By KT Reporter
The World Bank has hailed Uganda’s significantly high economic growth rates, but says that factors prevail that could hinder achieving the tenfold growth target. The government has drawn a strategy that aims to see the economy grow tenfold from last year’s USD 53 billion to USD 500 billion by 2040.
This target is based on the projections that the growth rate will jump from last year’s 6.3 percent to at least 10 percent per year starting next financial year. The World Bank, in its 25th edition of the Uganda Economic Update, says that oil is highly tipped to move this growth, with production planned to commence next year, according to government plans – but “production timing remains uncertain, including completion of large infrastructure needed to bring oil to the market and generate revenues,” according to the World Bank.
The report also cites the global energy transition, which could lower hydrocarbon prices and increase the risk of “stranded assets”, thereby making some oil reserves uneconomical to extract. “Therefore, it is essential to prioritize the non-oil private sector to prevent over-reliance on volatile oil revenue and support balanced fiscal consolidation,” it says.
Qimiao Fan, Division Director for Kenya, Rwanda, Somalia, and Uganda at the says this report is coming at a time that Uganda must improve its domestic revenue mobilization to offset the declining sources of external financing. He says Uganda’s domestic revenues remain too low at 13.5 percent of GDP (the Ministry of Finance puts it at 14 percent as of last financial year), which must increase. This, Qimao says, must be followed by prudent spending.
The report says that there is a need to increase spending on human capital in Uganda, specifically, on education, health, and social protection, to catch up with the rest of the region, for the current and future labor force to be more productive.
Moreover, given the dwindling official development assistance, raising tax revenues provides the best financing option to ensure public spending on key social priorities, including infrastructure, remains secure. Other risks, Qimao says, include climate change, increasing indebtedness, and debt servicing, which is responsible for the growing spending that, he says, is outpacing revenues.
The report recommends that reforms that lower regulatory barriers for business entry and exit, increase market competition, and foster a supportive environment for innovation will stimulate private sector investment and participation in the economy, ultimately contributing to a higher and broader tax revenue base.
The WB Director, who pledges that the World Bank will be there to support Uganda’s transition to become an upper middle-income country, says the most important focus for Uganda now should be raising domestic revenue mobilization.
He says the tax base remains too low, with large firms not contributing what they should, while a lot of income earners in the private sector remain out of the tax bracket. This, according to him, is made worse by the costly tax incentives, where some companies are given up to ten years of tax-free operations. Unfortunately, he says, even the little revenues are spent on recurrent needs, like loan servicing, and less on development.
Patrick Ocailap, the Deputy Permanent Secretary at the Ministry of Finance, Planning and Economic Development, says the low revenue to GDP ratio is not reflective of low revenue mobilization, but rather the fast-growing GDP, saying that more is needed to ensure the ratio catches up with the growth rate of the economy. First, he refutes the World Bank’s report that the country’s fiscal deficit was 7.6 percent.
Fiscal deficit is the difference between what the country expects to raise in revenues compared to what it expects to spend during the year, with that deficit being covered by borrowing if all the budgeted needs are to be financed. Ocailap adds that the government is increasing efficiency in spending, with more focus on the more developed and high-return areas.
The Deputy Secretary to the Treasury explained that part of what is contained in recurrent expenditure by the report is actually meant to support development and not consumption. He says, for example, that debt servicing largely goes to debt that was acquired for infrastructure and other development purposes, and therefore, repayment or servicing cannot be categorized as consumptive.
Patrick Ocailap also laid out what is expected of the next financial year, including increased export diversification and value addition, reducing tariff and non-tariff barriers, raising household aggregate demand, and enhancing peace and security. He also allayed fears of mis-budgeting for oil, and with the government insisting that commercial production will commence next year, but that the economy, excluding oil and gas, will grow at an average of 8 percent in the mid-term.
“The fiscal regime has been finalised for oil and gas revenue. We shall work towards ensuring good governance of the oil and gas sector,” he said. On the tax revenues, Ocailap says the government, through the Uganda Revenue Authority, will continue implementing strategies that will ensure reduced revenue leak, including the use of digital systems. He assured that borrowing will be controlled, with a mixed external financing strategy.
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