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Uganda: Govt Eyes Tough Options Amid World Bank Cuts

Less than two months since Uganda’s ministry of Finance released its annual budget, the government body is reviewing those plans after the World Bank – the country’s biggest development partner – decided to stop any further financial support to the country due to what they said was harsh legislation against homosexuals.

In taking its decision, the World Bank pointed out that its “vision to eradicate poverty on a liveable planet can only succeed if it includes every one irrespective of race, gender, or sexuality. This law undermines those efforts…”

The impact of the World Bank’s decision is bound to be felt throughout the economy – from posh homes to shanty shelters. The bank’s decision has jolted government to cut back on expenditures, whose money was expected to trickle down to people at the bottom of the economic barrel.

“The budget which we [released for] financial year 2023/2024 had elements which have been affected. We are still gathering ideas about what to do in line with adjusting the budget but this will require your approval,” Henry Musasizi, the minister of state for Finance, told parliament last week in the wake of the World Bank’s decision.

The World Bank has supported Uganda to the tune of over $5 billion since it began supporting Uganda more than 50 years ago. The bank has supported Uganda in nearly all the critical areas of the economy, from agriculture, roads, health and education, to energy plants.

A lot of the World Bank’s money is interest-free, although the bank earns from the appreciation of the dollar throughout the repayment period. Unlike other credit lines, the World Bank’s repayment period can even stretch up to 40 years. Other international funders prefer to have their money repaid within 20 years or less, putting government on pressure to pay back.

For Uganda’s, the World Bank’s announcement leaves the country with four painful decisions – cut back on expenditure, raise the tax rates, raid the foreign exchange reserves at the central bank, or borrow domestically to plug the gap created by the decision.

Already, Matia Kasaija, the finance minister, in June this year, announced numerous budget cuts for different sectors as the country struggled to bring down its debt level, which is just below the 50 per cent to GDP targeted threshold for East African countries.

Critical sectors such as health – and departments like the cancer institute in Mulago – had witnessed budget cuts as government tried to stay afloat. The World Bank decision only worsens the situation as government is expected to cut further its expenditure.

The second option is of government to raise the taxes on different commodities. With this financial year already underway, no new tax measures can be announced midway. But enforcement on tax collection and paying penalties is bound to get tougher.

Government will have to wait for the next financial year to announce the new tax rates. For a public that is already struggling to make ends meet, the new tax rates could throw a large size of the population into a desperate situation and financial difficulty.

The national poverty rate will be one of the key figures to watch out at the end of the year. Raiding the foreign exchange reserves to take care of its import bills is another option that government will likely consider.

That option presents government with another headache because the amount of money at the central bank has gone down. The estimated stock of reserves at the central bank had dropped to $3.6 billion (3.6 months of import cover) at the end of March 2023, compared to $4.4 billion (4.7 months of import cover) a year earlier.

Government also has the option of borrowing money from the domestic market by issuing securities such as treasury bonds and treasury bills. The domestic market, which is dominated by private commercial banks, are expected to bid with a higher coupon rate (interest rate) on these government securities since they know the kind of desperate situation government is.

Should government accept the demands of the domestic market, this will crowd out private sector credit, denying local businesses the much-needed investment capital. In doing so, these companies will neither be able to expand nor create new jobs. Already, private sector credit had declined in the first quarter of 2023, with Bank of Uganda pointing to an increase in commercial bank interest rates as the reason why.

The option of borrowing from the domestic market has the risk of raising interest rates in the market because of the competition for the available bank credit. The increase in interest rates is likely to be passed on to the final consumer in the form of a spike in the prices of goods and services.

This will not only trigger a jump in inflation, it will also eat into the disposal income and savings of the public. The idea of looking East to countries such as China might sound easy, but even that comes with its risks. A lot of credit from these countries comes with strings attached, dangled with a carrot-and-stick package.

This credit tends to push Uganda to an unwanted corner, with the ramifications being witnessed years later as a default on the loan becomes clear.

In the end, regardless of which option government takes to plug the gap left by the World Bank’s decision at least one thing is clear: the public should tighten its belt because it is going to be one long rough financial ride.

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