Overall, Uganda seen private investment growth slowdown over the last seven years and yet this is an epoch that coincides with expansionary fiscal policy/national budgets funded significantly by domestic and external loans. This nexus lends credence to the Richardian equivalence – an economic theory that suggests when government tries to explain the stimulate economy by increasing debt financed government spending, eventually aggregate demand and investment remain unchanged or even worse constrained.
Uganda Police Force (UPF) owes over UGX33 billion to over 596 contractors, an increase from the UGX27 billion outstanding arrears at the end of June 2016. And the suppliers have agreed to suspend any further supplies to the entity. These suppliers are also on bank books which does imply or in part explain the rising non-performing loans.
This fact was corroborated by recent Bank of Uganda survey on the key causes of rising non-performing loans.
According to the Auditor General’s report for FY 2016/17, the stock of domestic arrears was UGX2.91 trillion at end of June 2017 compared to the UGX2.7 trillion in June 2016.
This means an increase of UGX200 billion in FY 2016/17 despite over UGX500 billion arrears being paid in the same financial year. So the magnitude of arrears accumulation is now at over UGX500 billion if FY 2016/17 is to go by.
Eighty percent are arrears payable and the twenty is for pension arrears. This trend is unsustainable given that the budget provisioning is about 12% of the outstanding arrears.
READ: Broke Police cry out to govt: How the force is wasting away
The Ministry of Defence and Ministry of Justice and Constitutional Affairs account for over 50% of outstanding stock – respectively at 27% and 25%.
The latter is arguably attributed to the growing Court awards and compensations which continue to constitute the largest component of the arrears stock. The trend shows an exponential increase in domestic arrears from less than 0.5% of GDP to current 3.2%.
The other entities with large arrears in excess of UGX 100 billion are Uganda National Roads Authority (largest spending vote on the budget), Ministry of Finance, Planning and Economic Development, National Medical stores (NMS), Makerere University and Uganda Lands Board.
The NMS arrears may be explained by the unrecieved allocations from the PTA loan. The CEO provided a full story on the PTA loan found here.
The arrears are caused by the existence of a weak and ineffective commitment control system, budget cuts during the financial year, insufficient budgeting for certain items, early closure of the financial management systems, weaknesses in costing of development projects and monitoring of multi-year commitments as well as enhancement of salaries without matching resources.
Broadly, the trend exhibits poor fiscal discipline, which has also manifested due to lack of enforcement on the continued perpetuators of this syndrome.
In the old 2008 debt strategy, there were clear sanctions and actions to be taken including publishing the shame list and non-renewal of contracts for accounting officers responsible but that never saw light. Today government has no domestic arrears strategy.
In addition to arrears – which are also classified as domestic debt, Government is increasingly borrowing from the domestic market through issuance of treasury bills and bonds.
The recent trend shows faster government domestic debt growth than the growth in private sector credit – and currently government is largest borrower from the domestic debt.
While banks have excess reserves and arguably the government is not directly crowding out the private sector, indirectly government borrowing has down side effects 1) heavy borrowing tends to keep the interest free interest rates high – the average rate for treasury bills 2014-2017 was 15%.
This also means high interest cost on budget and prospective high tax burden on the small narrow tax base. Also high government securities rates has a knock off effect on the lending rates and arguably explains the perseverance of high interest rates.
2) Owing the domestic debt borrowing risks, Fitch credit rating agency assigned the issue ratings for short term local currency bonds at B compared to the unsecured long term bonds at B+ and any further down grade would imply negative signals to international investors. Already the foreign direct investment average over last two financial years is the lowest, Uganda has encountered in the last decade.
Overall, Uganda seen private investment growth slowdown over the last 7 years and yet this is an epoch that coincides with expansionary fiscal policy/national budgets funded significantly by domestic and external loans.
This nexus lends credence to the Richardian equivalence – an economic theory that suggests when government tries to explain the stimulate economy by increasing debt financed government spending, eventually aggregate demand and investment remain unchanged or even worse constrained.
