macroeconomic management has been, and will strengthen the credibility of the Government's commitment to anti-inflationary policies is an invaluable asset for this country, because it allows the private sector to invest for the long term, confident in the knowledge that the viability of their businesses will not be put in jeopardy by macroeconomic instability.

 

 

The country faced a difficult international economic environment in 1998/99. Coffee prices were on average some 12% lower in US dollar terms than they were in 1997/98, and this inevitably dampened the recovery of export earnings.

 

Nevertheless, coffee production in 1998/99 is projected to be about 24% higher than last year and export earnings 12% higher.

 

Besides coffee, there were increases in export volumes of cotton, tobacco, fish, cereals, beans, hides and skins and electricity, although production of tea remained at the same level as last year. Total exports in 198/99 are projected to have risen by about $91 million, from the level in 1997/98.

 

As would be expected given the sharp depreciation of the exchange rate, the growth of imports, when valued in US dollars, slowed in the current fiscal year.

 

 

In common with the currencies of many countries throughout the world, the Uganda shilling depreciated sharply again at the US dollar during this fiscal year.                                                                                                                               

The depreciation is partly attributed to the same international factors which have caused other countries' currencies to depreciate: in particular, the depressed state of primary commodity prices on world markets and the strength of the US dollar against almost all the world's currencies.

 

The impact of these factors was exacerbated in Uganda because of regional insecurity, which may have adversely affected the confidence of the currency, the well-publicized setbacks suffered by two important foreign exchange earners, the fish and tourist industries, and the fragility in the banking sector.

 

In addition, it is evident that in recent weeks the slide of the shilling was exacerbated by speculation. However, prompt action by the Government and Bank of Uganda to tighten liquidity and then to intervene in a timely and decisive manner in the foreign market halted and then reversed the depreciation of the shilling. In the process, speculators learnt a costly lesson the speculation against the shilling is not a one-way bet.

In an export oriented economy, an orderly depreciation of the exchange rate can bring important benefits. Our concern over the past weeks has been to dampen the volatility in the exchange rate, which was excessive and disruptive to some sections of the economy.

 

In the long run, depreciation will have a positive impact on the Ugandan economy. First, it will make our non-traditional exports more competitive on export markets. It will also make the production of exports more profitable, thereby stimulating investment in export industries.

 

Secondly, the depreciation will make our domestic manufacturing industries more competitive against imports, and thereby assist them to expand and capture a larger share of the market. Thirdly, the depreciation will encourage domestic industries to make greater efforts to find local sources of supply for their inputs, instead of relying so heavily on imported inputs. The depreciation will, therefore, give a long-term boost to domestic production, to employment creation and to our balance of payments.

 

 

13. The banking sector has experienced a very difficult year with the closure of three banks by the Bank of Uganda and the temporary closure of two others which have since reopened. The bank closures have understandably generated heated debate as to whether they were necessary.

 

I want to make it clear that the Bank of Uganda had no alternative but to close these banks. The banks that have been closed down were all insolvent and generating large ongoing losses as a result of gross mismanagement, insider lending and other forms of fraud and abuse of depositors' funds.

 

The fact that one of these banks was still liquid at the time it was closed does not mean that it was in a sound financial condition. A bank can often appear to be in a sound condition because it is liquid enough to temporarily continue normal operations.

 

But no insolvent bank can remain liquid indefinitely. It will inevitably fail to meet all of its liabilities to its depositors and other creditors.

 

 

14. Given the scale of insolvency, mismanagement and fraud in these banks, the losses they incurred would have escalated to even larger levels had they remained open, and would consequently have imposed even higher costs on the economy and the taxpayers.

 

Closing banks is inevitably painful and creates disruption to innocent depositors, but it is far less costly in the long run to promptly close down insolvent banks, than to bail these banks out with public funds in order to allow them to remain open and to continue accumulating losses.

 

Closing insolvent banks is also essential if we are to build a banking industry which is managed in a competent and professional manner and in which depositors can place their money with confidence.

 

15. Honorable Members, although responsibility for bank failures lies squarely with the owners and managers of the failed banks, we must recognise that banking regulation and supervision must be strengthened.

 

I will shortly place before this House a new Financial Institutions Bill which will rectify, in a comprehensive manner, the existing weaknesses in the banking legislation. The Bill will raise minimum capital and ongoing capital adequacy requirements for banks and deposit taking non-bank institutions.

 

It will strengthen restrictions on insider lending and tighten limits on large loan exposures. It will impose limits on ownership concentration to prevent banks being owned and controlled by one man or one family.

 

The Bill will also introduce a requirement for mandatory prompt corrective action to be imposed by the regulators on distressed banks and financial institutions, to remedy financial and managerial problems as soon as they are detected. Banks will be required to publish their audited annual accounts, compiled in accordance with international accounting standards.

 

In addition, the Bill will stipulate penalties for directors, management and auditors who violate the banking law. I trust Honorable Members will give their full support to this Bill when I present it to this House.

 

16. When the banks were closed, Government made a commitment to repay all deposits, whether or not they were covered by the Deposit Insurance Fund, which currently covers net deposit liabilities up to a maximum of Shs 3 million per depositor. I wish to announce that the depositors of these closed banks will soon be repaid. The Bank of Uganda will begin to repay the Greenland Bank depositors next week and the uninsured private sector deposits of the International Credit Bank on the 25th June. The Bank of Uganda has also invited bids, from soundly managed and well capitalised commercial banks for the purchase of branches of the Cooperative Bank.

 

If this exercise is successful, the deposits in the branches which are sold will be transferred to those banks which acquire the branches. All other deposits in the Cooperative Bank will be transferred to the Uganda Commercial Bank. This will ensure that all depositors of the Cooperative Bank have access to their deposits by mid July 1999.

