Inside Uganda’s election budget

Secondly, given the current economic situation, we need to get businesses to borrow and invest to stimulate economic activity. But if government goes to the domestic market to borrow, it will crowd the private sector out of our already constrained financial markets. The situation will be made worse by low aggregate demand resulting from job losses, leading to reduced economic output. It follows that Uganda government needs to tighten its belt considerably. Doing this in an election year is going to be difficult but is necessary.

So the question is what should government do? When one looks at the budget, there is little to cut. Ok, let me rephrase it: there may theoretically exist opportunities for cutting wasteful public spending. However, I do not think it would be politically possible to achieve this. One immediate area to cut is the over-sized State House and Security budgets. But is it possible to cut the president’s budget in an election year? It makes a lot of technical sense of course. But is it politically possible? State House is notorious for consuming its annual budget in the first half of the financial year, hence its everlasting requests for supplementary budgets.

Political and electoral debate in Uganda is always far removed from the reality of our wallet. Politicians promise entitlement programs whose budgetary needs far exceed what the country’s finances can pay for. Our government promises to meet all the health needs of every single person everywhere. Our elites expect and demand public goods and services to the quantity and quality of Belgium and Norway. Our so-called civil society does similar. The public expects and politicians promise a nanny state.

This is the reality behind Uganda (and Africa’s) persistent budget deficits. Every year we promise to spend much more than our revenues. We meet the balance by borrowing abroad and domestically. In countries like Japan, over 90% of the debt is held by its citizens. This is good because whatever is listed as a liability of the government’s balance sheet is an asset on the balance sheet of its citizens, thereby balancing the net assets of the country.

Most of the debt of the USA is held by China and Saudi Arabia, but it is denominated in dollars i.e. local currency. No country can default on debt held in its own currency, which it can print and pay. If America decided to use inflation to reduce her debt, by printing money, these countries will buy it out in order to keep the value of their debt holding. Indeed the experience of UK and France after World War Two shows that a country can use inflation to devalue her debt, thereby making it possible to pay it off.

Uganda’s domestic debt situation is complicated. First, a significant share of it is held by foreign owned commercial banks and other offshore investors seeking a quick killing. That means that a big share of government liabilities is held by foreign entities, not as assets by its citizens. These foreign entities (commercial banks) do not lend citizens to build viable businesses. They make easy money off government treasury bills and bonds; make handsome profits, which they ship abroad to their home countries as dividends.

While Ugandans are forever locked in irrelevant fights, they are blind to the big fact that foreign control of our economy could be much more damaging. It creates a continuous flow of resources out of the country to foreign investors and speculators. This is worsened because government gives tax exemptions to these foreign firms. To make money, these entities use (for free) public roads, security, ports, labour etc. all developed at taxpayer expense. If they do not pay their fair share of taxes, it means the net return on their investments could be negative.

****

amwenda@independent.co.ug