At the beginning of April, despair went through a cross section of Uganda’s private sector. This was after the government decided to reduce the planned budgetary allocation for payment of domestic arrears to UGX205 billion compared to the UGX605 billion that was approved for the current financial year ending in June 2023.
While addressing Parliament, Finance minister, Matia Kasaija confirmed this decision, resulting in a renewed concern about the government’s strategy for clearing its debts with local suppliers. The proposed figure is a drop of nearly 70% and a clear sign of where local businesses rank in the pecking order. A substantial amount of the domestic arrears is also made up of wage and salary arrears.
In terms of just goods and services, as of the end June 30, 2022, a pre-audit schedule put together by the finance ministry, shows that government ministries owed suppliers UGX274 billion while the agencies had pending bills of UGX455 billion.
A Kampala-based contractor said last week, “We used to be comforted by the fact that the government always pays. But in my case, it has been four years since we finished a government contract. There is big balance still remaining. Each year, they keep promising us ‘next financial year’. I have learnt my lesson and will not go through this kind of trouble again.”
The most worrying thing about mounting domestic arrears is the domino effect. In order to fulfill a government contract, Company 1 buys inputs from company 2 and company 3. If the government is slow to pay then there is a chain reaction down the supply chain which hurts business sustainability. Plenty of companies have collapsed due to this fallout.
Not long ago, Uganda Revenue Authority offered some consolation. No taxes would be levied on a company until confirmation of a government payment has been made. Ironically, URA is also in same boat with other suppliers due to delayed tax payments by government Ministries, Departments and Agencies (MDA).
The hardest hit, have been medium sized enterprises that often resort to borrowing from a bank for working capital in order to complete government contractual work. However due to late payments they then face financial penalties for failure to service their loans.
According to the International Monetary Fund (IMF), these arrears are found to weaken private sector activity and undermine financial stability. Importantly, arrears reduce the ability of fiscal policy to support the economy, by reducing (even turning negative under some circumstances), the multiplier effect of government spending.
Eng. Jameson Olonya, the President of the Uganda National Association of Building and Civil Engineering Contractors told MPs, “Local contractors have been hindered from performing ongoing works and other obligations. By not paying them, government is frustrating growth of its own national providers, which is contrary to objectives of Vision 2040 and NDPIII.”
In confidence, a government accounting officer told Business Times Uganda recently, “It is not that we do not want to pay. The situation is very tricky. Every year, we forward our expenditure needs. But between parliament and the finance ministry, the number is slashed and usually soon after the budget is read, for various reasons, the total figure is slashed once again. It’s a big headache for us as well,” he said.
For the government, the situation is like someone trying to beat the dust out of a carpet right next to a busy murrum road. The problem just will not go away. If anything, it even seems to be getting much worse. As of now total domestic arrears stand about UGX7.5 trillion. In 2021, it was UGX4.1 trillion and five years ago, the figure was just under UGX3 trillion.
While the cost of public administration continues to rise steeply, the private sector that contributes significantly to generating government revenue is being steadily squeezed by late payment of invoices. Going by this state of affairs, doing business with the government will in the future be seen as something to avoid, considering that your payments may be tied up for years.
Yet in January this year, Ramathan Ggoobi, the Permanent Secretary/Secretary to the Treasury was talking tough. He said, “Accounting officers must prioritise payment of service providers on time and avoid accumulation of arrears. Failure to adhere to this, the service providers should turn off services to the non-compliant votes. Clearance of domestic arrears must be prioritized.”
The odd thing is that the accumulation of domestic arrears is prohibited by law according to the Public Finance Management Act 2015. Under section 21 (2), ‘a vote shall not take any credit from any local company or body unless it has no unpaid domestic arrears from a debt in a previous financial year; and it has the capacity to pay for the expenditure from the approved estimates as appropriated by parliament for that financial year’.
In 2021, the government went a step forward by launching ‘A Strategy to Clear and Prevent Arrears’. At the time, Patrick Ocailip, the Deputy Secretary to the Treasury said, “The casual manner in which some arrears are created, are contrary to good financial management principles. Abiding by the strategies will begin a new era in fiscal management for the country. The adoption of these strategies will increase creditability and the confidence investors have in the country.”
Between 2021 and today, total domestic arrears have almost doubled. On several occasions the Uganda Manufacturers Association has raised the issue and the standard response from the finance ministry has been, ‘a constrained resource envelope’. Matters are not helped by frequent claims of fake suppliers getting priority nor can everyone afford the services of influence peddlers.
Agnes Atim, the Amolatar District Woman MP, was blunt in her assessment. Speaking during a parliamentary budget committee session in October 2021, she said “There is no deliberate effort from the Ministry of Finance to clear domestic arrears, because of the high level of corruption.”
Indeed, it was Kasaija who in 2018 and before Justice Catherine Bamugemereire’s commission on land, who said, “There are some ministries where if I am signing off their money, I sign when my hands are shaking because I don’t know whether the money will reach where it is supposed to be.”
The IMF, which annually sends missions to Kampala to check on government finances as a condition for using its money, is also concerned by the escalating domestic arrears.
In one briefing paper the IMF said studies often attribute arrears accumulation to weak public financial management systems and lack of political commitment to agreed financial policies.
The IMF cautions that domestic arrears can have multifaceted effects on the economy. They are damaging to the private sector and lead to stress on the banking sector, with negative ramifications for growth. They also undermine trust in government.
No one wants that. Even the most frustrated supplier Business Times Uganda spoke too, would be more than likely continue seeking out government contracts. After all, by virtue of being the single biggest buyer in the market place, the government, remains a very attractive customer.
However, in order to trigger a leap of confidence among impatient suppliers, the government needs to do a couple of things. Instead of arbitrarily setting aside money to pay arrears it should in future, have a fixed percentage of the annual expenditure to cater for these payments. Besides strengthening transparency around the whole issue of domestic arrears, the government should also come up with a priority payment schedule that is fair and equitable. In business, predictability in such matters is always welcome and enhances trust.
The Kenyan parliament is close to passing a Prompt Payments bill that would put legal pressure on accounting officers both in the public and private sector to clear bills quickly. Perhaps this is something our Ugandan legislators might want to also look into?
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