Uganda expects to transition from a high to a lower fiscal deficit and public debt level by 2025/26 to ensure fiscal and public debt sustainability. However, navigating the transition to sustainable and favorable public finances remains uncertain, especially considering the scarring effects of the COVID-19 pandemic on the economy.
The deficit increased from UGX 9,951 billion (7.1% of GDP) in 2019/20 to UGX 13,498 billion (9% of GDP) in 2020/21, while public debt increased from UGX 57,215 (41% of GDP) to UGX 69,512 billion (47% of GDP) over the same period.
Returning to lower deficit and debt levels is crucial for several economic, social, security and political reasons. First, high deficit and debt levels translate into high interest payments which may crowd out spending on priority sectors like education, health, and agriculture. Second, large debts place an increasing burden on future generations – in the form of higher taxes and lower spending – to repay the debt. Third, high deficit and debt levels limit the ability to respond to shocks and crises due to the limited fiscal space.
In the new Charter for Fiscal Responsibility (2021/22 – 2025/26), the government targets to reduce the fiscal deficit and public debt to below 3 percent of non-oil GDP and 50 percent of GDP by 2025/26 respectively. To achieve the fiscal deficit target, the government proposes to address tax collection inefficiencies, and to generate jobs and growth through timely implementation of public projects. To reduce the public debt, the government plans to increase domestic revenue collection and use more concessional financing instead of domestic and commercial debt.
Whereas the destination has been precisely defined, navigating the scale and speed of Uganda’s transition to lower debt and deficit levels remains uncertain for some reasons. First, the debt sustainability analyses by the Ministry of Finance and the IMF cannot “fully and accurately” consider uncertainty in future movements in macro indicators such as the primary balance, GDP growth and interest rates. Second, pandemic-induced spending and borrowing are likely to increase even as the COVID-19 mist lifts. Third, whereas Uganda has a debt management strategy, it lacks a credible fiscal strategy for debt and deficit reduction. Fourth, a strong communication strategy for implementing the Charter is lacking. Lastly, past and current forecasts of debt and fiscal deficits tend to be overly optimistic.
To reduce the uncertainty and ensure that Uganda meets the deficit and debt reduction targets enshrined in the Charter for Fiscal Responsibility, we propose the following policy options:
Strengthen the budget process by closely aligning budgets to the Charter. During the implementation of the first Charter (2015/16 - 2020/21), the lack of commitment to the fiscal deficit target was evident at the budget planning, monitoring and implementation stages – thus undermining enforcement and compliance. Adherence by the politicians and bureaucrats to the Charter is critical since they influence the budget and its implementation.
Develop and implement a clear deficit and debt reduction strategy. The government should complement the Charter with an enforceable, and a politically and economically feasible, deficit and debt reduction strategy consistent with the country's prevailing economic, political, and social circumstances. The strategy should be developed in close consultation with all key state and non-state actors to ensure buy-in and commitment to the fiscal commitments.
Develop and pragmatically implement a clear and robust strategy for communicating the critical components of the Charter to the public and the private sector.[2] The government can leverage official and non-official channels to raise awareness, ensure public ownership, and ensure accountability and transparency.
In conclusion, the government must guard against overly optimistic and ambitious strategies that are inconsistent with fiscal risks, challenges, and uncertainties. Credibility is at stake when unrealistic commitments are made, and the likelihood of compliance is minimal – a cautious approach is of the essence.
[2] Key issues include why the Charter is important, how it is being implemented, what would happen if the government needed to depart from it temporarily, and what path it would follow to revert to the Charter.
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