Post Budget Analysis Financial Year 2011/2012

1. Post Budget Analysis Financial Year 2011/2012 Date: June 17, 2011 By Department of Finance, Makerere University Business School

2. To review the budget to make sense of its content • To analyse the current state of the Ugandan economy in the face of the inflationary pressures & overall dev’t agenda • To acquaint ourselves with knowledge of economic mgt. so we become informed critics Objectives

3. Preamble • Budget presented on 8th June 2011 • Theme: “Promoting Economic Growth, Job Creation and Improving Service Delivery” • Budget was framed amid political unrest thanks to inflationary pressures, high fuel & food prices, and the Economy is still choked by crisis

4. Continued… • The economy is steadily transforming from agric (14% of GDP) to service-based (52%) and industry (25%) • Major constraints identified: • Inadequate physical infrastructure • Low levels of innovation • Inadequate supply of production inputs • Poor quality of human resource • High cost of financial services • Poor mind-set and limited business entrepreneurship

5. The ideal is for Government to commit resources, in the medium term, to address the challenges above in order to: • Increase household incomes • Create jobs • Increase people’s access to quality social services • Promote technological innovations • Promote good governance and democracy

6. Question we should ask: • How much of the budget is committed to addressing the above-mentioned constraints beyond rhetoric? Specifically: • Road construction (12.6%, down by 1.8%) • Energy & Minerals (12.4%, up by 7.1%) • Railway transport (only repairs!) • Agricultural (4.5%, down by 0.5%) • Incentives to innovators and entrepreneurs (0.1%, down from 0.2)

7. Continued… • How does the budget address the high cost of bank credit? • Lending rate -- 19.2% (EAC regional average is 15%) why? Structural constraints (several initiatives….) • But expansionary fiscal policy likely to impede on the downward movement of the market interest rates (Gov’t exp – Sh9,326bn, up from Sh7,180bn in 2010/11 ) • Effect? -- Crowding out of private investment, money demand & gov’t borrowing increase • Human resource dev’t (Educ--14.4%, health--10.3%, water & environ–2.8%) • Good but directed to observables at expense of non-obs

8. Budget Analysis • New budget addressed areas that make sense to mostly rural population but not the “walkers” -- kerosene, sugar, hoes • Kerosene tax reduction amounts to 200 UGX and for Sugar 25 UGX. • Won’t the high petro & diesel prices deter the policy on kerosene and sugar? • Reducing allocation to agric (from 5% to 4.5%) was inconsistent with policy • The budget silent on food security

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

10. Continued… • Causes are of three categories: • Exogenous -- (1) High global oil and food prices; (2) International oligopolies from which Uganda imports key inputs; (3) Regional insecurity (4) global econ • Regional/local -- (1) High regional dd; (2) seasonality i.e. drought conditions, and excess rains (floods) • Structural -- poor roads, poor agric performance, poor exports, chaotic politics, technical & entr. skills

11. How has Gov’t responded • In 2008/09 Gov’t outlined strategies to increase production of “strategic commodities” -- maize, rice, beans, livestock (cattle and goats and poultry), and fish. • Most of them were academic – teaching farmers how to space crops; promotion of farmer groups etc • Real constraints were not addressed – mechanize, inputs, irrigation, mitigation of climate changes, etc.

12. What needs to be done? • Reduce marketing margin for food (the price that a farmer in the village receives vis-à-vis the one paid by a Kampalan) • Remove informal food cartels in and around major towns in the country (middlemen disease) • Regulate fuel industry – Gov’t putting a lot of faith to the market!

13. Continued… • Reduce the scope of politics in economic policy and management • Matching budget allocation efficiency with performance • Pro-market vs. pro-business policy stance • Pragmatism vs. orthodoxy in economic policy and management

14. General Comments • Gov’t policy to turn the terms of trade against agric and in favour of the industry and service sectors could be flawed • Decline in ODA means gov’t must mobilise more domestic revenue which would mean increased tax liabilities to businesses and households. Tighten the belts after 2011 • The global recession has reduced the faith in free markets, and as a result we are likely to see more and more involvement of gov’t in the running of the economy.

15. Continued… • To address the current mismatch in labour market, there is need to equip Ugandans more with technical, business and entrepreneurial skills. • Macroeconomic stability – gov’t should not get tempted by the usual expansionary mania of planning (the NDP) to ruin its key economic achievement. • Without addressing the structural constraints, the current inflationary pressures will remain cyclical

16. Thank You As I grow older I pay less attention to what men say. I just watch what they do. Andrew Carnegie