By Julius Businge
Fred Kakongoro Muhumuza, (PhD), recently quit his position as Senior Advisor to the Minister of Finance. He is currently Senior Manager for Financial Services Inclusion Programme at KPMG Uganda. He spoke to The Independent’s Julius Businge about the budget.
What is your general assessment of Uganda’s economy going by what has transpired since 2011?
You don’t have to look at 2011 as your base year because it was a unique year; it is a year you can call an outlier. If you removed 2011, interest rates have not come down. They were 19%, 21% and they went up to 30% at the end of 2011 and some parts of 2012 because of high inflationary pressures. These rates have been at 20, 21% for the last 10-15 years.
They are not good for the economy especially when this is for commercial bank lending not development lending. Development lending ought to be much lower than that; possibly 10% or slightly higher than that. We do not have development finance in the country, so people who want to do development have got to use commercial bank lending which is very expensive and very short term. If we are to get double digit growth rates for this economy, we need to see further reduction in lending rates. The current GDP growth rate (5.7%) is still low. If we are to overcome the challenges we are facing, this economy has to grow in double digit. Anything below 10%, you are just stabilising the patient. If you want to grow to a middle income status as a country, you will need higher levels of growth.
You have been senior adviser to the minister of Finance; where do you find loopholes in the budget making process in this country?
What Uganda is doing today is more of budget allocations and not budgeting because the latter is proceeded by planning. As long as our planning has holes in it, our budgeting will never relate to our plans. That is why you will hear sectors saying `give us 10% or 15%’ and yet they don’t know what they are going to do. They prefer getting money first and then begin to plan. When time catches them before they finish with the planning, they bring the money back. Our budgeting must be driven by planning.
What other observations can you share about Uganda’s budgeting process?
The main thing is implementation. Like the president said, money is not a problem; it is the implementation, the trusted people to implement the programmes. But even if you have the trusted people and you have wrong plans and strategies, still you will not get the results. We need good policy and institutional reforms to implement our budget. We can even delete some of these institutions in this country. You do not need to deliver health services by every district; you can do it by every referral hospital so that you can reduce the overhead that is now at every small district. The roads program does not have to follow the district; you can deliver it by region. So you need to assemble yourself at the tier level; what we used to call the regional tier which is provided for. It helps you to limit the overheads that you have to run at 120 local administrative units. You would also want to scale back public administration. Kampala is a very good case for me; if councilors reported themselves that they were not sitting which is the case that Lukwago had for not convening the meetings and yet work was going on well, then you are telling me that councilors are not necessary for work to be done. I would have said thanks very much, Lukwago should go but so should you. From Kampala you move to other parts of the country. Let all councilors in all local governments go home and then you empower the Chief Administrative Officers to be like Musisi of KCCA, pay their staff well, motivate them and let them deliver the public service. These are institutional but also policy reforms which must be revised if the budget is to make sense. Short of that, we are doing just a ritual. Look at our legislature, legislation is not about 300 or 900 people…most of these decisions are done at committee level where 20 or 30 people sit. You can still legislate with 100 people. Once you do that you will realize that you do not need to borrow money. You will channel your money into infrastructure and other sectors that will support inclusive growth. It is wrong to increase your capital development budget without scaling back the recurrent budget. The moment we took a decision to move money into capital development, we ought to have removed money from the recurrent budget. Critical revisions on the recurrent budget which government should look at are public administrations, local government and all these institutions.
How should politics relate to the budget making process?
The summery part of it is that the budget is a political instrument with technical dimensions. But the assumption is that the politicians will be rational enough to know that by delivering services to the people they will be lengthening their stay in power. But in Uganda the voters seem to have accepted to trade their vote for a very short term kilo of sugar and bar of soap. In my view, politicians have got to rethink and make sure the budget is inclined to service delivery.
Over the years, government has in the budgeting process prioritised four key sectors; infrastructure, energy, health, education and security…what’s your observation on government’s accomplishments on the various projects in these sectors?
These sectors have yeilded positive results. There are roads and energy projects that have and are being worked on. Major steps have been accomplished in generation, transmission and distribution. We have been managing financial allocation and policy that relates to the energy sector. We have been able to attract private capital especially on the distribution and generation side because Bujagali is heavily funded by loans and investments by the private people. On security, everyone believes that Uganda is relatively peaceful in a very volatile environment. The Great Lakes region is still very vulnerable to lots of political and security risks not only from the Al-shabaab. We have the unsettled neighbors-Congo, Central African Republic, and South Sudan. The question one may raise is on efficiency, because we have achieved some of these projects at a bigger cost which is as a result of corruption and inefficiency in the system. The private sector has most times been smarter than government. In most cases government does not have the competence to understand the detailed costing of some of these projects. Also, because of corruption, some people on the side of government can easily get compromised and side with the private sector for personal interests. As long as personal interests override the public interest, you end up with inefficiency, loss of resources.
