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“Following the recent large shortfall in tax revenue and the risk of reductions in foreign aid, broadening the tax base and improving efficiency in tax administration are more critical than ever,” said the Ana Lucía Coronel, IMF mission chief and senior resident representative for Uganda after meeting Uganda finance officials.
“The mission strongly encourages the government to take decisive action to increase tax revenue collections. This would involve reviewing existing tax laws and eliminating tax exemptions that have little benefit for production but undermine growth-enhancing spending and constrain vibrant private sector growth,” said Ana.
In April, Uganda Revenue Authority said it could register a shortfall of about Shs 777bn at the current performance rate.
The three quarters’ performance report indicated that out of the Shs 8.53tn the body expected to collect this fiscal year, so far only Shs 5.87tn has been collected. O
Out of this, Shs 2.61tn came from taxes on international trade, while domestic tax collection amounted to Shs 3.35tn.
URA blamed the revenue shortfall to high interest rates discouraging borrowing and inflation which has a negative effect on aggregate demand thus affecting enterprise growth and production of goods and services.
The negative performance of VAT on goods and services and corporation income tax was mainly due to reduction in production activities.
The team from IMF visited Kampala during the past two weeks to conduct the second review of Uganda’s economic program supported by the Policy Support Instrument (PSI).
The mission met with Ms. Maria Kiwanuka, Minister of Finance, Planning and Economic Development; Mr. Keith Muhakanizi, Permanent Secretary/Secretary of Treasury, Mr. Louis Kasekende, Deputy Governor of the Bank of Uganda (BoU); as well as with other senior government officials and representatives from Parliament, and the international, business, and financial communities.
At the end of the mission, IMF said efforts should also center on strongly enforcing compliance by all taxpayers.
“The ongoing issuance of national identity cards should support the government’s efforts to achieve the long-awaited plan to raise Ugandan tax revenue and bring it closer to regional standards.”
On the expenditure side, IMF said it will be essential to focus on areas that support growth and job creation.
“In particular, the mission urges the authorities to take steps to avoid incurring domestic arrears that weaken economic management by impairing budget planning, increasing costs for the government, and negatively affecting those who conduct business with the government. The mission encourages the economic authorities to resist all spending pressures that are not compatible with Uganda’s economic priorities,” Ana advised.
“Sound fiscal policies supported by robust revenues and predictable spending would help reduce the need for large borrowing in the domestic market to finance government operations, and effectively contain interest rate increases on government securities,” the IMF official advised.
“These policies would also facilitate reductions in the BoU’s policy rate, ultimately improving credit conditions in the economy. The mission encourages the BoU to keep up its good track record of preserving low and stable inflation, and to stand ready to adjust policies in reaction to domestic or external shocks.”
Performance under the authorities’ program supported by the PSI was mixed.
End-December targets for inflation and for monetary and external sector indicators were met, but the indicative target on tax revenues was not observed, and the ceiling on government’s net domestic financing was missed by a small margin.
According to the international financial body, some important progress on structural reforms was achieved.
In particular, the mission welcomed the public financial management reforms to improve governance and budget transparency and credibility, including upgrades to the information systems, and completion of the initial arrangements toward the introduction of the Treasury Single Account.
South Sudan conflict
IMF also weighed in on the impact of the South Sudan conflict on Uganda’s economy.
“Despite a slowdown in agriculture and unrest in South Sudan, growth continues to be robust, and is now projected to reach 5.7 percent in Fiscal Year (FY) 2013/14 and 6.1 percent in FY 2014/15, mainly supported by public investment. However, private sector growth is lagging behind,” said Ana.
At 5.4 percent this year and 5.7 percent next year, inflation is projected to remain low and in line with the medium-term target of 5 percent.
IMF said international reserves are expected to remain ample at a level equivalent to 4.0–4.2 months of imports, providing a strong buffer against shocks to the Ugandan economy.
The external current account deficit is anticipated to widen next year, but would be fully financed by foreign loans, foreign direct investments, and some use of international reserves.
Medium-term growth prospects are strong, helped by integration of the East African Community, infrastructure development, and oil production.
Ana cautioned that this favourable economic outlook will require strong supportive policies.
Restrained public consumption in the upcoming year, in particular, would create room for improved credit conditions, laying the ground for a rebound in private sector activity. In addition, the government’s plans to embark on the large Karuma and Isimba hydropower projects to address the large infrastructure gap should start without further delay.
“The mission looks forward to further strengthening of the legal and institutional framework for economic policies. Notably, parliamentary approval of the Public Financial Management Bill is a critical step in maintaining the reform momentum and further increasing gains in budget credibility and execution.
Similarly, amendments to the BoU Act are important to strengthen the central bank independence granted in the constitution, and improve coordination between monetary and fiscal policies, a key requirement for modern central banks operating under inflation targeting.”