 

17. The decision to repay all depositors, irrespective of whether or not their deposits were covered by the Deposit Insurance Fund, undoubtedly helped to calm fears among depositors, but we must recognise that it is very costly for Government to repay all deposits in failed banks.

 

It is correct that Government should provide deposit insurance for small depositors, but it must place a maximum limit on the size of deposits which are insured. If Government continues to repay all the deposits in failed banks, large depositors can choose to put their money in weak banks where they will earn very high interest rates, safe in the knowledge that the taxpayers bear all of the risk.

 

This undermines prudent bank management, because it enables badly managed banks to attract deposits by offering unrealistically high interest rates, at the expense of soundly managed banks which take care to protect their depositors' money.

 

18. Honorable Members, at the start of the new financial year, on July 1st 1999, we will revert to our publicly announced policy of only paying insured deposits in the event of any further bank failures, which is in line with the Financial Institutions Statute. Government will always protect small deposits, because that is justified on grounds of equity and to promote savings by small depositors.

 

But we will not repay deposits in excess of the maximum amount covered by the Deposit Protection Fund. The Bank of Uganda will do everything it can to ensure that banks are managed in a safe and sound manner, but no bank regulator, in any country in the world, can possibly prevent all bank failures.

 

19. Honorable Members, it is regrettable that the privatisation of Uganda Commercial Bank unraveled. UCB was grossly mismanaged by Westmont Land Asia, who extended loans in violation of both the Financial Institutions Statute and the basic principles of prudent bank management.

 

Because of the mismanagement of UCB, which has almost certainly caused large losses to the bank, the Bank of Uganda placed UCB under statutory management and removed the Westmont management from the bank. Government is in the process of repossessing the 49% equity stake from Westmont and of suing Westmont for damages because of the losses they caused to the bank.

 

Once this has been achieved, we intend to re-capitalise the Bank and re- privatise it by selling a controlling stake to a reputable financial institution with the resources, expertise and incentives to manage this bank in a prudent and competent manner.

 

 

 

20. Mr. Speaker, Sir, after two years of substantial revenue shortfalls in 1996/97 and 1997/98, this year's revenue performance has improved.

 

The improved revenue performance means that we will have increased revenues as a percentage of GDP by almost half a percentage point, to this year's projected outturn of 12% of GDP Within total domestic revenues, Uganda Revenue Authority collections are expected to exceed their target of Shs 914 billion, which represents a marked improvement in revenue collection. However, the non-tax revenues, not collected by URA, have continued to perform poorly.

 

21. There are several reasons for the improved revenue performance in the current fiscal year. The exchange rate depreciation was an important factor, especially for the import tax components. Income tax collections were also very strong, reflecting the benefit of the reforms made in the 1997 Income Tax Act. The losses from duty rate reductions in last year's Budget, on fuels, beer, and sodas, were offset by gains from higher sales volumes. I am pleased to say that improved tax administration in the Uganda Revenue Authority has also made an important contribution to this year's revenue performance.

 

 

22. Government expenditures under the recurrent and domestic development budgets are projected at around Shs 1,127 billion in the current fiscal year, in line with the approved budget of Shs 1,131 billion.

 

Nevertheless, Government expenditures were 28% higher than the outturn in the previous fiscal year. Government spending was higher in this fiscal year than last year for three main reasons. First, there were increased expenditures on key poverty sensitive sectors, which included expenditures under Priority Program Areas and Poverty Action Fund programs and projects. Secondly, there was a large rise in 'the wage bill which arose partly because of the increased number of teachers brought onto the payroll.

 

Thirdly, there were increased expenditures on defence owing to the need to bring forward purchases of equipment for the UPDF originally scheduled for future years in order to deal with the threat to national security.

 

23. Out of the total Government expenditures during the current fiscal year, the wage bill accounted for a third, and the development budget 14% of the total.

 

24. In order to keep overall expenditures within budgetary targets, it was necessary to reallocate expenditures between sectors during the fiscal year to accommodate the large volume of supplementary expenditures, particularly for defence. Supplementary expenditures requiring additional resources approved during the fiscal year amounted to Shs 89 billion. Despite this, we were successful in maintaining overall expenditures within our budgetary targets, thereby ensuring that fiscal policy was consistent with the maintenance of macroeconomic stability.

 

Honorable Members, in spite of all these budgetary pressures during the year, Government has remained firmly committed to protecting poverty reduction programs and projects. As such, the Priority Program Areas in the recurrent budget, which include primary education and health, were fully protected from expenditure cuts, and received their budget allocations in full, as did the Poverty Action Funded component of the development budget.

 

25. Mr. Speaker, Sir, turning to specific achievements during the current year the main Health sector outturns were the completion of three hospitals at Adjumani, Bwera and Kaabong. In the Main Roads sub-sector in the current year, 8,800 kilometres of road have been manually maintained and a further 7,500 kilometres have been mechanically maintained under the routine maintenance program. A further 170 kilometres were covered under the periodic maintenance program.

 

These programs together were carried out at a cost of Shs 34 billion. In addition, on the Feeder Roads sub-sector, during 1998/99 a budget allocation of Shs 30 billion was applied in rehabilitating 740 kilometres of Feeder Roads across the country. A further Shs 12 billion was applied in carrying out routine and periodic maintenance to 10,000 kilometres and 1,000 kilometres of Feeder Road respectively.

 

For the Police Force during this fiscal year a total of Shs 5.5 billion was budgeted for purchase of vehicles and communication equipment. The achievement in the financial year include carrying out major repairs in Nsambya Barracks, partial payment on Kireka Barracks and construction of new police headquarters in the Districts of Mpigi, Masaka, Sembabule, Katakwi, Apac and Nebbi.

 

 

26. Honourable Members will recall that, last year, I established the Poverty Action Fund. The objective of the Fund is to direct funds from the Heavily Indebted Poor Countries (HIPC) debt relief initiative, together with other resources mobilised from donors, to the financing of projects which have a very strong impact in terms of poverty reduction.

