In Summary

Bad economy. The bad economy at the time was characterised by rising inflation that hit 30.5 per cent in October 2011 causing the Central Bank to raise interest rates possibly faster than was appropriate

Less than one million people and about 40,000 firms are registered as taxpayers in Uganda. That is less than 7 per cent of the total working age population, and less than 10 per cent of firms with a fixed location, respectively. While this is low on both scores, it represents a significant improvement over the last couple of years thanks to the enormous efforts by Uganda Revenue Authority (URA) to improve tax administration. A large proportion of persons and firms remain outside the tax bracket, however.
Some households are too poor to pay taxes, and many small businesses operate in the informal economy and are hard-to-reach. That said, many people and firms deliberately evade taxes or are granted generous exceptions. This is something that should be addressed right away.

Uganda collects taxes equivalent to 14 per cent of GDP. This is too low; it is below the government’s own target of 16 per cent set three years ago, and below what the country can collect—an estimated 18-23 per cent of GDP. It is also below what its neighbours collect - Kenya 18 per cent and Rwanda 16 per cent. A low tax effort contributes to fiscal deficits and limits opportunities for financing infrastructure and social services. While governments can borrow to fund vital infrastructure and human capital, they cannot do so indefinitely without running up debt, an issue that is quickly emerging as a concern in many African countries.

An improved tax collection is, therefore, critical to sustainably finance human capital and infrastructure while containing the rise in external debt. In addition, public investments, whether funded through domestic or external resources, need to be well managed - carefully prioritised, competitively procured, well supervised and maintained. When the latter is not the case, value for money is compromised. An increasing debt service is especially hard to stomach when public investments are ill-managed. In recent years, aid flows to Uganda have slowed while the country needs to scale up the financing of important infrastructure, and continue to build human capital through the provision of better education and health services on the back of a fast-increasing population.

Uganda needs to urgently increase the mobilisation of domestic revenues to stay its development course and not compromise fiscal stability. If, for instance, revenues collected over the past three years had met the target of 16 per cent instead of just 14 per cent, the additional 2 per cent would have been sufficient to triple government’s spending in the health sector in FY2016/17, or fully finance the Entebbe-Kampala expressway without having to borrow. So, what can Uganda do to raise more domestic revenues? An obvious first step is to reduce policy discretion, i.e., decrease the granting of tax exemptions. That could yield 4-5 per cent of GDP in additional revenue.

Second, make more people and firms pay taxes. Third, the government needs to not only promote equity in tax enforcement and administration, but also improve transparency and accountability while demonstrating a clear link between taxes and public services and strengthening the social contract. In recent years, the government has improved public expenditure transparency and how the Uganda budget is managed; it should also introduce transparency and accountability in the collection and management of public revenues.

The above are key recommendations from the 11th edition of the Uganda Economic Update series released today in Kampala. The report, ‘Financing Growth and Development: Options for Raising Domestic Revenues in Uganda,’ reviews the state of the economy and focuses on how Uganda can mobilize more domestic revenues to provide better access to and quality of public services. Government is in the process of formulating a medium-term domestic revenue strategy, providing an opportunity to review past approaches to revenue mobilisation, discuss options for tax policy and tax administration, and recommend reforms that will put the revenue-to-GDP ratio on an upward trajectory.

This process provides an opportunity for the government and broader public to establish a new social contract in Uganda. This can provide the basis for government to deliver better public services, while requiring citizens and firms to pay their taxes, thereby supporting higher domestic resource mobilisation. Making bold decisions now to diversify and increase tax revenues will better position Uganda to use future oil windfall for strategic physical and human capital investments, and to save for a future when the oil runs out.

Ms Calvo is the Country Manager of the World Bank in Uganda