Kiwanuka’s budget strategy

By Haggai Matsiko & Ronald Musoke

Good news: Why the minority private sector is praising it

Bad News: Why the majority poor are cursing

A day after Finance Minister Miria Kiwanuka presented 2013/14 FY budget, a meeting of the Private Sector Foundation of Uganda (PSFU) on June 14 praised her for factoring in 76% of members demands.

The PSFU reaction was markedly different to that of the public, pundits, and some media who continue to assail her for the tax-heavy budget and apparent lack of responsiveness to the needs of the poor.

“The government has found a solution by locally mobilising resources, the challenge will now be governance and accountability for this locally-generated revenue,” said Gideon Badagawa, the executive director of PSFU, “Donors have walked away from us…I wouldn’t want tax payers to run away from us.”

Stephen Biraahwa Mukitale (MP Buliisa), the chairperson of parliament’s Committee on National Economy, said the budget was meant to bring down the cost of doing business and boost Uganda’s competitiveness.

Chris Kassami, the outgoing Permanent Secretary and Secretary to the Treasury at the Finance ministry, was upbeat. He said the private sector to be able to fund the budget 100 per cent next year.

But Ben Asiimwe, the Chairman Uganda Informal Sector Transformation Organisation was not so excited. He opposed some of the new taxes proposed.

The different reactions are partly because the minister faced some tough choices. She had to plug a hole created by a 93% cut in budget support from donors over corruption allegations and was reading the budget just days after the Uganda Revenue Authority had announced a Shs 160 billion cumulative shortfall in collections for the year.

She chose to present an “ambitious” budget. Her strategy appears to be one of spending her way out of the problem since, despite the challenges, she announced plans to spend Shs 13.1 trillion in 2013/14 which is 18 percent more than last year’s budget and means that donor contribution will be just 19 percent.

The ambitious budget growth dwarfs Kenya’s which is proposed to increase by 7.5 percent. Regionally, Kenya which is the biggest economy plans to spend KShs 1.6 trillion (Approx. UShs 48 trillion), Tanzania plans to spend TShs 18 trillion (UShs 28.8 trillion), and Rwanda about RwFr 1.6 trillion (UShs6.5 trillion). Burundi, which is the newest member of the East African economic grouping, is yet to synchronise its budgeting process with its neighbours.

Kiwanuka has been praised for her independent-minded budget but the battery of 15 new tax proposals she announced, especially the consumption taxes on piped water, Kerosene, wheat, and mobile telephony have been criticised as retrogressive and taxing the poor to pamper the private sector.

Some pundits say the minister needed to match her bold ambition with equal innovations. They point to neighbouring Kenya, Tanzania, and Rwanda for innovations, especially in the income and corporation tax areas, citizen well-being, and public expenditure controls that she could have adopted.

As a result of the mixed reaction to the budge, on the same day the Finance Minister was being feted at the PSFU meeting, her assistant was being rebuffed in parliament where she had presented a request for a supplementary budget to pay salary arrears for teachers, health workers, and the police. Parliamentarians rejected her request accusing the government of “budgetary indiscipline”.

Questions are being asked about creeping budget indiscipline, the fate of the awaited pension sector reforms, failure to have a national population and housing census, and increased salary demands in the health, education, and internal security sectors.

Regional priorities

Kiwanuka’s budget mirrored her regional neighbour’s emphasis on infrastructure development, support to the private sector, job creation for the youth especially, and improvement in the doing business climate. The booming mobile telephony sector, withholding tax, and the informal sector incomes were game in all regional budgets.

Kenya appears to have had the most aggressive innovations in the direct tax area with proposals for a Capital Gains tax, a railway development levy, customs warehouse rent, rental incomes rent, and corporation tax compliance monitoring. Significantly, it announced plans to ensure that the tendering process for public procurement does not go beyond 30 days.

Tanzania appears to have continued on the road to improving citizen well-being with a minimum wage, lowering income taxes, and prompt payment of salaries and retirement benefits. Specifically, in the 2013/14 budget, it proposes to control the budget deficit below 7.5% of GDP and ensure that public expenditure complies with votes approved in parliament.

It also proposes to control expenditure by the government on telephones, ensure only locally manufactured furniture is purchased by its departments, and entitled officials get loans to buy vehicles instead using government cars.

Kiwanuka meanwhile opted to target the same tax revenue streams more aggressively.  She had proposals on 15 revenue sources. She marginally increased duty on petrol and diesel by Shs 50, restored a Shs 200 excise duty on kerosene, imposed new excise duty on cigarettes, indentured spirits, promotional activities, money transfers, stamp duty on Third Party insurance policies for motor vehicles to raise more revenues.

Kiwanuka also proposed to eliminate Value Added Tax (VAT) exemption on Hotel accommodation, supply of water for domestic use and wheat and flour.

She seeks to increase motorcycle and motor vehicle registration fees and introduced an International Calls Levy.

Michael Kabuuka, a Senior Associate with Deloitte told The Independent that, faced with donor-aid cuts, the government had to fill the gap with more taxes.