 

These include projects in sectors such as rural feeder roads, agricultural extension, primary education, primary health care, and water and sanitation. I am pleased to inform you that the Poverty Action Fund has been very successful in both mobilising resources and ensuring that we are able to increase expenditures on programs which have direct and substantial benefits for poverty reduction.

 

A total of Shs 83 billion was mobilised and spent on programs in the Poverty Action Fund in the current fiscal year compared to original projections of Shs 57 billion in the budget estimates.

 

 

27. I understand the concern that has been expressed in this House and by the public over domestic arrears owed by Government to the private sector. I wish to report to this House that this year Government has cleared Shs 80 billion of the outstanding verified domestic arrears. I will come back to the issue of domestic arrears later in my presentation.

 

 

 

28. The overall deficit, including grants, was limited to a very modest0.9% of GDP while the deficit excluding grants is projected at 6.6% of GDP We have taken great care, Honourable Members, to ensure that our fiscal deficit can be financed primarily by grants or by loans which have a grant element of 80%. This will ensure that fiscal policy is consistent with both macroeconomic stability long term budget sustain-ability.

 

 

29. Our medium-term economic and budgetary objectives are to provide the economic policy framework and the public goods needed to support private sector development and to focus our budgetary policies on programs and projects which can make the greatest contribution to increasing household incomes and hence reducing poverty. Private Investment

 

30. Rapid and broad-based growth requires high rates of private sector investment. We have already made substantial progress in the last few years in raising private investment rates in this country.

 

From an average of only 9% of GDP in the first half of this decade, private investment has increased to an annual average of 14% of a much larger GDP in the second half of the decade.

 

This increase in private investment has been made possible primarily because we have maintained macroeconomic stability and liberalized markets. The challenge facing us as we enter the next decade is to accelerate the growth of private investment still further.

 

31. A recent survey of firms in Uganda found that the most important constraints they faced were the poor quality of utility services, corruption, deficiencies in tax administration, weaknesses in the legal system and the lack of long term finance.

 

32.1 would like to assure Members of this House that Government will take decisive steps to tackle these constraints to private investment.

 

First, Government will tackle the deficiencies in utility supply, notably by encouraging private sector investment in the utilities.

 

Government will implement a series of measures to expand capacity and improve the quality of service in the electricity industry. We will attract private sector investment into the electricity industry, restructure the management and operating systems of Uganda Electricity Board and divest its non-core businesses.

 

33. Second, Government has decided to establish a single independent Utility Regulator to handle all regulations in power, water and telecommunications and ensure fair competition among service providers. A draft bill to set up this institution is already before Cabinet and I will soon present it to you.

 

34. Third, Government will reform the legal system applicable to commercial transactions. The aim is to ensure that the private sector can enter into contracts in the confidence that they will be enforceable.

 

Much progress has already been made in preparing updated commercial legislation in Uganda. Future key reforms will include the overhauling of the companies and land registries and the strengthening of the Commercial Court.

 

35. Fourth, the Tax Tribunal is now functioning and will provide the private sector with an independent channel of appeal in the event of disputes related to taxation.

 

36. Finally, when the proposals to extend the life of the Non-Performing Assets Recovery Trust are put to this House, it will be possible to conclude the restructuring of Uganda Development Bank, and thereby make important strides towards enhancing the supply of long term finance for private investors in Uganda.

 

 

 

37. Mr. Speaker Sir, Government is committed to implementing the agreed policy on reform and divestiture of the remaining public enterprises; to promote private participation in infrastructure and to cost the potential budgetary impact of all major commitments.

 

Improvements in the efficiency and viability of the parastatals would free up resources to finance poverty eradication programs. One of the largest expenditure outlays in the coming year pertains to the costs of reform of parastatals and divestiture of Utilities including payment of arrears due to: UPTC, NWSC, UEB, URC, SCOUL and UAC.

 

38. In addition, substantial progress has been made towards the implementation of the divestiture action plans. In a few weeks from now Uganda Clays Ltd will be privatised. This will be the first privatisation carried out through the floatation of shares on the Uganda's Securities Exchange. It is our conviction that providing the Ugandan public with the opportunity to purchase shares in privatised enterprises will boost investor confidence and build public support for privatisation.

 

39. The reforms I have just outlined will remove some of the key constraints to private investment and thereby help to sustain rapid economic growth rates.

 

 

40. Mr. Speaker, Sir, central to our economic policies is the objective of reducing poverty. Our poverty reduction strategy, as outlined in the

 

Poverty Eradication Action Plan, entails raising household incomes and improving the quality of life by enhancing access to basic social services. Household incomes must be raised by promoting growth in sectors of the economy where poor people earn their livelihoods, in particular, smallholder agriculture. Second, we must improve the quality of life of poor people by enhancing their access to basic social services such as education, health care and reproductive health services.

 

That is why we are placing so much emphasis within our budgetary policies on expanding the rural infrastructure, through for example the construction of rural feeder roads. We are also focusing our budgetary policies on human resource development, because that will give poor people the means to raise their labor productivity, and thus their incomes, and will also directly improve the welfare of the poor people, through improvements in health standards.

 

41. Honourable Members, if we have the patience to continue with our prudent economic policies, if we can deepen our structural reforms, particularly privatisation of the utilities, and if we can ensure that scarce budgetary resources are concentrated on areas where they generate the maximum impact on poverty reduction, we can be confident that Ugandans will continue to benefit from a steady increase in our living standards in the coming decade.

 

 

42. The Government is following a strategy that restricts total expenditure commitments to less than the sum of domestic tax and non-tax revenues and net inflows of external donor finance. We intend to continue pursuing this policy in order to deliver the medium-term macroeconomic objectives of high rates of broadly based economic growth, with low inflation, a sustainable external balance and poverty reduction.

