There has been a significant standoff between President Museveni and the World Bank over the latter’s suspension of public funding to Uganda.
On Tuesday, August 8, 2023, the World Bank announced that it would be suspending any future funding for projects in Uganda over alleged human rights violations following the signing into law of the March 21 Anti- Homosexuality Act.
The World Bank is one of the Bretton Woods institutions that was created to reduce poverty by lending money to governments in low-developed countries with the aim of improving their standards of living.
Currently, the World Bank funding portfolio for Uganda is at $ 5.2 billion and is being used to run several projects like the Uganda Climate Smart Agricultural Transformation Project, Electricity Access Scale-up Project, and the Uganda Support to Municipal Infrastructure Development Program, etc.
Regardless of the suspension, the World Bank has promised the current fund portfolio will not be affected as some of the monies for these projects have already been disbursed with some of them nearing completion. The president, on the other hand, came out to criticize the suspension of new funding and promised to find alternative sources of funding.
This standoff could have dire economic and fiscal consequences that might inevitably be felt by the country, especially the taxpayers.
Immediately following this suspension, for example, the state minister for Finance, Henry Musasizi, informed parliament about government’s intention to revise the National Budget to ensure that its activities and operations maintain smooth running amidst funding constraints.
A report by the Daily Monitor has also indicated a decline in the value of Uganda’s currency which also appears to be headed for its biggest fall since 2018. The revised budget and a drop in Uganda’s currency value are some of the many significant consequences of the World Bank’s actions.
This might lead to the Government of Uganda carrying out desperate and aggressive techniques in order to soothe the impasse and obtain money to fund its budget. Some of these policies include the imposition of austerity measures like reducing travel for government officials, retaining allowances for public servants, delayed payments for government-procured goods and or services, and laying off of workers, among other measures, which might be adopted in the near future.
There is also likely to be more aggressive tax collection and enforcement measures aimed at increasing revenue to meet budgetary needs. In fact, the president once hinted at this during his budget reading speech when he intimated that the Uganda Revenue Authority was under-collecting taxes and that Uganda’s tax-to-GDP ratio of 13 percent was ‘unserious’.
He went on to challenge the revenue body to replicate countries like Holland whose tax-to-GDP ratio currently stands at 39.7 percent. With this aggressiveness, taxpayers are likely to receive several assessments from URA. This, however, is not the ultimate solution.
If Uganda is to achieve economic independence, in light of the World Bank’s actions, there would be a need to come up with more efficient tax and revenue policies that ensure maximizing revenue collections and minimizing leakages or hemorrhage.
The first would be to streamline the exemption policies across all tax heads. According to a 2019 report on tax exemptions by SEATINI-Uganda, the country lost over Shs 2.8 trillion in tax exemptions for the financial year of 2022-/2023. This constituted six percent of last year’s budget.
Cutting down on these exemptions would not only raise the tax collectible but would also mean that entities that were erstwhile non-taxpaying would get involved in the grand plan of developing Uganda. There is a need to also rationalize and streamline the refund claim under Uganda’s Value Added Tax regime.
The current practice is that taxpayers are allowed to claim excess VAT paid on purchases which is at times higher than the VAT that the taxpayer collects from his customers. The challenge with this is that it creates opportunities for abuse which leads to revenue leakages as taxpayers overclaim their refunds mainly based on fictitious invoices being issued.
The revenue administration should also spread the tax compliance gospel to various Ugandans. By increasing the level of tax compliance, there would be a drop in the money spent on ensuring that debt arrears are collected. Tax audits would also easily be carried out without several intricacies caused by aggressive tax planners.
Additionally, there would be a need to incentivize payment of taxes in order to encourage compliance among taxpayers. These incentives, however, have to be non-tax-based. Interest and penalty can be waived for most compliant taxpayers if the payments are made within a specific quarter of the financial year.
By Derrick Nahumuza