Good (World Cup) Budget, but the ‘players’

It’s a budget that is anchored by a fantastic macroeconomic framework: growth of 7% per annum; inflation within single digit; positioning the economy in the context of EAC integration to ensure competitiveness; foreign exchange reserves of at least 5 months of import cover; and competitive real exchange rates to support exports.

Without even going into figures, FY 2014/15 budget, just like many recent budgets, shows that the “allocation efficiency” was achieved. In other words, this was a good development budget based on a good strategy. However, the usual questions remain:

Firstly, will government match the allocation efficiency with implementation? In the recent past, we have we have seen very good budgets, plans, and programmes that were not implemented. Why, this time round, should Ugandans expect miracles to be performed by a magician whose charm has failed in the past?

Secondly, who is going to implement the budget? Allocating lots of money to the “correct” sectors — agriculture, roads, electricity generation, youth employment etc. is very news. The bad news is that the money is going to be handed to the very people who for years have failed to deliver and to account! A recent Auditor General’s report shows that 40% of central government and 19% of local government’s accounts are “dirty”. In other words those percentages of the money allocated to the respective levels of government have annually been stolen by the same people that are going to be handed more money! What would stop them from stealing these trillions as well?

Low tax-GDP ratio

Thirdly, the budget has allocated a lot of money to sectors that historically have had low absorption capacity. For example, on average about 64% of the agricultural approved budget is released, and just about 55% is spent. So despite the low releases, utilisation of funds in the agricultural sector has often been very low. Yet farmers are out there crying of inadequate seed, fertilizer, machinery and other inputs. Was the problem entirely NAADs as you have told us? Will the new arrangement under Operation Wealth Creation (OWC) see this historical anomaly solved?

Mr. President, I overheard you basking in the glory of financing more than 82% of the budget using domestic resources. This is of course could be a moment of historic and significant opportunity. But what practical strategies does your government have to work on Uganda’s low tax-GDP ratio, now standing at about 12.5% (the lowest in Sub-Saharan Africa whose average is about 16%?

Like Minister Maria Kiwanuka said, we know why our tax revenue is low: tax evasion; politically driven tax exemptions; low capacity by the Uganda Revenue Authority to collect tax from powerful and politically connected taxpayers. Many of these are NRM supporters or to put it more correctly your supporters Mr. President. They use you and some other powerful politicians and army generals as godfathers to evade tax. Allen Kagina and her staff will tell you the agony they go through to collect tax from some big businessmen in this country, because they often get protection from you guys.

I know this is not about to end because our politics is increasingly becoming one based more on survival than any other ideological orientation. Many of the businessmen who would pay the badly needed taxes are the financiers of the ongoing political battles. Others are business partners, or even simply proxy owners of the businesses that belong to you guys. So, where will government get the over Shs. 10 trillion you hopes to collect in the form of domestically generated resources?

Strange growth path

To make matters worse, the sectors that dominate the economy do not pay tax. Agriculture, for example, contributes only 0.3% in taxes; constructions pay 2%; real estate, one of the fastest growing sectors of the economy also pay less than 2%; education 1%; and hotels 0.9%. These are the sectors that are making money and where a substantial number of Ugandans are working. If they don’t pay tax, where else does government expect to get the badly needed resources? Who’s paying taxes in Uganda? Importers, salary earners through pay-as-you-earn (PAYE), and businesses (corporate tax).

Mr. President, another question that needs to be asked is whether the budget that was presented will help to correct Uganda’s strange growth path! Normally, countries progress from agriculture to manufacturing & finally to service-based economy — in that order. To put it more clearly, a country should undergo an agricultural revolution, then an industrial revolution, before transforming into a services-based economy. That is exactly what happened in Western Europe and in North America. It is also what is happening in the emerging East Asia, Latin America and a few progressive African countries such as Mauritius, Botswana, South Africa etc.

In China, for example, the GDP share of services exceeded manufacturing for the first time just last year. After modernizing agriculture for the better first half of the 20th Century, the Chinese embarked on industrialization beginning in the late 1970s. Manufacturing became the dominant sector, and still is. Services are just beginning to dominate the contribution to GDP.

Another good example is Vietnam. It is a country that shares much with us — it is in the tropics, the Vietnamese have faced prolonged civil wars just like we did, and their economy is fast undergoing structural change just like ours. However, unlike ours, the Vietnam economy is following the right path to prosperity. Currently, agriculture contributes 19% of GDP, while industry is contributing 43%. Services are still below industry, contributing about 38% of GDP.

Coming back home, we have seen our economy swiftly moving from agriculture to services, without first undergoing both the agricultural and industrial revolutions! Currently the services sector contributes about 53% of Uganda’s GDP, while industry contributes only 25%. Agricultural sector is fast disappearing in terms its GDP share, contributing less than 20%.

Budget can’t work in distorted economy

Although economies must undergo this structural change to develop, ours is a very strange path. Our economy is structured as if we are a developed country. It is developed economies that have services dominating the sectoral contribution to GDP. For example, in Japan services contribute about 72% of GDP while industry and agriculture contribute 26% and 1.4% respectively.

So, why have we taken this strange path? What factors are contributing to failure by our economy to complete the agricultural revolution and embark on the industrial revolution? What is making Ugandans unable to modernize agriculture and industrialize, resorting in informal services that dominate the economy?

Mr. President, the deeper issue that Uganda faces today concerns the appropriate roles of the State and the market. Prior to the 1987 Economic Recovery Programme, there was too much government and too little market. When a question was posed; “why is the economy doing so badly?” Multilateral agencies, the World Bank and the International Monetary Fund (IMF), and the U.S. Treasury responded in unison, “Government is the problem.” So, in a bid to remove government from the functioning of the economy, we were asked to liberalise, deregulate, and privatise.

When we were told to liberalise, we took it literally to mean that government had no role at all to play. From then on, whenever Ugandans came out to ask their government to correct the numerous market failures that the excessive capitalism had created, authorities at Bank of Uganda and Ministry of Finance chorused their favourite response, “This is a free market economy; we have nothing to do with it.”

Like I wrote in these pages recently, today, many of Uganda’s problems stem from too much market and too little government. To put it another way, while government is doing some things that it shouldn’t, it is also not doing some things that it should. Your government, Mr. President, is behaving as if markets are self-regulating.

The economy is distorted with too much market that would not allow industrialization and modernization of agriculture to take place. Unfortunately, this is the environment in which the good budgets that government comes up with are expected to perform miracles. This will not happen. We need to rethink the economic system that we chose to guide us to prosperity before we write the good budgets that will never succeed in a distorted economy.

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