 

43. The Medium Term Expenditure Framework, continues to be one of the main tools in our financial armory enabling us to plan our activities not only on an annual basis but also in the medium term, over a three-year period. This in turn enables government to draw up realistic medium term sector plans to implement public policies taking into consideration the constraints of the macroeconomic framework.

 

 

44. Mr. Speaker, Sir I now turn to next years' expenditure proposals which are based on this financial year's achievements.

 

 

45. It is imperative that the issue of security continues to be accorded the highest priority in the budget and I have provided Shs 177 billion for Defence in the next fiscal year (excluding arrears payments).

 

Regional security problems and the need to provide security to national parks will require additional funding by way of salaries for new recruits in the UPDF. Non-Wage expenditures have, however, gone down because a one-time investment to equip the force has been carried out in the current year.

 

In order to increase the cost-effectiveness of expenditures by the. UPDF, the recommendations of a study on defence procurement financed by the United Kingdom will be implemented in the next fiscal year.

 

46. Mr. Speaker Sir, Government has made a provision of Shs 15 billion for gratuities for demobilised soldiers making a total of Shs 33.5 billion paid so far. The balance of arrears owed to them of Shs 11 billion will be cleared in the financial year 2000/2001.

 

47. Government has continued to provide assistance to the police to eliminate the major bottlenecks in the efficient operation of the force. I have provided over sh5 billion for the next fiscal year for various development activities in the Police Force to cater for the enhancement of logistics.

 

48. The Prisons Service like many Government institutions, suffered from past neglect leading to dilapidation of buildings and facilities. Since fiscal year 1995/96, Government has carried out renovations and emergency repairs to various prisons country wide.

 

49. The Poverty Action Fund has demonstrated its potential as an effective vehicle for donor budget support. The level of funding will increase from Shs 83 billion this fiscal year to Shs 154 billion in 1999/2000, an increase of 85%. The PAF funds will continue supporting targeted interventions for enhancing the potential income generation of the poor and improving their quality of life.

 

The improvement of the monitoring and accountability of the PAF funds will be a major challenge in the forthcoming year, as we are committed to undertaking physical and financial accountability of PAF programs. This will ensure that funds have the maximum possible impact.

 

I call upon all the stakeholders, especially the Local Government Officials, to put in place and implement the requisite reforms and measures to improve accountability for these increased resources.

 

 

 

 

50. Mr. Speaker, Sir, we have a Ten Year Road Sector Development Plan that sets out our main roads objectives until well into the next century. For 1999/2000 I have provided the sum of Shs 48 billion for maintenance programs catering for an expected output of 9,600 kilometres of main road routine manual maintenance, 9,400 kilometres of main road for routine mechanised maintenance and 170 kilometres of main road for periodic maintenance. 51. It is expected that the recent commencement of operations of the Road Agency Formation Unit will accelerate the implementation of programs to construct and rehabilitate our main roads.

 

Due to the expensive and mechanised nature of such work, Government has mobilised donor support and during this financial year this support is valued at about US$200 million.

 

This has been applied to various stages of our main roads' building and rehabilitation projects, covers a total of 385 kilometres of road network. During 1999/2000, a number of projects will be starting, including selected junctions and road sections around Kampala for which approximately US$6 million has been mobilised.

 

52. Mr. Speaker Sir, a comprehensive and strategic investment plan for the Feeder Roads Program is expected to be completed in the next financial year. During 1999/2000, 620 kilometres of Feeder roads will be rehabilitated whilst 10,000 kilometres and 1,000 kilometres will be routinely and periodically maintained respectively. I am providing sh25 billion for this work.

 

53.  I am glad to report that tenders have now been awarded for the supply of the necessary road equipment for six Districts. Suitable contractors have also been identified for constructing bridges at Budumba, Kabambiro, Buhindagye, Katonga and M117izi in 1999/2000.

 

 

54. Mr. Speaker Sir, Government is committed to introducing fundamental technological changes in the agriculture sector and the Plan for the Modernisation of Agriculture is expected to be completed by December 1999. Government will continue to facilitate good agricultural practice through research and the dissemination of research results, using agricultural extension services. These tools are aimed at improving the level of household incomes of the farmers. The overall outcome is expected to be that subsistence farmers will move out of subsistence and begin producing for the market.

 

55. The higher incomes that result from this process of modernisation will enable farmers to spend more on non-farm output, which in turn stimulates non-agricultural growth in the rural areas and provides purchasing power for the products of the industrial sector, thereby increasing national income in the non-agricultural sectors of the economy, as well as in agriculture.

 

56. For some time the Government has been discussing with donors a proposed reconstruction project for Northern Uganda. I am pleased to report that within the last few days, we have been able to agree with the World Bank that we will jointly prepare a project costing US$100 million which will involve resettlement of displaced persons, reconstruction of public infrastructure, rehabilitation of agriculture including re-stocking of animals and provision of improved planting materials and other inputs including the introduction of coffee.

 

This project will be discussed with all stakeholders so that the details can be fully worked out and the project negotiated with donors during the course of the next fiscal year.

 

As an interim measure and in order to demonstrate the Governments' commitment to this project, I have provided sh18 billion towards the re-stocking component of this project, which will be supervised by the Prime Minister's Office and implemented by Non-Government Organisations. It is estimated that this provision may be adequate to cover 10% of all households in the target area

 

57. Recruitment of graduate agricultural extension officers at the sub county level will be completed during 1999/2000.

 

 

 

 

 

58. Mr. Speaker, Sir, Government priority in the sector remains Universal Primary Education and this will continue to affect the level of resource transfers to tertiary institutions. In fiscal year 1998/99 the component of Primary Education accounted for sh219 billion of which salaries was sh100 billion for primary teachers and sh41 billion was for development. In 1998/99 630 new classrooms were constructed and 920 will be completed shortly. In the next financial year, we intend to spend sh35 billion to complete 4,700 half-finished classrooms and 1,400 new classrooms will be constructed. The program on purchase of textbooks has brought the average book to pupil ratio to 1:6.

