Inflation in times of high debt: a difficult balancing act
Uganda, like many other developing country governments, faces high debt levels and seeks to undertake fiscal consolidation which often faces a number of interrelated issues. What drives successful fiscal consolidation? What components of expenditure or revenue should be adjusted, and does the composition of the adjustment really matter?
Fiscal consolidation is defined as concrete policies aimed at reducing public deficits and debt accumulation. These consolidation plans and detailed measures are expressed as a percentage of nominal gross domestic product (GDP). All measurements are quantified to the extent possible.
Director of the Research Bank of Uganda, Dr. Adam Mugume, told Prosper Magazine that in the current fragile global economic environment characterized by high commodity prices and high inflationary pressures, it is difficult to achieve growth. high national economy without allowing higher inflation.
“The balance required is to ensure that monetary policy is not tightened very quickly and more aggressively than necessary. The tightening of monetary policy in the context of fiscal consolidation implies possible knock-on effects on growth This is the compromise to ensure macroeconomic stability,” he said.
Dr Mugume added: “Uganda’s debt has increased but at an alarming level. Public debt to GDP of around 49% is significantly lower than in comparable economies. The relevant question is whether any public debt incurred, even with a lower debt-to-GDP ratio, will generate higher economic growth in the future, in order to pay down the debt without causing lower economic growth.
The national budget for the financial year 2022/23 was first estimated by the Ministry of Finance at 43 trillion shillings and then 45.2 trillion shillings. Later in March, that amount was increased to 47.2 trillion shillings, as the ministry said it had identified nine bills that could support an increase in the total budget.
The overall fiscal strategy for the 2022/23 national budget is to promote inclusive growth to increase household incomes and improve the quality of life of Ugandans without compromising fiscal and debt sustainability.
This will involve the implementation of the Domestic Revenue Mobilization Strategy (DRMS) to reduce the share of the budget financed by borrowing. The focus of domestic revenue mobilization in FY 2022/23 will be on compliance enforcement other than the introduction of new taxes.
Some economists argue that an important factor in initiating consolidation is a country’s need for consolidation, which is reflected by the initial size of fiscal deficits, and that initial debt levels and increases in debt do not do not seem to encourage sanitation.
A lecturer at the Faculty of Economics at Makerere University, Dr Fred Muhumuza told Prosper that fiscal consolidation involves cutting government spending (cutting multiple expenditures and streamlining institutions) and cutting lending (public borrowing).
“For fiscal consolidation to be achieved, it is necessary to align budgetary allocations and expenditures in critical sectors of the economy, reducing public expenditures, improving the efficiency and effectiveness of service delivery public services,” he said.
Dr. Muhumuza said fiscal consolidation is about identifying ideas and targeted deployment of development programs and minimizing multiple spending.
“Fiscal consolidation is about the fundamental problems that need to be solved in the national economy, by improving production and increasing the productivity of the economy and also controlling debt levels,” he explained.
Hinting at economic growth, Dr. Muhumuza said that even before the emergence of Covid-19 in Uganda, the level of economic growth was already not strong and precise where the growth rate of 6% would come from. during the coming fiscal year.
Dr. Muhumuza explained that Covid-19 has affected the economy in the form of reduced growth rate, households in the form of reduced incomes, loss of jobs, increase in poverty and triggered low consumption. The economy was fully open just two months ago and some structures have fully recovered.
“The assumption that full reopening will lead to 6% economic growth is difficult given the current internal and external environment,” he said.
Most countries around the world, both developed and developing, have rightly taken a “whatever it takes” approach to combating the Covid-19 pandemic. On the fiscal side, extraordinary and far-reaching tax and spending measures have been implemented to save lives, support individuals and businesses, and set the stage for recovery.
The Ministry of Finance has already produced the Medium Term Debt Management Strategy 2022/23 – 2025/26.
The Ministry of Finance prepares each Fiscal Year the Medium-Term Debt Management Strategy (MTDS). This is in line with the provisions stipulated in Section 13(10) (a)(iv) of the Public Financial Management Act (2015), which requires the Minister of Finance to submit a public debt plan and any other financial liabilities, while presenting the national budget to Parliament.
Mr. Amos Lugoloobi, Minister of State for Finance (Planning) said the preparation of the MTDS for the financial year (FY) 2022/23 was highly consultative.
“Debt will continue to play an important role in financing Uganda’s development agenda, which is why its prudent management is a key element of Uganda’s fiscal policy. The Ugandan government will endeavor to continue to coordinate debt management in its macroeconomic and financial policy frameworks,” he wrote.
Domestic, external debt
At end-December 2021, total debt outstanding was $20.7 billion equivalent to $73.5 trillion, representing an increase of $18.0 billion equivalent to $65.6 trillion at end-December 2020 .
The Department of Finance said this represents a 15.4% increase in outstanding debt, equivalent to $2.8 billion over the year.
“The increase in debt stock was due to increased disbursements and borrowings to address the persistent revenue shortfall resulting from the negative impact of the Covid-19 pandemic on the economy,” he said. said the Ministry of Finance in the medium-term debt management strategy 2022. /23 – 2025/26.
He explained that this had led to an increase in domestic debt issuance to finance the budget deficit and fill shortfalls. Increased disbursements by Afrexim Bank, World Bank, Exim Bank of China and government effort to invest in productive sectors, consequently led to a 2.5% increase in nominal debt to GDP, from 47.2% in December 2020 to 49.7% in December. 2021.
At the end of December 2021, outstanding domestic debt comprised 19% Treasury bills (91 days, 182 days and 364 days) equivalent to 5.3 trillion shillings and 81% equivalent to 22.5 trillion shillings in goods of treasure.
Professor Augustus Nuwagaba of Makerere University told Prosper Magazine on April 22 that the Ugandan economy is facing trilemma (trinity) growth rates amid rising debt, inflation and the exchange rate. Prof Nuwagaba said the trilemma involves how to finance the economy. Uganda’s public debt is 53% of GDP due to increased borrowing. “It is necessary to incur debt productivity only and not for consumption purposes,” he said.
He said inflation is due to exogenous shocks that were caused to the global economy by the outbreak of Covid-19 which led to supply chain disruption.
Prof Nuwagaba said oil costs $120 a barrel, which is a 200% increase in the price of oil, but production has not reached pre-Covid-19 levels. In Uganda, the price of diesel is higher than that of gasoline, adding that the supply chain disruption also affects global (alkaline) crude oil for food, especially India and China manufacturing edible oil, with soap prices becoming very expensive as global demand started to pick up amid tight supply.
He said it is necessary to reduce borrowing for expanded fiscal operations as this will save the country from high debt service.
Second, there is a need to increase the production of commodities for export, as this will lead to increased inflows of foreign exchange, which will prevent the shilling from depreciating and save the country from trade deficits.