Tough budget against low growth, low aggregate demand and weak external sector

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By Stephen Kaboyo

The 2017/18 budget worth 29 trillion ($8.09 billion)is finally here. In my view, this is a tough budget against a challenging backdrop of simultaneously having to contain and manage government spending at the same time confronted with a narrow revenue base.
The budget also comes at a time when there are other challenges, such as; low growth, low aggregate demand in the economy, weak external sector, gradual depreciation of the Uganda shilling, and upward pressure on interest rates that threaten to undermine the macroeconomic stability.

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The budget is formulated against a difficult local and global background with significant downside risks. Slow tax revenue growth and expenditure overshoots means that we should not expect fiscal consolidation and the fiscal deficit will

Obviously the positive thing is that the trend of front end loading of infrastructure continues to be a major focus

The difficult task is placing the country’s public finances on a sustainable path in an environment of economic uncertainty, growing social spending demands, and continuation of public infrastructure investments and evaluating government spending commitments to sustainable levels.

Taxation has not yet reached optimal level of tax to GDP ratio, lowest in the region, just 13% after rebasing. Taxation is targeting a limited formal sector
The government expects to fund approximately 50% of the budget from domestic revenues. Looking back at previous budgets, government has been consistent with the approach of reducing donor dependence, but this time round it is tough. About 50% will be funded from external sources and the domestic banking system, this is a large portion.

Challenges in implementation of projects

On specific allocations, I see energy and works taking big chunks of the funds. This again is in line with government’s objective of carrying on with public investments in key sectors to address the infrastructure gaps in order to make the economy competitive. execution is critical because that determines the growth we can quickly reap from the investments made today

The hard work and the challenge is fast tracking the procurement and implementation of these projects as we continue to have very low absorption capacity. government should develop a framework that will facilitate quick turnaround of these projects.

Obviously, the increase in taxes especially the focus on the informal sector is the right approach but this needs to be tied in with attempts to reduce government spending. Balancing this can be challenging because too much fiscal tightening can be counterproductive in the sense that it could cause lower economic growth and then cause higher cyclical deficit.

2017/18: Budget allocations
Works and Transport ministry Ugx.4.5 trillion; up from Ugx 3.8 trillion whereas the Justice, Law and Order sector budget has been raised from Ugx 1.103 trillion to Ugx 1.119 trillion.
Education ministry allocated Ugx 2.5 trillion up from Ugx 2.4 trillion last year.
Science and Technology Sector gets Ugx 71.9 billion, an increase from Ugx 14.2 billion it got in the 2016/17 fiscal year. Information and Communication Technology (ICT) got Ugx 104.3 billion up from Ugx 55.3 billion in the previous financial year.

Public sector management receives Ugx 1.4 trillion, up from Ugx 1.2 trillion.
The allocation to the Legislature’s has been increased from Ugx 470 billion to Ugx 483 billion whereas the allocation to Trade, Tourism and Industry ministry has been increased from Ugx 89.6 billion to Ugx 116 billion.
Allocation to the Security sector dropped from Shs1.5 trillion to Ugx 1.4 trillion. While Health sector allocation dropped from Ugx 1.827 trillion to Ugx 1.823 trillion. And that for Water and Environment, allocation reduced from Ugx 689 billion to Ugx 632 billion.

Similarly, the allocation to the Energy and Mineral Development sector reduced from Ugx 2.377 trillion to Ugx 2.319 trillion.
Ugx 2.6 trillion, up from Ugx 2 trillion has been set aside to pay interest on outstanding government loans.

The writer is a Financial expert working with Alpha Capital Partners

Also read: Range bound for Shilling as market players remain cautious ahead budget reading

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