The uncertainty about the implications of the COVID-19 pandemic for fiscal policy and public debt is slowly fading. It is clear that the government plans to take unprecedented measures characterised by unanticipated expenditure increases, tax rate reductions and tax deferrals in response to the pandemic.[1] To shoulder these far-reaching fiscal actions, the government has borrowed/plans to borrow more funds. In addition, the government has rescheduled some of its debt repayments and obtained debt forgiveness thus reducing the pressure to borrow.
However, fiscal responses such as increased borrowing will put Uganda’s fiscal rules to the test and also increase citizens concern about government’s preparedness to undertake such radical actions to contain the pandemic and boost economic activity. In other words, does government have a fiscal strategy? Whereas efforts to revive the economy due to COVID-19 are in high gear, the effects of shocks like the invasion of locusts and floods also heighten the recourse to borrowing.
The Charter for Fiscal Responsibility (CFR) for 2016/17 – 2020/21[2], developed in line with the Public Financial Management (PFM) Act[3] of 2015, is government’s strategy to ensure that the fiscal balances and the total public debt levels are sustainable over the medium term and in the long run. Therefore, government’s fiscal actions during such emergencies can be guided by the CFR. In addition, the implementation of the CFR is expected to enable Uganda achieve the East Africa Monetary Union Convergence Criteria under the East African Community Monetary Union Protocol by 2020/21.
According to the CFR, the government adopted two fiscal policy objectives or fiscal rules that include (i) the fiscal balance (including grants) is reduced to a deficit of 3 percent of gross domestic product (GDP) by 2020/21 and (ii) the public debt in net present value (NPV) terms is maintained below 50 percent of GDP by 2020/21. Fiscal rules are long lasting constraints on fiscal policy aimed at providing credible commitment to fiscal discipline. These numerical targets are useful in reducing the budget deficit bias (where the government is inclined to run perpetual budget deficits) and ensuring fiscal and debt sustainability. However, the current fiscal environment is raising concerns on whether these fiscal anchors (rules) will be steady guides to fiscal policy.
In 2019/20, the projected fiscal deficit (including grants) to GDP was 7.5 percent and the projected public debt to GDP in NPV terms was 31.1 percent. The forecasts for 2020/21 indicate that the fiscal deficit (including grants) to GDP would be 8.6 percent and that the public debt to GDP in NPV terms would be 33.5 percent. However, the forecasts for 2020/21 do not fully account for the COVID-19 which might have devastating effects on the fiscal purse. Therefore, it’s likely that the fiscal deficit and the public debt levels will be higher than earlier projections because of the disruptions in domestic revenue mobilisation and the expected reductions in grants.
However, the CFR provides an escape clause permitting the government to deviate from the pre-announced path for fiscal policy in case of (i) a natural disaster, (ii) an unanticipated severe economic shock[4] and (iii) any unforeseen event that cannot be funded under the PFM Act or using prudent fiscal policy mechanisms. Therefore, because of the impact of COVID-19 and the associated containment measures, the government can deviate from the fiscal objectives or fiscal rules, while ensuring fiscal and debt sustainability.
During this stormy period, it is evident that the fiscal anchor that will hold or guide fiscal actions is the debt rule partly because the current debt to GDP ratio in NPV terms is far below the target. The fiscal balance rule will not guide fiscal actions because the government’s deficit is expected to increase more than earlier anticipated to contain the effects of the shocks to the economy. This suggests that the ladder to fiscal and debt sustainability is now more slippery, but it has not been kicked away. Therefore, the pandemic is exposing the dangers of commitments based on numerical targets rather than strategically reducing government expenditures and changing social norms that perpetuate borrowing.
The fiscal balance rule in its current state, though ineffective during this period, could have delivered better fiscal and debt sustainability results once adhered to because of the constraining effect on the size of the fiscal deficit (a flow) that eventually feeds into the public debt (a stock). However, the debt rule, though an effective guide now, might result in more debt because the government has more headroom to borrow. Therefore, the government needs to beware of the risks associated with the debt rule as the guiding fiscal anchor. This is because it will lead to more debt if followed blindly, which could prove unsustainable when the storm is past, after all every storm runs out of rain.
Because ensuring fiscal and public debt sustainability is worthwhile, the question that remains is, should we revise the current fiscal rules or should we reform them?
[1]MoFPED. (2020). Background to the Budget Fiscal Year 2020/21. Kampala: Ministry of Finance Planning and Economic Development.
[2] MoFPED. (2016). Charter for Fiscal Responsibility. Kampala: Ministry of Finance, Planning and Economic Development.
[3] GoU. (2015). The Public Finance Management Act, 2015 (as amended). Kampala: Government of Uganda.
[4] A severe economic shock constitutes an unexpected or unpredictable event resulting into a large scale economic downturn, measured by a decline in real GDP growth rates by over 1% for at least two consecutive quarters in a quarter to quarter comparison from the preceding period.
