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Fiscal holdup is indiscipline

Ramathan Ggoobi

Fiscal holdup is indiscipline

All signs indicate that money is being ring-fenced for political c ampaigns ahead of 2016 elections!

Remembered forever is one’s first date, so they say. It is, therefore, unbelievable that it is you, Mr President, to become the first to forget, pretty so easily, your “first date” with Uganda.  In 1986, your government found an economy in ruins, totally ravaged primarily by fiscal indiscipline. Fiscal indiscipline is the tendency by government to spend bigger proportions of its revenues on unproductive and non-developmental activities, thereby depriving the productive and development sectors of the country of resources.

In Uganda, it is Idi Amin who first introduced this culture in 1970s, spending colossal amounts of tax revenue on purchasing of military equipment and paying his hangers-on big allowances.

When Milton Obote a hitherto disciplined spender (he had presided over a well-functioning economy in the 1960s) returned to leadership in 1980 he picked from where Amin had left and extended the culture of fiscal indiscipline to the extent that IMF and World Bank stopped financing Uganda in 1983 due to Obote’s poor spending culture.

Then in 1985 when Tito Okello Lutwa took over, the country descended into a phase of total hopelessness. Governments make wasteful expenditures but Lutwa squandered taxpayers’ money! He revised Obote’s budget to accommodate one critical item for his new government — importation of alcohol to celebrate his ascendance to power! Thank God Lutwa had only 6 months to lead Uganda.

Mr. President, this is the Uganda you took over in 1986. By that time the shilling had totally lost value thanks to incessant printing of money to finance fiscal deficits, inflation was 191% forcing you to adopt the notorious price controls that escalated black markets. GDP growth rate had plunged into negative figures, the fixed exchange rate regime had led to rampant shortages of foreign exchange and high tariffs had discouraged foreign trade. The list is endless.

Return of 1970s & ’80s

We overcame many of these economic distortions because the “old” NRM’s ability to learn from mistakes. Beginning in 1992 a lesson had sunk in well and a number of reforms were adopted, the most significant being that of restoration of fiscal discipline.

Mr President, in your speech after presentation of the 1992/93 budget you explicitly mandated a matching of spending to resources. You said, “There will be no inflation. Inflation is indiscipline. If there is no money then we will close down some ministries and walk.”

This was not mere rhetoric; this is the spirit of true patriotism and ‘good sense’ that your government had brought from the Luwero bushes. You merged the then ministry of finance with that economic planning and development to ensure tight management of the budget. This is the kind of commitment to the national interest which put Uganda on the course to economic transformation in the years that followed.

Today, courtesy of bisanja politics, once again we are witnessing unprecedented levels of fiscal indiscipline unveiling at rates that bring the memories of 1970s and ’80s back.

Granted, on paper your government annually set sensible priorities — education, infrastructure, health etc — but with the waning budget discipline and budget management, the set priorities are rarely met.

Why low absorption capacity?

Asked why this is the case, your government often cites “absorption capacity” as the main reason for budget failure. That is, that several sectors of government and local governments are unable to utilise the funds allocated to them to serve Ugandans. So apparently they return the money to the treasury! When the “unspent” money is returned, it is quickly solicited by consuming sectors such as public administration (such as the Office of the Prime Minister, police, State House, Office of the President etc) in the form of supplementary budgets.

The trend of supplementary budgets has been on a steady increase from 1.2% in 1998/99 to 27.7% today. A bigger proportion of these supplementary budgets are sought by State House, Office of the President, and police. Very rarely will you find such supplementary expenditures going to payment of teachers and nurses a better wage or buying textbooks or fixing our bad roads.

Although domestic revenue has grown from 53% to 81% of the total budget, the development budget that is actually spent has remained low. The Budget Performance Report for 2012/13 shows that only 32% of the approved budget was spent on public investment. It also shows that absorption was lowest in sectors that matter most and highest in sectors that matter less to Ugandans.

In agriculture, for example, only 45% of the approved budget was released last financial year, and just about 34% of the released funds were spent! The energy sector that was sensibly allocated Shs. 1 trillion to generate more electricity spent only Shs. 83 billion (8%). In the roads subsector, only 36% of the budget was spent. No matter we continue to suffer with potholes.

Where is the money being spent religiously? Security (97%), public sector management (88%), and public administration (85%). These are the sectors that habitually demand for supplementary budgets.

Mr President, I have always questioned the logic of having a legislature of 375 MPs, a cabinet of 68 ministers, a stadium of RDCs, an extensive list of presidential advisers and other hangers-on, an extensive local government spread around 112 districts, and an indefinable civil service.

Economic suffocation

Mr President, you are often heard chest-thumping that since your government can now collect as much as 7 trillion in taxes, and since the oil money is also on the way, you can now afford to spend more. There is nothing to show for the bigger purse. The physical infrastructures (roads, energy, railway etc.) continue to rot, teachers are not teaching, agriculture is under-funded, job creation cycle is crippled, public investment in sectors such as housing, industry, etc. has been declining.

