Post Budget AnalysisPost Budget Analysis

Financial Year 2011/2012Financial Year 2011/2012

Date: June 17, 2011Date: June 17, 2011

ByByDepartment of Finance, Department of Finance,

Makerere University Business School Makerere University Business School

Objectives Objectives

To review the budget to make sense of To review the budget to make sense of its contentits content

To analyse the current state of the To analyse the current state of the Ugandan economy in the face of the Ugandan economy in the face of the inflationary pressures & overall dev’t inflationary pressures & overall dev’t agendaagenda To acquaint ourselves with knowledge To acquaint ourselves with knowledge of economic mgt. so we become informed of economic mgt. so we become informed critics critics

PreamblePreamble

Budget presented on 8Budget presented on 8thth June 2011 June 2011

Theme: Theme: “Promoting Economic Growth, “Promoting Economic Growth, Job Creation and Improving Service Job Creation and Improving Service Delivery” Delivery”

Budget was framed Budget was framed amid political amid political unrest thanks to inflationary pressures, unrest thanks to inflationary pressures, high fuel & food prices, and the high fuel & food prices, and the Economy is still choked by crisis Economy is still choked by crisis

Continued…Continued… The economy is steadily transforming The economy is steadily transforming

from agric (14% of GDP) to service-based from agric (14% of GDP) to service-based (52%) and industry (25%) (52%) and industry (25%)

Major constraints identified: Major constraints identified: Inadequate physical infrastructureInadequate physical infrastructure Low levels of innovation Low levels of innovation Inadequate supply of production inputsInadequate supply of production inputs Poor quality of human resourcePoor quality of human resource High cost of financial servicesHigh cost of financial services Poor mind-set and limited business Poor mind-set and limited business

entrepreneurship entrepreneurship

The ideal is for Government to The ideal is for Government to commit resources, in the medium commit resources, in the medium

term, to address the challenges term, to address the challenges above in order to:above in order to:

Increase household incomesIncrease household incomes Create jobs Create jobs Increase people’s access to quality social Increase people’s access to quality social

services services Promote technological innovations Promote technological innovations Promote good governance and democracyPromote good governance and democracy

Question we should ask:Question we should ask: How much of the budget is committed to How much of the budget is committed to

addressing the above-mentioned constraints addressing the above-mentioned constraints beyond rhetoric? beyond rhetoric?

Specifically:Specifically:

Road construction (12.6%, down by 1.8%) Road construction (12.6%, down by 1.8%) Energy & Minerals (12.4%, up by 7.1%) Energy & Minerals (12.4%, up by 7.1%) Railway transport (only repairs!) Railway transport (only repairs!) Agricultural (4.5%, down by 0.5%) Agricultural (4.5%, down by 0.5%) Incentives to innovators and entrepreneurs Incentives to innovators and entrepreneurs

(0.1%, down from 0.2)(0.1%, down from 0.2)

Continued…Continued…

How does the budget address the high cost How does the budget address the high cost of bank credit? of bank credit? Lending rate -- 19.2% (EAC regional average is 15%) Lending rate -- 19.2% (EAC regional average is 15%)

why? Structural constraints (several initiatives….)why? Structural constraints (several initiatives….) But expansionary fiscal policy likely to impede on the But expansionary fiscal policy likely to impede on the

downward movement of the market interest rates (Gov’t downward movement of the market interest rates (Gov’t exp – Sh9,326bn, up from Sh7,180bn in 2010/11 )exp – Sh9,326bn, up from Sh7,180bn in 2010/11 )

Effect? -- Crowding out of private investment, money Effect? -- Crowding out of private investment, money demand & gov’t borrowing increasedemand & gov’t borrowing increase

Human resource dev’t (Educ--14.4%, Human resource dev’t (Educ--14.4%, health--10.3%, water & environ–2.8%) health--10.3%, water & environ–2.8%) Good but directed to observables at expense of non-obsGood but directed to observables at expense of non-obs

Budget Analysis Budget Analysis New budget addressed areas that make New budget addressed areas that make

sense to mostly rural population but not sense to mostly rural population but not the “walkers” -- kerosene, sugar, hoesthe “walkers” -- kerosene, sugar, hoes

Kerosene tax reduction amounts to 200 Kerosene tax reduction amounts to 200 UGX and for Sugar 25 UGX.UGX and for Sugar 25 UGX.

Won’t the high petro & diesel prices Won’t the high petro & diesel prices deter the policy on kerosene and sugar?deter the policy on kerosene and sugar?

