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.