 

 

Additional funds amounting to sh15 billion will be given in the next fiscal year of which sh5 billion is earmarked to replace worn out textbooks and sh10 billion for the purchase of new instructional material. I am happy to inform you that enrolment in primary schools has increased from 2.5 million before the inception of the Universal Primary Education program to 6.5 million as of April 1 999.

 

 

59.   In 1999/2000 the Government will develop a strategy for expansion of the secondary school sub-sector to cater for the increasing number of primary school leavers arising from Universal Primary Education. Within the sector an emerging critical issue is the wage bill for secondary school teachers. The budget provision for this item has had to be increased sharply by over sh5 billion this year to fund the unexpected and substantial increases in numbers added to the payroll. This increase underlines the urgent need to set and enforce affordable structures for each school which Government will implement next fiscal year.

 

 

60. Mr. Speaker Sir, Government is to introduce cost sharing in tertiary institutions to enable them supplement transfers from Government, which have been inadequate over the years. I would also like to reaffirm government's commitment to sponsor 7,844 students yearly at Makerere University (including 2,000 new entrants for three years commencing in the next academic year). With effect from the next fiscal year the University will be given a one line subvention for the University management to allocate to their activities.

 

 

 

61. Mr. Speaker Sir, although a major effort has been made in the Primary Health Care sub sector; health status indicators remain disappointingly low in Uganda compared with the rest of sub Saharan Africa. Access to Health Centres is recognised as one of the main constraints in ensuring that health care is available to all.

 

 

62. To address this concern Government is, among other considerations, ensuring that there are adequate Level IV Health Centres nationwide. During the current fiscal year 40 health centres have been upgraded and the 1999/2000 budget caters for a further 47 health centres. This leaves a further 47 Level IV Health Centres to complete the process. These will be catered for in the 2000/01 budget. Within the medium term it is also intended to start tackling the need for Health Centres at Levels II and III. Two days ago, I signed an agreement for a Spanish loan of US$ 24.5 million on concessional terms for the construction of health centres in Kisoro and Kamuli Districts.

 

 

63. There is also an urgent need to put competent staff in place to enable the Health Centres to operate effectively. A manpower audit carried out in 1998 indicated that only 35% of the staff positions are filled.

 

 

64. To address this issue I have made a provision of sh7 billion in the 1999/2000 budget to double the number of qualified staff working at

 

 

 

 

Recruitment to fill the remaining vacancies will take place over the medium term. Local Governments should ensure that adequate provision is made in their budgets for staffing lower health centres during the next financial year.

 

 

65. The Government policy to support Non-Governmental hospitals will be enhanced next year to the level of Shs 3.3 billion

 

 

66. I would like to highlight the fact that Government has for a number of years put considerable emphasis and effort into educating the people of Uganda on the subjects of HIV and AIDS. Indeed, the recent statistics indicate that this policy is certainly paying off and the upward trend of the number of Ugandans afflicted by these terrible diseases has been reversed. Government is committed to continue supporting this process.

 

 

 

 

67. Mr. Speaker Sir, access to safe drinking water for all Ugandans remains a priority of government as it is a major factor in the improvement of health in particular and the quality of life in general. I am providing Shs 18 billion to this sector in the next fiscal year. This represents a threefold increase in the sector budget since 1997/98.

 

 

During the next financial year 214,000 people are scheduled to benefit from completion of piped water supply systems in ten selected towns and fifteen rural growth centres.

 

 

68. It is also planned that in rural are? > ongoing construction work on 1,000 boreholes, 900 protected springs, 1,000 shallow wells and 22 gravity flow schemes will be completed. These fresh water sources will benefit a further 719,000 people. The current coverage is 46% in rural areas and 65% in urban areas. When these programs are implemented the coverage at the end of next year will be 50% for rural areas and 68% for urban areas.

 

 

69.  In the next financial year I am introducing a District Water conditional grant amounting to sh4 billion to tackle problems faced by user communities who are unable to meet the costs of operation and maintenance of water supply systems. I expect 1,200 boreholes which are in need of major repairs to be rehabilitated. This will benefit 360,000 people. For urban water supply systems, the grant will cover the shortfall in revenues collected relative to operation and maintenance requirements, thus avoiding the degradation of facilities. In order to effectively implement this program every district will be required to employ a District Water Officer.

 

 

 

 

 

 

70.  Mr. Speaker Sir, as part of our ongoing pay reform program, I am glad to announce the following salary increments; public officers in salary scales U5c - U7 that includes most teachers and medical workers will get an increase of 5% while the lowest grades in U8 and Support Staff which include police constables and copy typists will receive a 10% increase. Due to resource constraints, I am unable 'to increase salaries to staff in U1 - U5b. I will however consider them when revenues improve within the financial year. This review will not cover those at or above Permanent Secretary rank.

 

 

 

 

 

71. Mr. Speaker, Sir, I regret to inform the Honourable Members that the failure to revise the pension formula has resulted in inadequate funding of the pensions and in the accumulation of pension arrears. The Attorney General will study the problem and give a legal opinion to enable Government to consider viable alternatives. I am providing sh5 billion for pension arrears payments based on the recent census.

 

 

 

 

72. Government will complete filling vacant posts in the approved ministerial structures during the next financial year. Restructuring the remaining government bodies including secretariats of constitutional commissions, semi-autonomous and autonomous bodies, and bodies yet to be divested will be concluded by December 1999. Government will ensure that all public officers in the service both at the centre and local governments are properly appointed by the respective Service Commissions so that they can quickly access the payroll.