Reducing allocation to agric (from 5% to Reducing allocation to agric (from 5% to 4.5%) was inconsistent with policy4.5%) was inconsistent with policy

The budget silent on food security The budget silent on food security

State of the EconomyState of the Economy Inflation running at 16% p.a.Inflation running at 16% p.a. Recent trend of headline inflation Recent trend of headline inflation 2006/07 --------------------------- 5.6%2006/07 --------------------------- 5.6%2007/08 --------------------------- 11.2%2007/08 --------------------------- 11.2%2008/09 (32008/09 (3rdrd quarter) ---------- 14.4% quarter) ---------- 14.4%2008/09 (last quarter) --------- 12.4%2008/09 (last quarter) --------- 12.4%2010/11 (12010/11 (1stst quarter) ------------ 4.4% quarter) ------------ 4.4% 2010/11 (last quarter) -----------14.0%2010/11 (last quarter) -----------14.0%

ContinuedContinued…… Causes are of three categories:Causes are of three categories:1.1. ExogenousExogenous -- (1) High global oil and food -- (1) High global oil and food

prices; (2) International oligopolies from prices; (2) International oligopolies from which Uganda imports key inputs; (3) which Uganda imports key inputs; (3) Regional insecurity (4) global econRegional insecurity (4) global econ

2.2. Regional/localRegional/local -- (1) High regional dd; (2) -- (1) High regional dd; (2) seasonality i.e. drought conditions, and seasonality i.e. drought conditions, and excess rains (floods)excess rains (floods)

3.3. StructuralStructural -- poor roads, poor agric -- poor roads, poor agric performance, poor exports, chaotic performance, poor exports, chaotic politics, technical & entr. skills politics, technical & entr. skills

How has Gov’t respondedHow has Gov’t responded

In 2008/09 Gov’t outlined strategies to In 2008/09 Gov’t outlined strategies to increase production of “strategic increase production of “strategic commodities” -- maize, rice, beans, commodities” -- maize, rice, beans, livestock (cattle and goats and poultry), livestock (cattle and goats and poultry), and fish.and fish.

Most of them were academic – teaching Most of them were academic – teaching farmers how to space crops; promotion farmers how to space crops; promotion of farmer groups etcof farmer groups etc

Real constraints were not addressed – Real constraints were not addressed – mechanize, inputs, irrigation, mitigation of climate changes, etc.mechanize, inputs, irrigation, mitigation of climate changes, etc.

What needs to be done?What needs to be done?

Reduce marketing margin for food Reduce marketing margin for food (the price that a farmer in the village (the price that a farmer in the village receives vis-à-vis the one paid by a receives vis-à-vis the one paid by a Kampalan)Kampalan)

Remove informal food cartels in and Remove informal food cartels in and around major towns in the country around major towns in the country (middlemen disease)(middlemen disease)

Regulate fuel industry – Gov’t Regulate fuel industry – Gov’t putting a lot of faith to the market! putting a lot of faith to the market!

Continued…Continued…

Reduce the scope of politics in Reduce the scope of politics in economic policy and managementeconomic policy and management

Matching budget allocation Matching budget allocation efficiency with performanceefficiency with performance

Pro-market vs. pro-business policy Pro-market vs. pro-business policy stancestance

Pragmatism vs. orthodoxy in Pragmatism vs. orthodoxy in economic policy and managementeconomic policy and management

General CommentsGeneral Comments Gov’t policy to turn the terms of trade Gov’t policy to turn the terms of trade

against agric and in favour of the industry against agric and in favour of the industry and service sectors could be flawed and service sectors could be flawed

Decline in ODA means gov’t must mobilise Decline in ODA means gov’t must mobilise more domestic revenue which would mean more domestic revenue which would mean increased tax liabilities to businesses and increased tax liabilities to businesses and households. households. Tighten the belts after 2011Tighten the belts after 2011

The global recession has reduced the faith The global recession has reduced the faith in free markets, and as a result we are in free markets, and as a result we are likely to see more and more involvement of likely to see more and more involvement of gov’t in the running of the economy. gov’t in the running of the economy.

Continued…Continued…

To address the current mismatch in To address the current mismatch in labour market, there is need to equip labour market, there is need to equip Ugandans more with technical, business Ugandans more with technical, business and entrepreneurial skills. and entrepreneurial skills.

Macroeconomic stability – gov’t should not Macroeconomic stability – gov’t should not get tempted by the usual expansionary get tempted by the usual expansionary mania of planning (the NDP) to ruin its key mania of planning (the NDP) to ruin its key economic achievement. economic achievement.

Without addressing the structural Without addressing the structural constraints, the current inflationary constraints, the current inflationary pressures will remain cyclical pressures will remain cyclical

Thank YouThank You

As I grow older I pay less As I grow older I pay less attention to what men say. I attention to what men say. I

just watch what they do.just watch what they do.Andrew CarnegieAndrew Carnegie