In a statement regarding fiscal risks, Finance Minister Matia Kasaija has indicated the possibility of a regression in the recent economic progress and potential obstacles in reducing external debt, primarily attributed to macroeconomic risks, climate change fiscal risks, and other specific risks and contingent liabilities.
Fiscal risks are described as elements that could lead to deviations from anticipated or forecasted fiscal outcomes, particularly concerning expected revenues, expenditures, assets, or liabilities.
The Ministry of Finance, Planning, and Economic Development has again cautioned about the government’s performance in the upcoming financial year, highlighting the heightened financial risks.They include climate change, natural disasters, unforeseen expenditure pressures, revenue shortfalls, terms of trade shocks, exchange rate volatility, and materializing of government guarantees.
“If any or all the risks materialize, there may be additional pressures on public finances, which might prompt additional borrowing and a consequent rise in public debt, or budget cuts and reallocations,” says Kasaija.This means, therefore, a more challenging budget planning and execution task, hence the need for sound public finance management as the starting point and foundation for the management of the risk.
Under macroeconomic risks, the minister says that these mainly stem from the domestic and external environment and forecast performance against out-turns. These could cause fiscal aggregates like revenue and expenditure to deviate from their forecasts. External risks arising from geopolitical tensions, tight global financial conditions, and volatility in global commodity prices are a significant source of fiscal risks to public finances in Uganda.
The persistent tensions like the Russia-Ukraine war and conflict in the Middle East have the potential to further disrupt global supply chains and cause volatility in commodity prices, according to the statement. In addition, the conflicts in South Sudan and the Democratic Republic of Congo (DRC), could disrupt regional trade and increase government spending requirements, especially on security, thereby posing significant fiscal risks to the next budget.
Uganda, like many developing and poor countries, has encountered a rising scarcity of international finances in the last few years, as advanced economies tighten monetary policy to curb rising inflation.This is abetting capital flight in search of higher returns abroad, which may affect forex inflows to Uganda thereby exerting significant pressure on the Ugandan shilling, which can in turn give rise to risks on the cost of living, production, and debt servicing.
“Furthermore, tighter global financial conditions particularly make the cost of external borrowing significantly higher. This, combined with a decline in access to concessional financing poses significant financing constraints on the national budget,” explains Kasaija.The minister also fears that the increasing global crude oil prices will have a significant impact on Uganda’s spend on imports, especially as the demand for petroleum products rises.
The fear is, that this could further lead to an increase in the cost of doing business and the prices of local products.
On the domestic front, a slowdown in economic growth arising from factors such as adverse weather conditions due to climate change may hinder the attainment of the revenue target set out in the budget, thereby worsening public finances through higher borrowing during the financial year.If there are negative macroeconomic changes as feared above, there is a major risk to domestic revenues.
“Tax revenues are very sensitive to macroeconomic changes, particularly economic growth, a reduction in growth projections can lead to lower tax revenue collections and lead to higher borrowing requirements,” he says.
However, Kasaija forecasts that there is a 70 per cent chance that the economy will grow between 6 and 12 per cent next year and in the mid-term. The other risk is the increasing debt levels, with the debt to GDP ratio expected to rise to 49.2 per cent, having dropped recently to below 48 per cent.
The decline was not due to debt repayment, but the economic expansion mainly caused by the high inflation last year, which is not expected to be the same this and next year. As of June 2023, debt service as a percentage of revenue amounted to 32.6 per cent and is expected to remain above 30 per cent over the next two fiscal years, especially due to high domestic interest rates as well as the increasing cost of external debt as global financing conditions continue to tighten.
There is also risk coming from interest rates with the time for repayment and for changes in interest rates becoming shorter due to more commercial no concessional loans contracted by the government. This will also have an impact on government spending priorities.
Fasten Your Belts We Are Going For Tough Economic Times This Financial Year
