KAMPALA: Recent data from the 23rd edition of the Uganda Economic Update released by the World Bank reveals significant challenges and developments in Uganda’s fiscal landscape, driven by poor planning, routine use of supplementary budgets, and weaknesses in public financial management. These factors have led to overspending, fiscal slippages, and the accumulation of domestic arrears.
Persistent Overspending and Domestic Arrears
Uganda’s government has been grappling with persistent overspending and the accumulation of domestic arrears. During the first half of FY23/24, the government paid down USh 164 billion in domestic arrears, exceeding the target by 5 percent. However, this amount was insufficient to address the growing problem of arrears. By June 2023, total domestic arrears had increased by 34 percent to USh 10.8 trillion, amounting to 20.6 percent of the revised national budget.
The Auditor General’s Report for FY22/23 highlights the persistent accumulation of arrears as a failure in the commitment-control system, contradicting the 2021 Domestic Arrears Strategy. The repeated use of supplementary budgets, often funded through borrowing, undermines the fiscal consolidation agenda, according to the report. During the first three quarters of FY23/24, a supplementary budget of USh 4.6 trillion (9.1 percent of the approved budget) was adopted to finance various sectors, including the State House, President’s Office, public health, and security sectors. This level of excess spending is nearly three times the limit established by the 2015 Public Finance Management Act.
Impact of Supplementary Spending
Supplementary spending has become a norm in Uganda’s budgeting process, spread across many ministries, departments, and agencies. The Ministry of Science, Technology and Innovation, local governments, the State House, Energy and Mineral Development, and the National Identification & Registration Authority received the largest shares of supplementary spending.
The World Bank report notes, “Supplementary spending continues to undermine the credibility of annual planning and budgeting. Resources for these activities could have been allocated through the annual budget and likely fail to meet the definition of ‘unavoidable and unforeseeable’ costs that justify supplementary spending.”
Banking System Stability and Challenges
Despite tepid activity in the credit market, Uganda’s banking system remained stable and sound. Bank assets increased by 10 percent between June 2023 and March 2024, with the ratio of capital to risk-weighted assets remaining at more than twice the mandatory level of 10 percent. However, commercial banks’ exposure to government debt has gradually increased, with claims on the government by supervised financial institutions growing by 11.5 percent by February 2024.
The report highlights, “The financial system’s contribution to private-sector-led growth remains limited. The stock of private-sector credit fell by a full percentage point of GDP between June 2022 and June 2023 before recovering to an estimated 12.3 percent by February 2024.”
Fiscal Deficit and Revenue Collection
Reduced capital investment has helped narrow the primary fiscal deficit but may constrain future economic growth. During the first half of FY23/24, the overall fiscal deficit, including grants, equaled 4.3 percent of GDP, down from 5.4 percent during the same period in FY22/23. The under-execution of the capital budget offset a significant shortfall in revenue and grants, narrowing the fiscal deficit to within the target of 4.6 percent of GDP set out in the Charter for Fiscal Responsibility (CFR).
Government revenues are projected to reach 14.0 percent of GDP in FY23/24. Efforts to strengthen tax administration increased tax receipts between the first and second quarters of the financial year, though revenue still fell short of its target by 0.9 percentage points of GDP. Tax collection increased year-on-year across all tax heads, with direct domestic taxes experiencing the strongest growth.
The World Bank report concludes, “A combination of increased health spending and efficiency gains will be necessary to build Uganda’s human capital and reap a demographic dividend. The government must assume a much stronger role in addressing the huge gaps in healthcare quality and service availability in public health facilities.”
This comprehensive analysis underscores the urgent need for Uganda to improve its fiscal management practices, enhance budget credibility, and prioritize sustainable development to achieve long-term economic stability.
