Key Factors Driving Uganda’s Economic Downturn
Many economists tend to produce short-term (5-year) projections of economic performance, probably a strategy to remain safe, since no one can exactly predict the future.
In addition, they tend to focus on macro-parameters, because micro-parameters are highly volatile. Although macro-parameters are good indicators of economic performance, they rarely tell the real individual’s experience – many are performing far below the macroeconomic indicators.
Uganda’s economic performance has persistently been rated poor, despite registering positive macroeconomic indicators above 4.0% over the last 14 years. Most Ugandan are struggling to make “ends-meet”; aggregate demand is low; businesses are struggling to “stay afloat”; the banking sector is bedeviled by non-performing loans; tax revenue performance is below annual targets; and government is struggling to pay bills, which are all symptoms of an economy in recession.
This is further blamed on political, environmental and regional factors like the multiple severe droughts; political turmoil in Burundi and civil conflicts in South Sudan and the Democratic Republic of Congo that have reduced tourism receipts, Foreign Direct Investments (FDI), and exports of goods and services.
This article, however, focuses on issues not commonly evaluated as possible contributors to the recession when analyzing the country’s economic performance and these include:
Over-Dependence on Foreign Direct Investment (FDI)
We have seen our politicians traveling abroad at taxpayers’ expense and hobnobbing with multinational companies in the name of soliciting for FDI and forgetting to interact with Ugandan companies or according foreign investors red-carpet reception, while treating Ugandan businessmen as unimportant.
While FDI is not essentially bad, to think that FDI is the key driver of economic growth and development is a misguided mindset. In the current investment policy framework, multinationals expatriate huge amounts of money that result in a net outflow of capital from the country, thus bleeding the economy.
It is insignificant for one to argue that some money remains in the form of salaries, rental charges, taxes and other operational costs as a benefit to the country. One needs to compare FDI with the net outflow of capital and justify the value of FDI to the economy.
Government needs to invest in indigenous businesses by offering them affordable credit and according similar incentives or relief as those offered to multinational corporations. We could call this shift of focus “Internal Direct Investment (IDI)”.
Expatriation of 100% of the Profits in a single Financial Year
Uganda’s investment incentive to multinational corporations is the opportunity for them to expatriate 100% of their profits every year. While this is just, it results in a net capital flight, leaving the economy severely bred.
Often companies employ tax planning strategies to skim-off more profits in the guise of operational costs paid to subsidiaries/ shell companies abroad, which goes unnoticed or is sanctioned by the tax authorities as a result of monitoring and auditing weaknesses in the tax body.
This could explain the net capital outflow that the African continent has suffered over the years. In some African countries, multinational corporations are not allowed to expatriate 100% of their profits in a single year, but are allowed to stagger the transfer of monies abroad.
Uganda seems to being taking a similar trend with oil revenues, where the Public Finance Act 2015 allows up to 50% expatriation of profits in a single year. In some cases, corporations are required to build own offices in the host country and cease renting. In others, 15% of the foreign exchange entering the country is retained as a surcharge/ fee. This has the effect/impact of keeping capital within the country and thus helps to stabilize the economy. Uganda is currently suffering escalating inflation due to a net outflow of capital facilitated by expatriation and imports that exceed exports.
Uganda has a policy of offering tax exemptions as an incentive of promoting investment, growth and development. This is done on the belief that the beneficiaries are doing charitable work and service not offered through regular government goods and service delivery systems or with the intention of triggering the emergence of a given economic sector and/or to reduce the cost-burden on the final consumer of a product or service.
Tax exemptions are not free; they must be paid by government using taxpayers’ money. While tax exemptions are not entirely bad per-se, the manner in which exemptions are awarded and the number of exemptions is the source of the problem.
We have seen tax exemptions awarded selectively to corporations that have political connections and those where the exemptions did not result in the intended benefits, yet they are causing significant hemorrhage of the tax revenue and instead enriching the corporations.
This year alone government will pay 77 billion shillings of taxpayers’ money to pay taxes for a select group of companies (i.e. BIDCO Oil Refineries Ltd; Aya Investments; Steel and Tube; Cipla Quality Chemicals, Uganda Electricity Generation Company and Uganda Electricity Transmission Company Ltd.) and such payments have gone on for the last 3 decades and are expected to continue.
Award of tax exemptions should be informed by cost-benefit and opportunity-cost analyses and their effect/impact routinely monitored to justify their existence. But often, this is not the case in Uganda. Imagine what this money would have achieved in education, health and agriculture – the often underfunded sectors.
Water Governance Institute is a member of the Uganda Tax Justice Alliance; Civil Society Coalition on Oil and Gas (CSCO); and the Uganda Contracts Monitoring Coalition (UCMC).