You cannot spend nearly half of the budget on unproductive sectors; public administration and management, politics, etc. and think of transforming a country. I have on several occasions put it to you Mr President that your government has become as fiscally profligate as those governments it fought.

It is Will Rogers who once said, “The quickest way to double your money is to fold it over and put it back in your pocket.” The wisdom behind Rogers’ maxim is that wealth accumulation is not necessarily as a result of amassing a lot of money or working so hard, rather saving is the key.

The secret to saving is to disobey (Northcote) Parkinson’s Law, which states that “expenses rise to meet income.” Mr President, as long as you continue to spend on unproductive ventures as outlined above, however much the resource envelope grows we shall not be able to accumulate national wealth.

This country’s history is typified by business cycles where the periods of good economic performance and prosperity of our people has been conveyed by good fiscal management. For example, the first post-independence decade of 1962 – ’72 saw a remarkable degree of economic prosperity, characterised by high real GDP growth of about 6%, stable prices, and high GDP per capita of about US$ 512 in 1980 prices (the fifth highest in the black Africa). The key to this stupendous performance was fiscal discipline exhibited by Obote’s first government before Amin’s overly expansionist fiscal and monetary policy reversed everything beginning in 1972.

And indeed it is well known that it is fiscal and monetary discipline, restored by NRM beginning in 1992, that turned the Ugandan economy in a solid performance with inflation reducing from 108% in 1992 to 5% in 1997. Fiscal discipline after 1992 also saw the economy grow at an average rate of 7.5%, poverty reducing from 56% in 1992 to 25%, and GDP per capita growing by over 4.5% in real terms as compared to 1.5% in 1992.

Today we hear that you have ring-fenced all the money for your political campaigns ahead of 2016 elections. You may claim that you are denying ministries money as a way of controlling expenditure. You may even claim that after all you are spending the money more wisely by buying tractors that we saw you giving out at Kololo Airstrip to selected individuals or by financing youth groups, veterans, and other groups that have benefited from your cash bonanza. This is fiscal indiscipline and it will breed one outcome — economic suffocation.

The writer is a lecturer of Economics at Makerere University Business School

Fiscal holdup is indiscipline

23 September 2013 12:26

All signs indicate that money is being ring-fenced for political c ampaigns ahead of 2016 elections!

Remembered forever is one’s first date, so they say. It is, therefore, unbelievable that it is you, Mr President, to become the first to forget, pretty so easily, your “first date” with Uganda.  In 1986, your government found an economy in ruins, totally ravaged primarily by fiscal indiscipline. Fiscal indiscipline is the tendency by government to spend bigger proportions of its revenues on unproductive and non-developmental activities, thereby depriving the productive and development sectors of the country of resources.

In Uganda, it is Idi Amin who first introduced this culture in 1970s, spending colossal amounts of tax revenue on purchasing of military equipment and paying his hangers-on big allowances.

When Milton Obote, a hitherto disciplined spender (he had presided over a well-functioning economy in the 1960s), returned to leadership in 1980 he picked from where Amin had left and extended the culture of fiscal indiscipline to the extent that IMF and World Bank stopped financing Uganda in 1983 due to Obote’s poor spending culture.

Then in 1985 when Tito Okello Lutwa took over, the country descended into a phase of total hopelessness. Governments make wasteful expenditures but Lutwa squandered taxpayers’ money! He revised Obote’s budget to accommodate one critical item for his new government — importation of alcohol to celebrate his ascendance to power! Thank God Lutwa had only 6 months to lead Uganda.

Mr. President, this is the Uganda you took over in 1986. By that time the shilling had totally lost value thanks to incessant printing of money to finance fiscal deficits, inflation was 191% forcing you to adopt the notorious price controls that escalated black markets. GDP growth rate had plunged into negative figures, the fixed exchange rate regime had led to rampant shortages of foreign exchange and high tariffs had discouraged foreign trade. The list is endless.

Return of 1970s & ’80s

We overcame many of these economic distortions because the “old” NRM’s ability to learn from mistakes. Beginning in 1992 a lesson had sunk in well and a number of reforms were adopted, the most significant being that of restoration of fiscal discipline.

Mr President, in your speech after presentation of the 1992/93 budget you explicitly mandated a matching of spending to resources. You said, “There will be no inflation. Inflation is indiscipline. If there is no money then we will close down some ministries and walk.”

This was not mere rhetoric; this is the spirit of true patriotism and ‘good sense’ that your government had brought from the Luwero bushes. You merged the then ministry of finance with that economic planning and development to ensure tight management of the budget. This is the kind of commitment to the national interest which put Uganda on the course to economic transformation in the years that followed.

