Case of social sectors and infrastructure

Labors is underway construction of the first flyover in Tanzania at Tazara by the junction of Nelson Mandela Expressway and Nyerere Road in Dar es Salaam recently. The construction is implemented by Sumitomo Mitsui in collaboration with JICA and the Tanzania National Roads Agency (TANROADS) the project is at 45.3% is expected to completion by end of October 2018 and cost of about US$965.9m upon completion. PHOTO|ANTONY SIAME

What you need to know:

The Ugandan government is facing pressure to deliver on many fronts. Economic growth slowed in recent years, averaging 4.5 per cent in the five years to 2016.

Member countries of the East African Community (EAC) simultaneously tabled the 2018-2019 budgets in their respective parliaments. In Uganda, finance minister Matia Kasaija presented a $8 billion budget.

The Ugandan government is facing pressure to deliver on many fronts. Economic growth slowed in recent years, averaging 4.5 per cent in the five years to 2016. That’s down from an average of 7.8 per cent in the previous five year period. Curtailed growth was due to lower commodity prices. Uganda’s main commodity exports of coffee, cotton and copper all experienced diminished world prices.

Other contributing factors were an increased incidence of drought and the conflict in neighbouring South Sudan, Uganda’s main export trade partner.

Constraints to growth and productivity remain notable, particularly in agriculture and manufacturing. These sectors are hampered by infrastructure gaps, high interest rates that have made borrowing expensive, and difficulties accessing high quality inputs.

In recent budgets, the government has significantly raised investment in public infrastructure (notably in transport, works, and energy) to address these constraints. It’s also tried to cater for relatively rapid urbanisation. But long project timescales, poor project selection and execution, and absorptive capacity constraints mean that maximum gains from these investments have not been realised.

These investments have also necessitated greater government spending in recent years, financed by increased borrowing from both domestic and external sources. As a result government debt has grown to 38.6 per cent of GDP, up from 19.2 per cent in 2009. But debt remains within the confines of what is considered sustainable.

Most challenging factors

Working out the right balance between investing in infrastructure and social sectors is a key challenge. While more spending on infrastructure development is vital, it has necessitated budget cuts to arguably already underfunded social sectors, including health and education. But the right balance cannot be judged on budget allocations alone: these figures don’t take into account off-budget financing, which is common in social sectors.

International targets (where they exist) are also of limited value in guiding allocations as spending needs vary across countries and over time.

Another key challenge is how to fund the budget. The National Budget Framework Paper envisions both external and domestic borrowing, as well as the use of domestic tax and non-tax revenues. Government’s domestic borrowing has contributed to raising interest rates, making borrowing more expensive.

Consequently, a growing portion of government spending now goes on servicing its debt obligations, estimated at 12.3 per cent of total revenues for 2018/19. In time, this figure should be lowered, thus opening up funds for spending on development priorities.

Domestic tax and non-tax revenues are generally a preferred source of budget funding as they do not incur debt. The contribution from these sources is expected to rise to 53 per cent through anticipated improvements to tax administration and compliance. This is a positive sign.

Continued investment in energy and infrastructure should be pursued, but it is necessary to improve the efficiency of these public investments. For example, up to 60 per cent of the works and transport budget was reportedly not spent.

The government has recognised in its National Budget Framework Paper that issues around under-execution of development projects need to be addressed and it is working on ways to better allocate funds based on absorptive capacity. The government is also cognisant of the need to provide funds to cover operations and maintenance costs in coming years to slow infrastructure deterioration.

More could be done to expand the tax base and minimise distortions through, for example, greater focus on value added tax – one of the more progressive tax instruments – rather than import tariffs.

Source: Conversation Africa