IS UGANDA AS A COUNTRY SECURE GIVEN THE UNRELENTING GOVERNMENT SPENDING PRESSURES?

NEW QUERIES OVER BANK OF UGANDA'S CASH OPERATIONS
By Yasiin Mugerwa

Posted Thursday, June 23 2011 at 00:00

A new report by the Auditor General shows that the country’s capital reserves in Bank of Uganda have declined by 48 per cent due to the bank’s rising expenses and unrelenting government spending pressures.
Mr John Muwanga has noted in his latest report that various government accounts held in Bank of Uganda were also overdrawn to a tune of Shs3.188 trillion through unexplained circumstances and without the authority from Minister of Finance contrary to the Public Finance and Accountability Act.

Dipping foreign reserves
“We didn’t not see any evidence of the ministers’ approval for any of the government’s overdrawn accounts we reviewed,” Mr Muwanga said. “I advised the management (at the Bank of Uganda) to investigate all government overdrawn accounts to ascertain the cause and corrective action be immediately taken to normalise these accounts.”
The new report further shows that the Bank’s capital reserves, including unutilised foreign exchange gains reduced from Shs1,080 trillion to Shs1,046 trillion. At the same time, Bank of Uganda’s expenses have also increased from Shs138 billion for the year ended June 2009 to Shs204 billion as of June 2010.
“The trend of the Bank’s operating results indicates that the Bank’s capital reserves, excluding foreign exchange gains have been significantly eroded,” Mr Muwanga said. “This is expected to continue as the Bank is projecting to make operating losses...the Bank’s capital might be impaired in the near future and may require government intervention as per Article 14(4) of the Bank of Uganda Act.”

Governor’s concerns
The latest AG report to Parliament comes after the Bank of Uganda Governor, Mr Emmanuel Tumusiime-Mutebile, told the Financial Times newspaper that he had disagreed with Mr Museveni over the decision to spend $740 million on jet fighters, which has pushed reserves down from six to four months of import cover.
“He gave me some promises which he has not kept – like a way to redress the reserves,” Mr Mutebile told the FT recently. Already under pressure to deal with the double-digit inflation- currently standing at 17 per cent and the depreciation of the shilling, the Auditor General said Bank of Uganda has suffered from cash flow problems partly due to effects of the global financial crisis.
For example, interest income has significantly decreased from Shs114 billion for the year ended June 2009 to only Shs38 billion in June 2010, representing a decrease of over 67 per cent.
The revelation is, however, likely to affect the Bank’s efforts to ease the depreciation of the shilling and inflationary pressures on the economy.
On the solution to the crisis at Bank of Uganda, Mr Muwanga said: “I advised management that the Bank’s operations should be critically monitored with a view of improving the operating results i.e. improve earnings and minimise operating costs.”
He added: “The Bank should also consider reassessing its investment policy with a view of improving and widening the source of income. There is also need to control both operating costs and capital expenditure to minimize further erosion of capital reserves.”
When contacted yesterday, Mr Elliot Mwebya, the director communications Bank of Uganda, said he had not yet read the Auditor General’s findings and promised to get back to this newspaper after reading the report.
In the recent past, however, BoU management has said they were considering ways and means of enhancing the Bank’s income and controlling expenditure. However, they said they were constrained by the low interest rates still prevailing in the international markets.

Action promises
Bank of Uganda said the Accountant General promised to resolve the controversies surrounding all the government’s overdrawn accounts. Mr Muwanga also asked BoU to recover $11 million from city businessman Hassan Basajjabalaba or demand the money from the government, the guarantor of the loan to Hides & Skins Ltd, a private company. In 2003, the government undertook to pay the money in the event that the company fails to repay the loan.

MUSEVENI,DONORS LOCK HORNS OVER ELECTION MONEY

Tuesday, 25 January 2011 11:42 by Joseph Were

Donors fear the President is either raiding the reserves at Bank of Uganda or printing new money

World Bank Country Director John Murray McIntire who flew into Uganda on January 12 landed right into the middle of a perfect storm brewing between the government on one hand and donors and the World Bank otherwise called `development partners’ on the other.

Donors are apparently concerned about the implications on the economy of the many financial pledges, commitments, and policy changes that President Yoweri Museveni is spewing out in the heat of his campaign.

The donors held a heated meeting with finance ministry bureaucrats on Wednesday January 13 at the ministry of Finance offices in Kampala.

One of the most contested issues was the recent Shs 600 billion `emergency’ supplementary budgets approved by a special sitting of parliament on Jan.4 for various government departments.

Nobody at the World Bank office and the donor community in Kampala is speaking on the record yet because the donors are carrying out an internal analysis of the implications of Museveni’s spending bonanza.



They are also preparing a statement on a joint position. The statement will include steps they intend to take if Museveni does not adequately explain what they are terming “budget indiscipline”.