Today, courtesy of bisanja politics, once again we are witnessing unprecedented levels of fiscal indiscipline unveiling at rates that bring the memories of 1970s and ’80s back.

Granted, on paper your government annually set sensible priorities — education, infrastructure, health etc — but with the waning budget discipline and budget management, the set priorities are rarely met.

Why low absorption capacity?

Asked why this is the case, your government often cites “absorption capacity” as the main reason for budget failure. That is, that several sectors of government and local governments are unable to utilise the funds allocated to them to serve Ugandans. So apparently they return the money to the treasury! When the “unspent” money is returned, it is quickly solicited by consuming sectors such as public administration (such as the Office of the Prime Minister, police, State House, Office of the President etc) in the form of supplementary budgets.

The trend of supplementary budgets has been on a steady increase from 1.2% in 1998/99 to 27.7% today. A bigger proportion of these supplementary budgets are sought by State House, Office of the President, and police. Very rarely will you find such supplementary expenditures going to payment of teachers and nurses a better wage or buying textbooks or fixing our bad roads.

Although domestic revenue has grown from 53% to 81% of the total budget, the development budget that is actually spent has remained low. The Budget Performance Report for 2012/13 shows that only 32% of the approved budget was spent on public investment. It also shows that absorption was lowest in sectors that matter most and highest in sectors that matter less to Ugandans.

In agriculture, for example, only 45% of the approved budget was released last financial year, and just about 34% of the released funds were spent! The energy sector that was sensibly allocated Shs. 1 trillion to generate more electricity spent only Shs. 83 billion (8%). In the roads subsector, only 36% of the budget was spent. No matter we continue to suffer with potholes.

Where is the money being spent religiously? Security (97%), public sector management (88%), and public administration (85%). These are the sectors that habitually demand for supplementary budgets.

Mr President, I have always questioned the logic of having a legislature of 375 MPs, a cabinet of 68 ministers, a stadium of RDCs, an extensive list of presidential advisers and other hangers-on, an extensive local government spread around 112 districts, and an indefinable civil service.

Economic suffocation

Mr President, you are often heard chest-thumping that since your government can now collect as much as 7 trillion in taxes, and since the oil money is also on the way, you can now afford to spend more. There is nothing to show for the bigger purse. The physical infrastructures (roads, energy, railway etc.) continue to rot, teachers are not teaching, agriculture is under-funded, job creation cycle is crippled, public investment in sectors such as housing, industry, etc. has been declining.

You cannot spend nearly half of the budget on unproductive sectors; public administration and management, politics, etc. and think of transforming a country. I have on several occasions put it to you Mr President that your government has become as fiscally profligate as those governments it fought.

It is Will Rogers who once said, “The quickest way to double your money is to fold it over and put it back in your pocket.” The wisdom behind Rogers’ maxim is that wealth accumulation is not necessarily as a result of amassing a lot of money or working so hard, rather saving is the key.

The secret to saving is to disobey (Northcote) Parkinson’s Law, which states that “expenses rise to meet income.” Mr President, as long as you continue to spend on unproductive ventures as outlined above, however much the resource envelope grows we shall not be able to accumulate national wealth.

This country’s history is typified by business cycles where the periods of good economic performance and prosperity of our people has been conveyed by good fiscal management. For example, the first post-independence decade of 1962 – ’72 saw a remarkable degree of economic prosperity, characterised by high real GDP growth of about 6%, stable prices, and high GDP per capita of about US$ 512 in 1980 prices (the fifth highest in the black Africa). The key to this stupendous performance was fiscal discipline exhibited by Obote’s first government before Amin’s overly expansionist fiscal and monetary policy reversed everything beginning in 1972.

And indeed it is well known that it is fiscal and monetary discipline, restored by NRM beginning in 1992, that turned the Ugandan economy in a solid performance with inflation reducing from 108% in 1992 to 5% in 1997. Fiscal discipline after 1992 also saw the economy grow at an average rate of 7.5%, poverty reducing from 56% in 1992 to 25%, and GDP per capita growing by over 4.5% in real terms as compared to 1.5% in 1992.

Today we hear that you have ring-fenced all the money for your political campaigns ahead of 2016 elections. You may claim that you are denying ministries money as a way of controlling expenditure. You may even claim that after all you are spending the money more wisely by buying tractors that we saw you giving out at Kololo Airstrip to selected individuals or by financing youth groups, veterans, and other groups that have benefited from your cash bonanza. This is fiscal indiscipline and it will breed one outcome — economic suffocation.

The writer is a lecturer of Economics at Makerere University Business School

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Ramathan Ggoobi

Ramathan Ggoobi is Policy Analyst, and Researcher. He lecturers economics at Makerere University Business School (MUBS) and has co-authored several studies on Uganda's economy. For the past ten years, he has published a weekly column 'Are You Listening Mr. President' in The Sunrise Newspaper, Uganda's Leading Weekly

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