Bernard Busuulwa
5 June 2011
Nairobi — Uganda is expecting a fiscal deficit of about 6.8 per cent in the coming financial year, up from 6.2 per cent last year, courtesy of higher expenditure on projects in the energy and transport sectors, as well as rising costs of public administration.
According to Treasury’s latest Medium Term Expenditure Framework paper (2011/12- 2015/16), this could force the government to borrow more and thin out its diminishing revenue flows. The fiscal deficit is forecast to hit 7.9 per cent in 2012/13 before slowing down in subsequent years.
Fiscal deficit refers to the excess margin of total government expenditure compared with its overall incomes.
Sharp increases in fiscal deficit levels usually raise government’s borrowing costs, diverting resources from vital social services like health and affect a country’s standards of living.
Experts said the surging deficit could push up lending rates, reducing private sector’s access to credit. Pressure for Kampala to embrace fiscal discipline have gained urgency as inflation rose to double digit figures in the past months on the back of high food and fuel prices.
“The projected increase in the fiscal deficit will necessitate higher government borrowing from the banking system and recent gains in treasury yields will certainly entice many banks into considerable government lending,” said Bill Page, Partner at Deloitte and Touche Uganda.
Critical projects
“But expenditures supported by government borrowing are best utilised if they are spent on major infrastructure projects such as power generation, that are critical in stimulating economic growth. The long term growth in tax revenues generated from such sectors could offer a good trade-off for the ‘crowding out effect’ against private sector borrowers,” he added.
Uganda’s budget is projected to hit Ush9.2 trillion ($3.8 billion), up from last year’s Ush7.3 trillion ($3.1 trillion). External budget support is projected at 24.5 per cent while domestic financing is equivalent to 9.2 per cent, coming from savings from the energy fund and tax proceeds from recent capital gains liabilities derived from the oil and gas sector.
More so, government’s intentions to utilise treasury bonds for borrowing operations alongside liquidity management will help deepen monetary policy actions under the new inflation targeting regime.
Dr Fred Muhumuza, Economic Advisor to the Minister of Finance, Planning and Economic Development said in a statement: “Projected growth in the fiscal deficit is linked to rising expenditure needs in our development priorities but we intend to redirect resources towards the most deserving areas.
Though revenue collections have struggled in the past financial year, we are counting on the projected growth in total gross domestic product from Ush34 trillion ($14.2 billion) to Ush38 trillion ($15.9 billion) in the next financial year to mitigate the stagnant tax to GDP ratio of 12.5 per cent which will in turn increase the overall revenue base. “
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Continued here:
Govt Faces Growing Fiscal Deficit Up to 2013