Reviewing or even a suspension of donor/World Bank budget support to Uganda is on the cards, The Independent has been told on condition of anonymity and in several separate interviews by officials on the development partners side.

“This is a defining moment for the relationship between the government and the donors,” one source said.

The donors are also concerned about such off-budget activity as the recent purchase of six SU-30 MK2 fighter jets from Russia by the government. Each of them is valued at approximately U600 million (Approx. Shs 1.3 trillion).

According to the source, financial analysis indicates that the off-budget expenditure in the Ministry of Defense alone is about 3.2 percent of the national budget which is equivalent to the budget allocation to the ministry of Agriculture. This is dangerous and unsustainable, the source said.

But the donors have internal problems as well. To arrive at a joint position, they need to overcome indifference from German’s GTZ, and American and British fixation with using budget-support to poor countries as a means of retaining influence, most especially on security matters.

[President Museveni hands out an envelope to a resident of Kalanga village in Buyende district on 22-8-2010 on his tour of Busoga Sub Region in August last year  Independent/PPU PHOTO] Already, there are holes in the donors’ group. GTZ (which since Jan.1 is operating as GIZ after merging with DED and Inwent), the Americans and the British have already indicated they will continue offering support under whatever aperture of opportunity is offered by the government. That leaves only the World Bank, IMF and the European Union as the only parties determined to press the point of budget discipline.

what they can expect from the government.

Usually the Permanent Secretary Ministry of Finance and Secretary to the Treasury, Chris Kassami, who is the government’s points man in dealing with development partners favors the posture of a taciturn with his wrinkled ashen face giving away little behind his bifocal glasses.

At last week’s meeting, sources say, he adopted exactly this posture as a band of development partner representatives berated him over the perceived spending binge by Museveni.

“We are very angry,” one of them said to an emotionless Kassami, “we are going to cut budget support 100 percent.” Usually, during such beratings, Kassami offers a defense of the government position. This time he did not.

Instead Kassami simply told the donors: “Ok, just go ahead and cut it.”

Donors are still wondering where the government is getting the arrogant attitude towards them, more so the ministry of Finance with which they have had a cordial working relationship. Some suspect that the expectations of oil revenues are changing Ugandan officials’ attitude towards donors.

The development partners were taken aback. The question they are asking now is: “Where is the government getting the money it is spending?”

“For us this is an even bigger problem than the budget indiscipline,” one source told The Independent.

Previously, whenever government departments requested for supplementary budgets, the money would be whittled off the allocation of other departments. This time it has not happened. Instead most departments either have a flat-budget without the year-on-year increment in allocation or have requested supplementary allocation.

The donors are unsure but they say there are only two ways the government could be financing its spending binge. They say the government is either printing new currency or depleting the country’s national reserves at the Bank of Uganda.

[Kundhavi Kadiresan] Both these positions, if the government adopted them, are highly dangerous to economic stability.

“Right now the country has about six months-plus worth of reserves,” one source said, “If this is depleted to below three months it could leave the country quite vulnerable to shocks both internal and external that could occur especially with an election coming.”

Ugandans go to the polls on February 18 to elect the President and members of Parliament.

Under the approved supplementary budgets, State House will get Shs 95 billion. Of this Shs 18.6 billion is for donations by President Museveni which have been criticized as `bribes’ during this campaign period. State House has defended them claiming that the President is not bribing voters but doing his job as president.

State House had Shs 80.6 billion in the budget. That means its budget has shot up by 130 percent.

The ministry of Defense will get Shs 89 billion, Shs 83 billion for the Electoral Commission, Shs 82 billion for police, Shs 37.7 billion for Ministry of Justice to compensate DURA Cement Ltd, Shs 5 billion for the Ministry of Security, Shs 8.4 billion for President’s office, Shs 5 billion for Bududa landslide victims, and Shs 891 for the office of the Inspector General of Government.

The Independent broke the story of the request for supplementary budgets story in our December 17 issue under the title: `Museveni’s Shs 380bn campaign bonanza’.

During debate in parliament, MPs mainly from the opposition, echoed claims that the supplementary budget requests are really designed to put money into Museveni’s campaign kitty.

[Finance Minister Syda Bbumba] But NRM Secretary General and Ministry of Security, Amama Mbabazi dismissed the claims.

“We don’t intend to use public funds,” he told MPs, “we have enough.”

Mbabazi’s ministry will get Shs 5 billion and from the Shs 8.4 billion for the Office of the President, the Internal Security Organisation and External Security Organisation, which Mbabazi controls, will take Shs 5.3 billion.

