Economy

Navigating Fiscal Risks: Challenges and Strategies for Uganda’s Economic Stability

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  • Kasaija warns that if any or all of these risks materialize, it could place additional strain on public finances, potentially necessitating increased borrowing and subsequent escalation in public debt or mandating budget cuts and reallocations.
  • Debt service as a percentage of revenue is projected to remain above 30 percent over the next two fiscal years, largely due to high domestic interest rates and increasing external debt costs amid tightening global financing conditions.

The Ministry of Finance, Planning, and Economic Development has issued a fresh caution regarding government performance in the upcoming financial year, highlighting heightened financial risks. Finance Minister Matia Kasaija, through the fiscal risk statement, expresses concerns about potential setbacks to recent economic progress and a disruption in external debt reduction. These concerns primarily revolve around macroeconomic risks, climate change fiscal risks, and other specific risks and contingent liabilities.

Fiscal risks are delineated as factors capable of causing deviations in fiscal outcomes from anticipated or forecasted levels, particularly concerning expected revenues, expenditures, assets, or liabilities. These encompass a spectrum of challenges such as climate change, natural disasters, unforeseen expenditure pressures, revenue shortfalls, terms of trade shocks, exchange rate volatility, and the realization of government guarantees.

Kasaija warns that if any or all of these risks materialize, it could place additional strain on public finances, potentially necessitating increased borrowing and subsequent escalation in public debt or mandating budget cuts and reallocations.

This scenario implies a more arduous task in budget planning and execution, underscoring the imperative for robust public finance management as the cornerstone for risk management. Regarding macroeconomic risks, the minister underscores their origins in both domestic and external environments, and their potential to deviate fiscal aggregates like revenue and expenditure from their projected trajectories.

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External risks, stemming from geopolitical tensions, tight global financial conditions, and volatility in global commodity prices, pose substantial threats to Uganda’s public finances. Ongoing conflicts in regions like South Sudan and the Democratic Republic of Congo exacerbate these risks by disrupting regional trade and necessitating increased government spending, particularly on security.

Moreover, Uganda, akin to many developing nations, faces challenges in accessing international finances amid tightening monetary policies in advanced economies, leading to capital flight and pressure on the Ugandan shilling, thereby affecting costs of living, production, and debt servicing.

Tighter global financial conditions also heighten the cost of external borrowing, compounded by a decline in access to concessional financing, constraining the national budget’s financing options. Kasaija further anticipates that escalating global crude oil prices may inflate Uganda’s import expenditure, potentially driving up the costs of business operations and local products.

Domestically, factors like adverse weather conditions due to climate change may impede economic growth, hampering revenue targets set in the budget and necessitating increased borrowing during the financial year.

The minister acknowledges the sensitivity of tax revenues to macroeconomic shifts, particularly economic growth, where a reduction in growth projections could translate to lower tax revenue collections and heightened borrowing requirements. However, he forecasts a 70 percent likelihood of the economy growing between 6 and 12 percent next year and in the mid-term.

Another significant concern is the escalating debt levels, with the debt-to-GDP ratio expected to rise to 49.2 percent, attributed to economic expansion and not debt repayment. Debt service as a percentage of revenue is projected to remain above 30 percent over the next two fiscal years, largely due to high domestic interest rates and increasing external debt costs amid tightening global financing conditions.

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Additionally, risks emanating from interest rates, with shorter repayment periods and potential changes in interest rates due to more non-concessional loans contracted by the government, could influence government spending priorities.

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