 

 

 

 

73. Mr. Speaker, Sir, Government has been very much concerned about the delay in paying salaries to public officers, especially teachers. I would like to reiterate that salaries have the first call on Central and local government's resources and any excuse for not paying salaries on time is not acceptable. To increase transparency and accountability in salary payments, Government has now directed that from 1st July 1999, all public officers both at the centre and under Local Governments must receive their salaries by the 28th of every month. Salaries are released automatically by the Treasury every month and are never constrained by cash flow problems.

 

 

 

 

74. Mr. Speaker, Sir, the Government is still very much concerned about accumulation of domestic arrears and lack of expenditure control and accountability. Arrears have continued to accumulate every year despite substantial funds released for arrears clearance during the last two years. Continued creation of arrears is not only illegal, but also represents a serious breakdown in budget discipline. In addition, such arrears are a constraint on the private sector and run counter to the Government's strategy for private sector development.

 

 

75. In order to tackle this problem a Commitment Control System has been established and was introduced on a pilot basis with effect from April 1, 1999 for four votes. The Commitment Control System enables Accounting Officers to manage and control commitments and expenditure within the quarterly expenditure limit and monthly cash releases, thereby avoid build-up of new arrears. This new system will be extended to all votes from 1st July 1999. New letters of appointment to Accounting Officers have been issued today, clearly specifying the officer's duties and responsibilities and stipulating the penalties for non-compliance. In addition to pecuniary liability, failure to comply with any of the financial and accounting instructions will attract disciplinary action from the Public Service Commission, which shall result in demotion, retirement or dismissal of the Accounting Officer.

 

 

76. Honourable Members will be pleased to hear that Government has discontinued the system of credit purchases and from April 1 1999, all ministries and departments were directed to pay for goods and services within 30 days after delivery. In the fiscal year 1999/2000 expenditure estimates, priority expenditure items such as public utilities and rent have been provided for adequately. From 1 July 1999 all bills for Electricity, Telephone and Water will be settled in full using budget provisions. Swap arrangements and issuance of Promissory notes for utility bills have been discontinued.

 

 

77. Mr. Speaker, Sir, the ongoing process of verification of accumulated arrears by the Auditor General is progressing well. It is estimated that the outstanding stock is worth sh261 billion. Of this amount sh261 billion only sh136 billion is due to private sector supplies to Government and the balance of sh125 billion is for wages and pension arrears, court awards, payments to former East African Community employees, gratuity for demobilised soldiers and subscription to international organisations. I am providing sh120 billion next year to clear nearly half of the arrears.

 

 

78 Honourable Members, I am convinced that greater transparency will help to foster good economic performance, in part by encouraging more widespread discussion and analysis of our country's economic and financial policies by the public, and also by engendering trust in policymaking, which can enable timely and decisive decision making. It is now recognised that the adoption of internationally accepted standards, or codes of good practice, can make an important contribution to improving policy making. For this reason, we have agreed to participate in a series of experimental case studies of transparency practices conducted by staff of the IMF in conjunction with the Government in each of the participating countries. I am proud to point out that Uganda will participate alongside the United Kingdom, Austria and Argentina in this exercise.

 

 

79. To increase transparency, I will soon issue new public procurement regulations to replace the Central Tender Board Regulations which have become outdated. The new regulations will encourage competition, assign primary responsibility to each procuring entity for procurement within the funds allocated to it. In the next financial year, all Accounting Officers will be required to constitute a Contracts Committee which will be responsible for awarding contracts, a function hitherto performed by the Central Tender Board. In addition, the services of a third party monitoring body/firm will continue to be used for all public procurement.

 

 

80. Mr. Speaker Sir, to continue to strengthen our fight against corruption, I have increased the budget provision for the Auditor General by 39% relative to the approved estimates and the Inspector General of Government by 47%.

 

 

 

 

81. The introduction of the Smart Fuel Card had led to considerable savings throughout Government. The savings that were effected were about 80% in some organisations. I have, therefore, agreed with a proposal from the Standard Chartered Bank to offer these services to the Government, with effect from the first quarter of the next fiscal year. I must emphasise that this venture with the Standard Chartered Bank is not meant to be a monopoly. I will consider other proposals as and when they are made.

 

 

 

 

82. In order to cut down on the high cost of travel abroad, I have decided to call for tenders from travel agencies to offer services to all Ministries and Departments of Government for purchase of tickets at competitive rates. The new system will be put into operation from July 1st 1999. I expect the system to bring about considerable savings on this item and bring about more transparency in the purchase of tickets.

 

 

 

 

83. Mr. Speaker Sir, with the authority of His Excellency the President, in compliance with Article 155 (2) of the Constitution, I have received the budgetary proposals of the five self-accounting bodies. In compliance with Article 155 (3) of the Constitution I have made comments on them and I hereby lay both their budget proposals and my comments on them before the House, as required by the Constitution.

 

 

84. In order to enable me to submit a complete National Budget for your consideration in accordance with Article 151 (1) of the Constitution, the budget provisions of these self-accounting bodies incorporated into the Medium Term Expenditure Framework are in accordance with the resource envelope conveyed to the Self Accounting Bodies during the course of our discussions.

 

 

 

 

 

85. In keeping with our policy on decentralisation, three important decisions have been taken to give greater financial and administrative powers to Local Governments. The first that was taken during the course of the year was to lend support to Local Governments in the planning and budgeting process, through the introduction of the Local Government Budget Framework Papers. This support from the Central Government, will be enhanced next year with a view to building up capacities in planning and budgeting in Local Governments, starting at the District level.

 

 

86. Secondly, the Constitution provides for Equalisation Grants to be paid to Local Governments for giving subsidies or making special provisions to the least developed Districts which shall be based on the degree to which a Local Government is lagging behind the national average for a particular service. The data required to compute the level of the grant required to fulfill the Constitutional obligation is not yet available. However, we have decided to make a modest start. I have made a provision of sh2 billion and its implementation modality will be decided shortly in consultation with the Local Government Finance Commission.

