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Uganda’s addiction to borrowing

Why our country continues to take more and more loans and what this means for the economy

THE LAST WORD | ANDREW M. MWENDA | Uganda is at a crossroads. Early this year, government passed a budget of Shs32 trillion for the 2020/2021 Financial Year. It also projected to collect Shs21.8 trillion in taxes and then would raise the rest from international loans and grants, non-tax revenues and domestic borrowing. Then COVID struck.

The lockdown slowed economic activity. So government revised its revenue targets downward to Shs19.3 trillion but did not revise its expenditure plans.

Governments can respond to a crisis like the one created by COVID in four ways: by collecting more money through taxes, or printing money, imposing austerity (i.e. cutting spending) or by borrowing.

It is difficult to raise significant sums of tax revenues in a short period. In any case, precipitate tax hikes can be counterproductive since taxpayers can take evasive actions or even stop producing.

The Uganda Revenue Authority (URA) is also small and underfunded to reach every segment of the economy and collect taxes. To make matters worse, COVID lockdown led many companies to downsize and therefore unable to pay more in taxes.

So the government has only three viable options: to print money, impose austerity or borrow. If government prints money it risks inflation. There is always a fear that when a government gets on the money printing trade mill, it is hard to stop the slide to hyperinflation. And once inflation goes above 20%, it creates a self-fulfilling prophecy. Once above that threshold, it is hard to stop it climbing to 100%. Of course the inflation fear is sometimes overstated.

For instance, what is the reasonable level of inflation that a country should target? No one has a clear answer to this question. The government of Uganda targets inflation not to exceed 5%, the government of the United Kingdom targets 2%. However, South Korea, for instance, had inflation averaging 19% between 1960 and 1990. Yet this was also the period of its intense transformation from a poor peasant nation into a rich, modern industrial society. France and Germany had inflation of up to 13% to 17% between 1945 and 1980; the period of their rapid GDP growth, which marked their recovery from the destruction wrought by World War Two.

Indeed, William Easterly, a professor at New York University, and Michael Bruno, previously a chief economist at the World Bank, published a research paper in 1998 where they argue that below 40%, there is no evidence that inflation is harmful to growth. But government of Uganda is hooked to the magical 5% limit and is unlikely to change this position. However, sources tell me they have printed some money to finance the current budget but I do not know how much.

The theoretically feasible option would have been austerity, but this is politically difficult. This is because cutting spending would antagonise many constituencies in an election year. For instance, government of Uganda will not cut salaries of public sector workers without facing a strike. It will not cut back on its road construction agenda, because we are facing elections. And there will be no cuts on our obese political patronage for the same reason i.e. elections. The problem with public spending is that once a government makes commitments, it is forever hard for it to change course.

2 comments

  1. Andrew Mwenda also! At one time and still says corruption is a good thing. But when some people try to do honest business through borrowing, but whose interest rates are business-wise debilitation; AM labels them borrowing addicts.

    Andrew, it is not addiction but dictatorship or tyranny, which is forcing Ugandans to borrow in order to stay afloat. In the Republic, according to Plato, because of their financial/economic incompetence especially indiscipline dictators/tyrants only survive by borrowing. In other words, the NRM is a borrowing addict. Being a self-confessed dictator, how much has Mr. Museveni’ s leadership so far borrowed?

  2. 1.During this period of Covid 19;Civil Servants are the most envied they receive their salary however little in time including even the Pensioners;What does his mean for the Private Sector?It could be one The biggest frauds in the World what do i mean if a business x has been making profits for 20 years why should it collaspe within a year coz of Covid 19?Is there something the private sector is hiding?
    2.The role of development partners like EU,IFC,IDA,World Bank,IMF is to enable some nations achieve MDGs.
    3.Those who apply for Loans should be credit worthy that explains why Uganda is rarely declined a loan.
    4.Uganda presents great business proposals thats why development partners can not resist lending money to her.
    5.The competition between the traditional lenders based in Europe and USA has increased with the emergence of wealthy nations like Japan,China,Saudi Arabia that is why Nations like Uganda,Kenya have now some breathing space when it comes to borrowing because nations like China and Japan know the complexities with Democracy.
    6.Uganda’s chief Economits,Mr.Kaguta is very keen when it comes to business matters;M7 refused to commission a Toyota show room in Namamve he preffered to commisson an Assembly Plant instead. Actually Rwanda’s excitement with Volkeswegan was just to traumatize M7 Volkswegan Rwanda just fits car tyres and wipers only Rwanda received a bad deal.
    7.Uganda’s Public secotor is sustained by the taxes Ugandans pay while big development projects like Road,Railway,Airport construction are sustained by development partners who charge small interest actually they even tend to waive off some bad loans.

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