The donors are concerned that government has promised to give every MP Shs 20 million purportedly to oversee the National Agricultural Advisory Services (NAADs) as constituency mobilization. Donors fund 80 percent of the US$ 108 million NAADS budget. They are also unhappy that a day after the supplementary budgets were passed, the NRM gave each of its MPs Shs 20 for the campaign. Then a few days later it unveiled a Shs 900 billion plan for the redevelopment of Kampala roads which is not in the budget. The donors see the allocations as open and blatant bribes to buy off the legislature.

The donor community and government of Uganda have a standing agreement to “ring-fence” budgets for what donors call “poverty reduction expenditure areas” such as health, education and agricultural extension services. NAADs money falls under this category of priority budget areas that are not supposed to be cut of short-changed.

Most money for these areas is actually not direct aid but savings from Uganda’s debt forgiveness by donors. It is money the Uganda government would otherwise have paid in debt service but is required to put in these priority areas under the terms of debt forgiveness.

[Chris Kassami] Donors have in the past cut aid over NUSAF and NAADS over breaches of the agreement.

Supplementary budgets are normal, but donors are questioning the volumes involved. Why would State House ask for a supplementary budget that is 150 percent more than its original budget, one donor official asked, especially in the middle of a campaign? This is obviously money meant for Museveni’s campaign.

Charles Onyango-Obbo, the renowned journalist and commentator has spent over three decades analysing Uganda’s political economy.

He told The Independent that oil revenues are, at least, another three years off.

“That doesn’t seem to be a compelling explanation for Kassami/govt position. Also, I doubt that the donors would collapse their budget support during the election period - that would overly politicise their actions,” he said.

However, he said Museveni’s spending binge reveals a lot about the elections and the premium that Museveni is putting on winning with less violence than in 2001 and 2006. “He will pay whatever bribe it takes to the voters,” Onyango-Obbo said.

Donors, the World Bank and IMF have been great bed-fellows with government of Uganda since it adopted their preferred policy recommendations of Structural Adjustments, Stabilization, deregulation, privatization and liberalisation. However, the relationship has become rocky since the government started cutting down on donor dependence.

According to The Independent’s Managing Editor, Andrew Mwenda, who has previously worked with the World Bank as a consultant on the political economy of donor-Uganda government relations, the relationship between these erstwhile allies may be difficult to sustain going forward.

“Previously there was a convergence of different but compatible interests between the donors and the NRM government,” Mwenda says, “The NRM had inherited a collapsed state and economy. Yet to consolidate itself politically, it needed money – which only Western donors could give. On the other hand, donors wanted to produce an African success story through structural adjustment reforms – and many African governments were resisting.

“The NRM government was on the ropes finally, so it accepted donor conditions out of desperation. When reform unlocked badly needed aid money and put the economy on a growth path, the NRM shifted from cautious acceptance to fully blown embrace of these reforms. Political consolidation and economic growth made Uganda a darling of the donors and helped them to project it as an African success story in a rather distressful continent.”

[President Museveni hands out a cash-stashed envelope to a Bishop] From this analysis, it seems over time the two sides became dependant on each other; and mutual dependence led to mutual vulnerability. However, over the years, many African countries have embraced these reforms and began to register sustained growth. So Uganda lost its position as the leading reformer and success story – and had increasingly been replaced by Ghana, Mozambique, Rwanda, Ethiopia, Mali, etc.

On the other hand, sustained growth and expected oil revenues have also given Uganda potential access to increasing tax revenues and also higher expectations from oil. This has made the government more self reliant and therefore confident and even arrogant. Thus, the factors that had sustained this good relationship with donors seem to be dead or dying.
Many observers fear the relationship could totally collapse when the government starts earning the much anticipated petrol dollars. They note, however, that there is a window of between seven to 10 years to when Uganda could actually starts pumping oil from the ground and donors will remain relevant during this time. For now, government of Uganda may try to assert its independence and sovereignty but not as much as to totally alienate donors.
Many are keenly aware that Uganda does not actually have to wait until it starts pumping the oil to earn the oil dollars – it can sell the oil underground under futures’ contracts. These are financial arrangements that enable an entity to sell an asset at a specified future date at a price agreed today.
However, Uganda will still need donors to part-finance either a refinery or a pipe line. It also needs them for its reputation in international financial markets where it may seek loans. Donors also know that in spite of NRM’s increasing patrimonial practices, the economy shows both robustness and growth momentum. Because of these factors, it is unnecessary for government and donors to cut off what has been a successful relationship.
“The two sides may quarrel bitterly against each other,” a Makerere University don who is consulting for the government on a donor funded project and therefore requested anonymity told The Independent, “But they know that they still need each other. This is a marriage of convenience. The strategic objective of the donors is growth. Uganda government is keeping pro-growth policies on track. So donors are getting their strategic objective. How government allocates its budget is a tactical problem which donors should not make the principal source of conflict in their relations with government.