 

 

87. The third important decision is to decentralise the development budget, in a phased manner. I intend to pilot a Local Government Development Program, which will be released to Local Governments for use in specific areas after certain access conditions have been satisfied by them.

 

 

88. Mr. Speaker, Sir, I am aware that districts are concerned about the proliferation of conditional grants and the constraints that this imposes on the allocation of funds. In order to simplify the process, I have consolidated several conditional grants. The introduction of the Local Government Development Fund will increase flexibility in allocations to programs chosen by Local Governments

 

 

 

89. As we prepare to enter the new millennium, one of our concerns is the possible effect of the so called Millenium Bug. We are taking all possible measures to ward off the anticipated problems. I would urge aV those outside the Government Sector to cater adequately for the problem and keep abreast with developments taking place elsewhere in the field so that this does not adversely affect them.

 

 

 

 

90. Mr. Speaker Sir, I now turn to discuss Revenue and Taxation issues.

 

 

91. In last year's Budget Speech, I talked about the urgent need to improve our revenue performance. Some of the issues here are worth stressing again. As Honourable Members are aware, our revenue to GDP ratio of 12% is one of the lowest in Africa and is well below the average of 16% for sub-Saharan countries. This severely constrains Government's ability to provide much-needed services. We are under intense pressure from all sides to provide more and better services. But with the current revenue performance, our hands are completely tied. We cannot spend what we have not got. Without the resources, Government simply cannot meet the endless demands for more spending.

 

 

92. Furthermore, the pressures for tax reliefs and reductions are intense. Sometimes I feel that there are serious misunderstandings about the impact of tax reductions on revenues. Indeed, some people say that tax reductions will even increase revenues. While I fully appreciate that excessive tax rates can undermine compliance, and as a result reduce collections, this argument is no longer valid in Uganda. This is because, after many years of reforms, our tax rates are now very low and are by far the most competitive in this region and even compare well with the best in Africa. I do recognise that investors still have serious concerns about tax issues, but the bigger problems are with tax administration, not high tax rates. But even with tax administration, some positive progress is being made.

 

 

93. Let me illustrate how competitive our tax system is. Our company tax rate of 30% and our maximum personal tax rate of 30% are among the lowest in Africa. Indeed, in the broader world context, you will find very few countries with rates of personal and company tax lower than these. The same is true for our trade tax regime - export taxes have been abolished, import duty rates have been slashed and restrictive non-tariff barriers have been removed. Since 1993, we have made continuous reductions in our excise duties, resulting in our rates being comparable with the lowest in the region. Taken together, these reforms have given credibility and predictability to Government's tax strategy, which is what investors want.

 

 

94. I now wish to discuss the various tax headings and the measures I am proposing.

 

 

 

 

 

95. Mr. Speaker Sir, I do not propose to make any income tax changes for 1999/2000. While I am well aware of the pressures for income tax reliefs, the Budget pressures are even greater and leave me with no room for action. In last year's Speech, I explained in some detail the Government's position with regard to Income Tax. I do not want to go over this ground again now, except to say that the case I presented last year still remains very valid today.

 

 

96. By keeping inflation under tight control, the real value of the personal tax threshold has depreciated very little in recent years. Our present threshold of sh130,000 per month allows about 80% of all employees in Uganda a completely tax-free income. This fact surely dispels the myth that we need a threshold increase to cater for low-income workers.

 

 

97. An increased threshold would naturally mean reducing a tax base which is already very small and, as a result, would greatly reduce revenue. For example, a new threshold of Shs 235,000 (as some people have called for) would mean that over 75% of people currently paying some tax would drop completely out of the tax net, with a revenue loss of about Shs 25 billion. We can ill afford an income tax system which taxes only a tiny minority of income earners. Value Added Tax

 

 

98. Mr. Speaker Sir, I am proposing a number of improvements in our VAT arrangements, the details of which will be found in the Finance Bill. The most important of these charges are as follows:

 

 

99. First, I am providing relief for bad debts in VAT-registered businesses.

 

 

100. Second, I am widening the definition of Business Entertainment to allow input credits for expenditures related to the provision of staff canteen facilities at places of work.

 

 

101. Third, I am extending the period for Investment Traders to accommodate long term projects like mining, oil exploration and power generation.

 

 

102. Finally, to facilitate VAT refunds, which still remain a cause of concern for many businesses, especially exporters, I have instructed URA to implement a number of additional measures to expedite payments. The most important change will facilitate taxpayers with a good VAT filing record who will get automatic refunds of small claims. For large claims which are certified by an Auditor, fast-track treatment will be given. With effect from 1st July 1999, URA will start paying taxpayers an interest penalty on late refunds.

 

 

103. To allow URA to concentrate on collecting current tax liabilities, I have decided to allow an amnesty for all arrears of Sales Tax, CTL and the Coffee Stabilisation Tax. The details of provisions in this regard will be found in the Finance Bill.

 

 

 

 

104. Mr. Speaker, Sir, I wish to inform the House that Government remains committed to further trade liberalisation, especially in the East African context. However, the plan for the Zero Tariff on Internal Trade in East Africa, which was to commence in July 1999, has been postponed until next year, to allow time for further preparatory work on many related issues.

 

The most important of these are the East African Common External Tariff, harmonising customs nomenclature, agreeing the list of goods to be subject to the 10% surcharge, developing a uniform exemption regime, agreeing rules of origin for goods to be subject to the preferential tariffs and putting in place systems for policing/monitoring the new East African trade regime.

