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Parliament approves UGX 5.4 trillion loan to finance budget deficit

Speaker Rebecca Kadaga

Kampala, Uganda | THE INDEPENDENT | Parliament has approved up to 5.4 trillion Shillings loan to finance the budget deficit for the current financial year 2020/2021.

This followed the adoption of Parliament’s National Economy Committee report in a plenary session chaired by Speaker of Parliament Rebecca Kadaga.

The approved funds are meant for items like classified expenditure for State House and Ministry of Defence, Uganda Development Bank, Ministry of Health, Ministry of Trade and for recurrent domestic arrears and a bilateral road infrastructure project between Uganda and the Democratic Republic of Congo (DRC).

Initially, the government had sought to borrow up to 6.2 trillion Shillings to finance the budget deficit and out of this USD 600 million (2.2 trillion Shillings) was proposed to be borrowed from the International Monetary Fund (IMF) and a total of 4.3 trillion Shillings proposed to be borrowed from the domestic market.

However, in the report presented by the Committee vice chairperson Lawrence Bategeka, legislators recommended approval of only Shillings 3.25 trillion through domestic borrowing and the approval of USD 600 million (2.2 trillion) from the International Monetary Fund (IMF).

Bategeka defended the cut on the proposed borrowing by government noting that borrowing Shillings 4.3 trillion from the domestic market would slow down private sector credit growth from 8.9 percent registered in financial year 2019/2020 to 3 percent in financial year 2020/2021.

Report on the Proposal by Government to Borrow Up to USD 600 Million From the IMF by The Independent Magazine on Scribd

“The committee recommends that the World Bank loan resources that were disbursed at the beginning of the financial year should be included in the resource envelope of the current financial year, which will eliminate the projected revenue shortfall that is a partial basis for the borrowing,” said Bategeka referring to an earlier 1 trillion loan from World Bank.

He emphasized that government should borrow only Shillings 3.25 trillion from the domestic market since the projected shortfall on the revised resource envelope is addressed by the World Bank resources, and the borrowing proposal would create an excess borrowing of Shillings 1.04 trillion.

Bategeka also said that the government should prioritize the borrowed resources towards expenditure on only productive areas that will stimulate economic growth.

Meanwhile, Bategeka recommended that parliament approves 2.2 Trillion Shillings loan from IMF. He however said that if the economy is unable to register a significant rise in foreign inflows, the government should adjust its fiscal policy stance and opt to cut spending in less critical areas, without undermining economic growth objectives.

While presenting the loan request to parliament last month, State Minister for Planning David Bahati explained that the outbreak of COVID-19 pandemic had greatly affected the economy of Uganda and that the economic growth projections were revised downwards from 6 percent to 4.5 percent in the financial year 2020/2021 due to the impact of the pandemic.

“Madam Speaker in the financial sector, the past financial year 2019/2020 registered a shortfall in revenue collection of 1.2 trillion Shillings, and in the current financial year, we are registering a shortfall of 2.5 trillion Shillings due to the impact of COVID-19,” he said then.

Report on the Proposal by Government to Borrow Up to UGX 4307.3 Billion by The Independent Magazine on Scribd

In May 2020, parliament approved a total budget of 45.4 trillion Shillings for the financial year 2020/2021 that kicked off on July 1, 2020. Out of this budget, 21.8 trillion Shillings is to be financed through revenue collection while 15 trillion Shillings is to be financed through external borrowing.

According to Bahati, 1.5 trillion Shillings has so far been raised from domestic financing leaving a deficit of 1.4 trillion Shillings to be raised from the domestic market to finance the budget. He also told parliament that the government has been having different financial pressures and that due to these, the government had been forced to seek a loan to further finance the budget.

