Government: Braving short-term pain for long-term gain


The question posed by the ABSA-NTV post-budget dialogue held last week on Thursday was simple but thought-provoking: Is the 2022/2023 national budget responsive to economic recovery and growth? Presented by Finance Minister Matia Kasaija a few days earlier, the new budget – if not in its 18-word theme, then in its content – ​​persisted in its exhortation to endure short-term pain to pave the way. to long-term gains.

Mr. Patrick Ocailap, the Under Secretary of the Treasury, during Thursday’s post-budget, reiterated the merits of the average household having to bide its time. Not even the revelation by Mr Fred Muhumuza – the dialogue moderator – that he fueled his car at an unprecedented price of 6,000 shillings a liter of petrol that morning did not seem to bother government officials. .

Mr Johnson Omolo, Managing Director of NTV, had made it clear that the intention of the dialogue was to “put the budget into perspective”. Its co-organizer and chief executive of ABSA Bank, Mr Mumba Kalifungwa, would go on to admit that the future must be assessed “with cautious optimism”.

He added: “As we slept last night (Wednesday), the Fed (the central bank of the United States) raised interest rates by 75 basis points. What does this mean for the global economy…for the Ugandan economy…for our currency?

Mr. Ocailap’s response was that when the United States sneezes, small economies like Uganda catch a cold.

“Holders of US assets around the world are likely to move their assets back to the US because interest rates are attractive and they will be able to meet their inflation levels from there” , the Assistant Secretary of the Treasury would later say, adding: “If those who participated overseas by bringing their dollar-denominated assets into our Treasury and bond markets get [them] out, that then means the exchange rate kicks in. The upward pressure kicks in.”

Mr Omolo initially said he was unsure “whether the budget is adequate to protect Ugandans from shocks” such as the inflationary spiral unleashed by the Russian-Ukrainian war and pandemic-induced supply disruptions. In response, Mr Ocailap had mixed feelings while revealing that fiscal and monetary policies will be used “to deal with the adverse effects” of the broader cost-of-living squeeze.

“It’s a risky way,” he confessed, adding: “[We] hopefully maybe two or three months later… [a] a new equilibrium, which is not as high as it is now, will emerge.

Uganda’s central bank has recently reacted to spikes in annual headline inflation (6.3%) and core inflation (5.1%) by tightening monetary policy. The central bank rate was raised by one percentage point to 7.5%. Commercial banks are generally expected to pass on higher interest rates to consumers and commercial borrowers as well as savers. The net result could be lower spending that clearly makes a recession possible.

Mr. Ocailap said during the post-budget dialogue that agriculture could be what will pull Uganda from the brink. He further said, “The Agricultural Credit Facility has worked wonders…this scheme has generated nearly 627 billion shillings in capital base. This is no small feat…a capacity of about 800 billion shillings (including government contribution) in this area is big enough to wake up the economy.

But it is in the Parish Development Model (PDM) that we should expect the greatest dividends. Mr. Ocailap, a development economist by training, described the PDM as “the missing link in our development agenda”. He added that if implemented “as it was intended”, PDM will be “very transformative”.

Achieving this, however, will require integrating “the seven pillars of PDM into a parish” and ultimately, Mr. Ocailap added, “seeing the whole of government operate as a parish.”

The agro-processing component in the model “will help minimize post-harvest losses, which in some cases are very high, in the order of 35-40%. Agro-processing” also increases[s] …production of the acreage” and “once the products are better processed, the next step is marketing or perhaps value addition through the rural electrification program”.

In the meantime, however, Mr Ocailap notes that “it’s going to be painful for a short while” as the government “maintains[s] market-based pricing.

He added: “If we deal with aspects of food production at the national level as well as surpluses for export and for the market, we believe that the inflation index attributed to food volatility or shortages will slightly mitigate inflationary trends; now we have to manage the interest rates and the exchange rate induced by external factors.

While Mr Ocailap revealed that the government hopes to restore economic activity by ensuring the tax authorities collect 59% (some 23.7 trillion shillings) of our spending next year, there was a caveat. Rate hikes by northern central banks will have far-reaching effects. All in all, the uniformity in the rise in borrowing costs calls for caution.

“It tells us that when you go out to borrow to support the URA to fund next year’s budget, you have to be careful,” Mr Ocailap said emphatically. “Borrowing on concessional terms because interest rates are going to be hostile to us…borrowing foreign currency actually comes with inherent exchange rate risks in terms of servicing the debt in the future. “


Comments are closed.