 

 

 

 

 

105. I wish to inform the House that our tax rates on fuel have now been brought more into line with tax rates in neighbouring countries. Let me illustrate my point with figures for diesel fuel. Currently, our duty on diesel is sh370 per litre, which is only about sh50 higher than Kenya's tax for diesel. Two years ago, our diesel duty rate per litre was progress with harmonising tax rates. However, for the price excluding tax, the differential with Kenya remains high.

 

 

106. To increase competition in the industry and to reduce the excessive non-tax element of pump prices, I wish to announce three measures:

 

 

107. First, by 1 July 1999, all filling stations will be required to display fuel prices prominently outside their premises;

 

 

108. Second, Government is taking steps to liberalise fuel importation and supply systems in line with the Petroleum Act.

 

 

109. Thirdly, URA will expedite clearance procedures at the border to allow fuel trucks to complete the journey to Kampala with minimum delay.

 

 

 

 

 

110. Mr. Speaker, Sir, I am proposing a modest reduction from 25% to 20% in the excise duty rate for soft drinks. All soft drinks made from imported concentrates will be subject to the new rate of 20%. Similarly, all imported soft drinks will be subject to excise duty. These measures will take effect on 1 July 1999.

 

 

111. To strengthen incentives for development of a drinks industry based on our excellent range of indigenous fruits, this excise duty will not apply to drinks made from locally produced fruits like mangoes, passion fruits, pineapples, etc. Tourism Vehicles

 

 

112. I have decided to reduce Import Duty from 15o to 7% for specially adapted tourist vehicles to promote the tourism industry.

 

 

 

 

113. To make administration and control easier, the expiry dates for vehicle licenses will be changed to end-month, with effect from 1 July 1999. In addition, the arrangements for procuring vehicle number plates are being liberalised.

 

 

 

 

114. Mr. Speaker, Sir, I wish to announce some measures to reduce costs and promote traffic at Entebbe Airport.

 

 

115. First, I am revising the method for calculating taxes on airfreighted imports. At present, only 50% of the airfreight element of the GIF "markup" is included in the tax base. I am now reducing this to 30%. This means that importers will be charged customs duties on the basis of the cost of their goods plus insurance plus only 30% of the freight cost.

 

 

116. To help with reducing costs for airlines using Entebbe Airport, the CAA levy on jet kerosene will be reduced from 9.5 US Cents per gallon to 5 Cents per gallon with effect from 1 July 1999.

 

 

117. The $20 airport service charge payable by departing passengers at Entebbe will, with effect from 1st July 1999 be included in the cost of the air ticket and transferred directly to the Civil Aviation Authority.

 

 

118.1 am raising the Traveller's Duty-Free Allowance for miscellaneous goods from $100 to $300 with effect from 1 July 1999.

 

 

 

 

119. Mr. Speaker, Sir, the monopoly previously enjoyed by UCB in handling URA revenue is being abolished with effect from 1 July 1 999. The objective here is to facilitate taxpayers to pay their taxes with minimum inconvenience and to ensure faster and more efficient transfer of funds.

 

 

 

 

120. Taking account of all of these adjustments, I am budgeting for Total Revenue of Shs 1119 billion for next year, which is equal to about 12.5% of GDP Of this total, Shs 1 100 billion will be provided by URA, with the balance coming from non-URA sources.

 

121. For URA collections the breakdown is as follows:

 

Shs 205.8 billion from Income Taxes, Shs 121.1 billion from Customs Duty, Shs 377.0 billion from Excise Duty, Shs 344.3 billion from VAT, and Shs 51.8 billion from Fees and Licenses.

 

 

 

 

 

122. Mr. Speaker, Honourable Members, you will find attached to the Budget speech a set of 11 tables which summarises the Budget and provides estimates for Recurrent and Development Budgets as well as the estimates for the Consolidated Fund Services and for Revenues. The tables also contain the Medium Term Expenditure Framework, the District Recurrent Grants as well as the Poverty Action Fund. I hope you will agree that this level of detail will help to increase budgetary transparency and facilitate informed debate.

 

123. Mr. Speaker, Sir, on the tax side, some may feel that, without a long list of tax cuts, the Budget lacks fizz and colour. However, I want to present another view. What business and investors want now is a steady and predictable tax regime, with no sudden U-turns.

 

Today's Budget delivers that. We can also celebrate the fact that, despite very severe expenditure pressures, I am able to present a Budget without tax increases. Over the past 5 years or more, we have made significant tax reforms and reduced tax rates steadily. Now the priority is to consolidate, not to make unsustainable changes.

 

124. Government spending will increase next year by 25% and by 20% in real terms. I can assure this august House that there are few countries in the world which can afford that rate of increase and yet justly claim to be managing their budgets in a prudent and sustainable manner.

 

125. Not only will Government expenditures increase, Mr. Speaker, but my expenditure proposals will further strengthen the focus of budgetary policies on poverty reduction, which is the Government's principal economic objective. Expenditures on Poverty Action Fund funded programs will almost double in the coming fiscal year.

 

Next year the Government is initiating a far-reaching program to rehabilitate the North including a substantial sh18b program for restocking. Next year our budget provision for the road building program will rise by 50% and our capital development program for primary education will more than triple. As a result of all these initiatives, large numbers of ordinary Ugandan households will be able to benefit now an in the future from greater opportunities to increase their production and thus to raise their incomes.

 

126. Finally, Honourable Members, our economic policies have proved their worth in guiding the economy through a very difficult year. We have overcome several major shocks and yet still achieved rapid economic growth and record levels of private investment. In the last two months, we have managed the transition to a more competitive exchange rate and implemented the two most critical, and long overdue, actions required to reform the financial sector.

 

We can now enter the next financial year, and the next century, with a tremendously strong foundation for further rapid economic growth, structural transformation and poverty eradication.

 

127. I commend this Budget to you. Mr. Speaker, Sir and Honourable Members, I beg to move.

 

 

FOR GOD AND MY COUNTRY