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One comment

  1. Same government telling us that the economy is improving while borrowing as if its becoming a business.
    HomeBusinessUganda’s public debt rises by 20% to sh56 trillionWorld Bank’s new east African boss starts work todayPrevious StoryWorld Bank’s new east African boss starts work todayNITA-U Kahigi headed for gobal cyber security role NITA-U Kahigi headed for gobal cyber secur…Next Story
    Uganda’s public debt rises by 20% to sh56 trillion
    By Vision Reporter

    Added 9th September 2020 05:30 PM

    A recent IMF report raised a red flag at the rate Uganda is borrowing

    Uganda’s public debt rises by 20% to sh56 trillion
    A man loading matooke at Farmers Market in Kireka on Jinja Road in Wakiso district. High transport fares caused by government COVID-19 restrictions have caused inflation.

    Uganda’s public debt has increased by 20.5% in the last one year, from $12.5b (sh46.2 trillion) in June last year, to $15.3b (sh56.5 trillion) in June this year.

    According to the Bank of Uganda monetary policy report for August 2020, which was released on Thursday, the sporadic rise in the country’s public debt is attributed to interest accumulation on old debts and the many new debts acquired in the last one year.

    The report indicates that between June last year and June this year, the Government acquired loans totalling sh6.4 trillion, mostly from the International Monetary Fund (IMF), PTA Bank and Stanbic Bank.

    Bank of Uganda says in the report that the bulk of the sh6.4 trillion was acquired this year (2020) to enable the Government counter the economic distress brought about by the coronavirus pandemic.

    Considering that Uganda’s public debt was only $1.9b in the 2008/2009 financial year, it means that the bulk of Uganda’s current public debt of $15.5b has been created in the last 10 years.

    A recent IMF report raised a red flag at the rate Uganda is borrowing and warned that by 2022, Uganda’s debt would be unsustainable.

    Uganda’s economy was rebased at the end of the 2018/2019 financial year, from sh109.9 trillion to sh122.7 trillion, which made the economy to become 11.6% larger than it was.

    Had the economy not been rebased, Uganda would have, at the current debt of sh56.5 trillion, exceeded the red mark of a debt to gross domestic product ratio of 50% beyond which it becomes unsustainable to borrow.

    The Government said the rebasing of the economy was aimed at capturing new economic activities, such as information and communications technology, gold and oil, which were not considered the last time the country’s economy was quantified.

    For the last four financial years, including the current one, debt repayment has been taking the biggest portion of Uganda’s national budget.

    Of this financial year’s sh45.5 trillion national budget, sh13 trillion (29% of the total budget), is earmarked for debt repayment.

    Makerere University finance lecturer Dr Sulait Tumwine says the rate at which Uganda is borrowing and the way the borrowed money is utilised is endangering the country.

    “We are now mostly borrowing for consumption. Consumption cannot pay back the loans we are borrowing.

    It is endangering our economy. That is why, right now, the biggest portion of our national budget of 29% is going into debt repayment. This, coupled with other recurrent expenditures, such as wages and administrative costs, leaves us with limited resources for developing the economy,” Tumwine said.

    He added that at a time when the country’s public debt is increasing rapidly, government is worsening the situation by creating more administrative units and parliamentary seats, instead of downsizing government.

    “That is why I predict that just as government has failed to achieve the second National Development Plan (NDPII) targets, even the NDPIII targets will not be realised without radical reforms. Even in the next five years, we shall remain where we are because most of the resources are going into recurrent expenditures,” Dr. Tumwine said.

    Transport fares and inflation

    The Bank of Uganda report indicates that whereas food prices have continued to be low, inflation is being driven up by the high transport fares caused by the Government COVID-19 restrictions.

    The restrictions require public passenger service vehicles to operate at half capacity for social distancing.

    “Consequently, annual headline inflation rose to 4.7% in July, from 4.1% in June. Annual core inflation rose to 5.8% from 4.9% over the same period. Food crops annual inflation declined further to 5.8% in July, from -5 in June, driven down mainly by lower prices of fruits and vegetables, and reflecting largely ample food supplies,” the report states.

    Although many countries in the world are in recession and others experiencing negative growth arising from the COVID-19 consequences, Uganda’s economy grew at 3.2% in June, up from 1.7% in the previous two months (April and May) when the country was under lockdown.

    According to the IMF World Economic Outlook (WEO) update for June 2020, global economic recovery is projected to be more gradual than previously forecast.

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