How Sh1.9 Trillion revenue shortfall will affect the economy

by Business Times writer
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The Uganda Revenue Authority (URA) is anticipated to fall short of its revenue collection target for the financial year 2023/24, which is nearing its end. The projected domestic revenue for this ending financial year is Shs27.725 trillion, whereas the target was set at Shs29.672 trillion. This discrepancy results in a revenue shortfall exceeding Shs1.9 trillion. 

The Minister of Finance Matia Kasaija has addressed this issue, acknowledging the significant gap between the projected revenue and the target. He has emphasized that URA is making concerted efforts in the remaining days of the financial year to bridge this shortfall.

“The projected domestic revenue outturn for FY2023/24 is Shs27.725 trillion against the target of Shs29.672 trillion, leading to a revenue shortfall of over Shs1.9 trillion. The Uganda Revenue Authority is working hard in the remaining days to reduce this shortfall,” Kasaija said. 

This is not the first instance the Uganda Revenue Authority has fallen short of meeting its revenue collection targets. Each financial year, the taxman is assigned a specific tax revenue collection target in relation to the national budget for that fiscal period. The government sets these targets for the URA after summing up the total non-tax revenues and the financial aid received from donors, which come in the form of loans and grants.

Although the URA has consistently demonstrated growth in revenue collections — evident from an increase from Shs16,751.64 billion in the fiscal year 2019/20 to Shs25,209.05 billion in the fiscal year 2022/23, the taxman has repeatedly missed the targets set by the Ministry of Finance. For instance, according to the performance of the economy monthly report for December 2023 released by the Ministry of Finance on January 17, 2024, domestic revenue collections in December 2023 amounted to 3.059 trillion shillings, which was against a target of 3.453 trillion implying a shortfall of 11.4% of the target as both tax revenue and non-tax revenue were short of their respective targets for the month.

“Tax revenue collections amounted to Shs2.902 trillion against a target of Shs3.268 trillion translating into a shortfall of Shs365.79 billion. All the major tax categories registered shortfalls during the month,” the report reads in part. The Ministry of Finance has consistently said to the URA that any shortfall in revenue collection will not be tolerated.

IMPLICATIONS

Revenue shortfalls lead to increased fiscal deficits. When the government is unable to collect sufficient revenue, it must either cut spending or increase borrowing to meet its financial obligations. Borrowing can lead to higher national debt levels, which in turn can increase the burden of debt servicing. For instance, the budget for the current financial year 2023/24 budget is 52.7 trillion shillings. Out of the 52.7 trillion, a whopping 17 trillion was allocated for debt repayment, taking the biggest chunk of the budget.

Higher debt servicing costs mean that a larger portion of future budgets must be allocated to paying interest and principal on existing debt, reducing the amount available for public services and investment as Deputy Secretary to the Treasury, Patrick Ocailap explains.

“Everyday, we are incurring almost an interest of 1 billion shillings. In a year, that is 365 billion shillings. That cannot continue. Secondly, the amount of money we expect to borrow from abroad, the 450 billion this financial year could not come because according to our assessment, we saw that the interest rates out there remained sticky upwards on account of fiscal adjustments (the monetary adjustments) that those countries took in order to contain inflation in those countries [Europe and USA] in the aftermath of crises that happened in the world,” says Ocailap.

“You find that the interest rates remained upwards to the extent that if we were to borrow 450 billion for this year’s budget which was approved by parliament, it would have meant that we would pay an interest rate as high as 10% on a dollar. That would be totally unrealistic,” Ocailap explains.

Additionally, revenue shortfalls compel the government to borrow domestically hence creating stiff competition with the private sector. For instance, to finance the budget for the next financial year 2024/25 which amounts to sh72.1 trillion, a whopping Shs8.968 trillion will be borrowed domestically.

In April, the Bank of Uganda issued a warning concerning the potential crowding out of the private sector from the domestic credit market. This situation arises as the government continues to experience tax revenue collections that fall short of their projections. The Central Bank highlighted that the ongoing shortfall in tax revenues would likely compel the government to increase its domestic borrowing. This, in turn, would result in higher taxes as the government seeks to mobilize the necessary resources to address budget deficits.

Essentially, the government’s need to finance its expenditures will lead to increased borrowing from the domestic market, which traditionally involves the issuance of treasury bills and bonds. However, there has been a notable shift, with the government resorting to direct borrow from commercial banks. For instance, in May 2024, Parliament approved a government request to borrow up to Euro 110.5 million (about Shs450 billion) from Standard Chartered Bank to finance the Kitgum-Kidepo Road upgrading project. This direct borrowing from commercial banks intensifies the competition for credit within the domestic market.

As the government borrows more from these financial institutions, the available credit for the private sector diminishes, leading to what is known as the “crowding out” effect. This situation can have significant implications for private enterprises that rely on access to credit for their operations and growth. The Central Bank’s warning underscores the delicate balance that must be maintained between government borrowing and private sector access to credit.

When the government borrows extensively from commercial banks, it can drive up interest rates, making loans more expensive for private businesses. This can stifle entrepreneurial activities and inhibit economic growth, as private sector investment is crucial for job creation and overall economic development.

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