Which sector deserves to have the largest share of the budget?
In real budgeting, the allocation is driven by what events and activities are to be done in a given year in a particular sector. A sector that took a lion’s share last year may not necessarily take a lion’s share this year because of the differences in current or ongoing fundable activities. But most of them have inherent ongoing projects that you cannot stop. Such sectors will consistently take a big share of the entire budget. Education, health, and roads take a big share. So we are going to see a lot of our funding going into infrastructure, energy, education and health for a number of years.
Uganda has failed to hit the 2003 Maputo declaration of raising the agriculture budget to at least 10%. It has also failed to hit the 15% Abuja declaration of the health sector…what needs to be done?
Allocations are based on the activities available in the sector. It is not about meeting declarations. These were opinions of people and they were more passionate about one sector without looking at the other sectors a country has. The meetings were not about national planning and budgeting where you look at the whole spectrum. When we are working at planning level we are looking at ten or more sectors and so many things therein; so you are not driven by that narrow perspective to say give us 15% of the budget. I will allocate as per the problems and priorities government has set.
What’s your take on the government’s focus on local revenue (taxes) to raise over 80% of the Budget instead of donors?
These are always budget estimates. The reality can be driven by many factors. For instance this year, some donors withdrew their aid. Also, government local revenues did not come through as anticipated because of the slowdown in economic activity especially on the corporate side and some other developments within the economy. But it is also good for the budget to be funded by local revenues because it does not have future costs on the economy. It also gives you a firmer area to control your planned investments. There is room for Uganda to collect more revenues locally given that we are still collecting 12-13% of the GDP compared to our regional neighbors-Kenya, Tanzania and Rwanda who are at about 20% on average. The expenditure of government is about 18-19 % of the GDP; so if we were collecting in the region of 18-20% we would not even talk about donors. Our system here leaves out many people because of weaknesses in our data system partly because we don’t have a national I.D, have not enforced the tax identification numbers policy, don’t know who owns what piece of land, and that means we don’t know who to tax. If we worked on these, we would be better positioned to move up to 19% tax collection as a percentage of GDP. It is not a URA issue, it is a national issue. We did it two years ago when we said; anybody buying an asset above Shs 50 million should declare the source of income and pay tax in case they were not taxed when they earned the income, but it is still being fought by some people who are the beneficiaries of the current confusion in our tax regime.
Where do these suggestions leave the informal sector?
The informal sector obviously comes through because most of our taxes are consumption taxes. The only thing I will lose out on this category is income tax.
Now by targeting consumption in taxes, aren’t you sending a signal that prices should go up?
You don’t tax to kill off consumption. It depends on the responsiveness of consumers. There are certain things consumers must buy like beers, cigarettes, cars which you can tax with a big percentage because people will not leave them due to addiction.
What does a Ugandan tax payer deserve from government?
If government does not deliver what tax payers expect, then people will find ways of defaulting. But there is an implied expectation that government must deliver the public good say roads, good healthcare, security, and bringing down the cost of doing business among other costs for the public. If I have lesser costs on my own, I am able to meet my tax obligations and maintain my standards of living. This happens in the well-to-do economies like Sweden, Norway because in these countries income taxes for example are as high as over 50%. When the public pays, they do not have to meet any other expenditure. When their child falls, they freely call an ambulance to take them to hospital and everything will be catered for.
Government targets more funding from external borrowing yet debt has jumped to US$6.4 bn as of Dec, 2013 from US$2.45bn in 2007. Is this something to worry about?
Definitely any debt is something to worry about especially when your ability to pay back can be compromised by the nature of investments you are doing. There is a simplistic assumption that when you do the roads, electricity, the private sector will come up. So we need to be cautious about borrowing. I am not happy with our borrowing strategy because I think we have over-borrowed and gone into non-concessional borrowing which is expensive compared to the concessional loans whose rates of borrowing are manageable and spread over a long period of time; 30-50 years. The easiest thing to do is for us to scale back some projects. The other option is to finish off first those projects that are already started because we have binding contracts with contractors. We don’t need to sign new contracts no matter what people are appealing for politically.
Lastly, how should government go about the issue of tax incentives, tax holidays?
Those are some of the areas where we are losing money. There is a belief that incentives attract investors which is not correct. Genuine investors will be attracted by the market. The moment you give incentives you are undermining the business analysis of the investment. An investment that wouldn’t have taken place begins to come up which may not actually be the best investment for the economy. For instance we over incentivised the hotel industry during Chogm and everyone now involved in the business is suffering from the low levels of occupancy.