“That is why the government looked at taxes that are easier to administer,” he said and singled out the levy on international in-coming calls as “smart”.

“It will not affect the economy yet it will bag the country Shs 43 billion,” he said.

Through new taxes and other domestic sources, Kiwanuka promised to raise Shs 10 trillion.  The URA has to collect Shs 8.4 trillion in taxes, and Shs 275 billion in Non-Tax Revenues.

Despite the uproar some of them have generated, all the proposed new sources of revenue, if approved by parliament, can only raise an additional Shs 384 billion or 3 percent of the proposed budget of Shs 13.1 trillion.

Right moves, wrong timing?

The spirit behind the move to fund 81 percent of the budget from domestic sources has been welcomed by experts who are excited that Uganda is freeing itself from the shackles of unpredictable donor aid dependency. Among them is Dr Roberto Ridolfi, the head of the European Union delegation in Uganda has praised the country’s growing independence.

In reality, Uganda is majorly engaged in a fire-fighting reaction to the aid cuts. The timing of the budget independence does not correspond with any growth of the economy.

Uganda, Tanzania and Kenya have been reducing dependence on budget support from development partners.

In the 2012/13 budget, Uganda reduced the portion of the budget financed by donors from 30 percent in 2011/12 to 25 percent. Kenya has reduced dependence to 15 percent in 2011/12 and just 7.5 percent in 2013/2014. Tanzania got only 5.5 percent of the budget from donors in 2012 and the latest budget has whittled it further down to 5 percent in 2013/14.

Rwanda’s story is slightly different since it suffered huge aid cuts following allegations it was supporting M23 rebels in the DR Congo. In reaction, it introduced the Agaciro Development Fund (Sovereign Wealth Fund). But donors are back and the external resources support of their budget is 39.8 per cent this year.

But Uganda appears to be in the unique situation being pushed into financing a staggering 81 percent of its budget during tough times instead of easing into budget independence gradually as the economy improved. Its trump card now appears to be the anticipated revenue from the newly discovered but yet to be exploited oil resources.

Kiwanuka’s projections also appear driven by relative macro-economic stability in FY 2012/13 compared to the previous turbulence in inflation rates, exchange rates, and lending rates. The economy rebounded last year, posting 5.1 per cent GDP growth from 3.4 per cent the year before, foreign exchange reserve growth, and positive Balance of Payments account.

Kiwanuka appears to have decided to maintain a grip on populist expenditure in spite of launching what appears to be a private-sector led economic stimulus budget. The tight budget could explain why the government could not raise salaries for teachers, health workers and the police but increased expenditure on roads and works by 50 percent.

She said she intends to borrow to finance the budget in the same direction.

“Non-concessional borrowing for consumption expenditures is not productive, as it does not generate the necessary returns required to enhance growth and development. Any future borrowing therefore, both from external or domestic sources, will only be secured for financing the productive sector, specifically to address our infrastructure needs,” she announced.

Budget performance

The real test for Kiwanuka, experts say, and the fear of Ugandans is where after squeezing these resources out of them, the government will this time implement the projects proposals.

Kiwanuka is pumping the largest chunk of funds into works and transport, education and energy sectors respectively.

While the works ministry claimed Shs 2.3 trillion to construct about 3000 Kms roads among others, education claimed Shs 1.8 trillion and energy Shs 1.6 trillion..

Economists say that these are the drivers of the economy but that unfortunately, previously the biggest chunks of these votes have always gone to recurrent expenses like salaries, rent and allowances.

“The energy sector stimulates growth,” Kabuuka said, “if you look at the previous years when there was load shedding, production went down, and when Bujagali came on board production improved.”

Electricity supply grew by 10 percent posting a 4.2 percent growth in the manufacturing sector compared to a 0.3 percent decline the previous year when load shedding was the order of the day.

Critics are asking why Kiwanuka’s budget sidelined agriculture yet the minister herself acknowledges that the sector employs about 66 per cent of Uganda’s total labour force and about 80 percent of the population directly and indirectly depends on it.

Kiwanuka allocated a paltry Shs 394.4 billion to the agricultural sector next year. No wonder, the sector output grew by 1.4 percent and a measly 0.8 percent the previous year.

But Kiwanuka says, “Agriculture is a private sector activity, for which government will continue to provide support”.

The other critical question is unemployment. While Kenya pledged to post one million jobs a year. Youth MP Evelyn Anite questioned how Kiwanuka’s Youth Venture Capital Fund that is supposed to enable youth start up enterprises had already spent the Shs 21 billion yet there was nothing to show for it.

The theme of the budget this year is, “The Journey Continues: Towards Socio-Economic Transformation for Uganda”. The plan is to graduate Uganda to middle income status by 2017 as elaborated in the Vision 2040 announced this year. It is unclear how that will be achieved if one group celebrates, while another majority grumbles of the price of kerosene and piped water.

Additional reporting by Angella Abushedde, Muthoni Karubiu, and Isiah Mwebaze

2013/2014 Sector Budget Allocation