Economics of State of Nation address
COMMENT | ENOCK NYOREKWA TWINOBURYO | In an elaborate State of Nation Address, the President of Uganda started off his speech by underlining that Uganda collected tax revenue Shs2.23 trillion (about 12% of GDP) in financial year (FY) 2015/16. “Economics of State of Nation address”.

MUSEVENI WAS SHORT ON ACCOUNTING FOR WHY MIDDLE INCOME TARGET OF 2020 WILL BE MISSED AND THE ASSOCIATED CONSTRAINTS

The point, he re- emphasized was over dependence on foreign funding, particularly grants. But Uganda has made sizable progress since then. At the time, Uganda’s public debt had reached unsustainable levels.

Significantly, however, the decline in Uganda’s debt happened in 2006 when 100 % of Uganda’s external debt owed to the World Bank, IMF and African Development Bank was forgiven under the Multilateral Debt Relief Initiative (MDRI). This reduced Uganda’s debt stock to USD 1.3 billion from the USD 4.5 billion.

The fiscal deficit (difference between expenditure and revenue) was about 6.5% of GDP -funded 90% by grants and 10% loans. The same size of fiscal deficit is expected in 2018/19 – only that this time it is predominately funded by loans (domestic and external).

A third of the current national budget is funded by external resources and as such public debt (disbursed and outstanding) to GDP will be in excess of 45% in FY 2018/19.

One notable fact is that Tax to GDP ratio has grown marginally over the last thirteen years largely due to “deepening of the tax base” as opposed to a widened tax base. According to IMF 2018 statistics, Uganda is among the 30% of African countries with revenue to GDP of less than 15%, a level considered as the minimum to deliver basic functions of the state, according to an IMF working paper titled ‘Tax Capacity and Growth: Is there a tipping point?” by Vitor Gaspar, Laura Jaramillo and Philippe Wingender.

It is also believed that revenue generation is the basic function of the state and the predominating hypothesis suggests that low tax effort is a reflection of poor state capacity and efficacy. This may have needed emphasis in the President’s speech.

The President’s narrative was short on accounting for middle income target of 2020 and associated impeding constraints. However, emphasis was placed on Uganda growth recovery trajectory to 7% per annum in 2019, a growth rate last seen in 2010. I must also underline that some of the statistics in the speech were inconsistent with other national statistics. For example in the Speech, the GDP per capita was put at USD 776 which would represent an illustrious 11% increment from June 2017.

Alternatively, with a population of 38.9 million (UBOS statistic), Uganda’s GDP would be USD 30.2 billion (population times the GDP Per capita). The equivalent in Shs113 trillion – would represent a 24 percentage point increase from the UBOS published GDP for June 2017. The simple fact is that economic growth for this FY even in nominal terms will be much lower. Even if the economy recovered to 7% growth per annum, simple compounding shows that the attainment of lower middle income threshold of US$ 1035 is only feasible after the next elections in 2023.

The President was emphatic about growth prospects, reiterating this message with the projections by the Center for International Development at Harvard University (CID) that indicated Uganda will be second highest growing economy in World by 2025.

I have over the last months failed to get hold of the full study – so I do make peripheral comments on this. According to the IMF Regional Economic Outlook 2018, Uganda’s growth ranked 14th out of 45 Sub-Saharan African countries in 2017.

Within the East African community, it only grew faster than Burundi (zero growth) and South Sudan that was in recession. This precedence notwithstanding, the study’s growth projection of 7-8% for Uganda is consistent with the 1990-2010 average annual growth rates. It is also not overly on high, factoring in the fact that Uganda in mid 2020s will have added oil related growth.

History shows that oil adds 2-7% growth in the short term. The IMF also projects Uganda’s growth to recover to the levels of 7% in medium term.

On the downside, the growth forecasts used in the Harvard study use data from 2015, and Uganda has since seen only a GDP growth of less than 5% per annum. And some of the underlying causes relate to institutional effectiveness and structural factors.

Since 2015, Uganda has seen a downgrade in the World Bank Country Policy Institutional Assessment from strong performer to moderate. Broadly, the World Governance Indicators and Public Investment Management Indicators continue to indicate structural weaknesses. These could be the reasons for slow progress in negotiating an overly overdue new programme with IMF.

The President also missed to aptly account for his directive on the institutional review that was due October 2017. Strong and effective institutions are the bedrock of transformation. The ecosystem of reform – in right order – should be institutions, individuals, infrastructure and integration.

SOURCE: https://xclusiveafrica.com/comment-economics-of-state-of-nation-address/