I refer to James Anyanwa’s article (“EAMU: Back to the drawing board as council of ministers reviews timelines,” October 18 – 25, 2020) that showed that member countries are not complying with the stipulated convergence criteria indicators. Consequently, this has slowed down the pace of creating the EAMU by 2024.
Uganda’s rising fiscal deficit and public debt are partly exposing the unconstrained fiscal policymaking that is common in many East African countries in the run up to the East African Monetary Union (EAMU). The Bank of Uganda Annual report 2019 indicates that the budget deficit and debt increased from Shs 4,902.3 billion and Shs 42,435 billion in June 2018 to Shs 6,401 billion (preliminary data) and Shs 47,305.2 billion in June 2019 respectively.
Countries have attempted to counter the unrestrained fiscal behaviour by adopting fiscal rules that aim at limiting their annual budget deficits, debt levels, expenditures and revenues. Fiscal rules are long-term constraints on fiscal policy through simple numerical limits on budgetary aggregates. Apart from constraining government’s fiscal behaviour, these rules aim at supporting fiscal credibility and fiscal discipline.
Uganda has adopted the supranational rules under the EAMU protocol that originate from the need to constrain individual countries from running fiscal policies that are inconsistent with the monetary union needs. These rules include a limit on the gross public debt of 50 percent of GDP in net present value (NPV) terms and a budget deficit rule (including grants) of 3 percent of GDP. The rules contribute to the establishment of a framework for better coordination of monetary and fiscal policy.
Because of government’s current spending behaviour, the policy concern is whether Uganda needs a national debt rule to complement the EAMU protocol convergence criteria. The recent forecasts by the Ministry of Finance, Planning and Economic Development indicate that Uganda will not violate the debt limit set in the EAMU protocol in the next 20 years. This result could lead the policymakers to think that Uganda’s debt is too safe to violate the threshold under the EAMU protocol and consequently breed fiscal indiscipline in the conduct of fiscal affairs.
Therefore, in the case of Uganda, there could be some merit in modifying the debt limit set under the EAMU protocol. This is particularly because Uganda’s debt to GDP ratio in net present value terms is far below (31 percent) the threshold (50 percent). The government could modify the current debt limit to a lower limit to demand greater debt discipline early enough before the debt reaches unsustainable levels. The EAMU debt limit, as it is now, does not seem to bind Uganda’s fiscal behaviour.
However, the national debt limit (if proposed and adopted) should be flexible enough to respond to temporary shocks in national output (GDP), interest rate, exchange rate and other unanticipated shocks (like natural disasters). Such flexibility would reduce the adverse impacts of these shocks on performance of the economy.
Whereas the notion of having a “national debt limit” is good, does Uganda have an adequate public financial management system to sustain its implementation? Uganda meets some of the prerequisites for effective implementation of a national debt limit. First, Uganda has developed its capacity to provide reliable data on the fiscal variables and a minimum technical forecasting capacity. Secondly, the government provides fiscal year data publicly and this will facilitate the monitoring of the rule.
However, there is need to strengthen the budget reporting system to ensure that it is comprehensive enough to cover all fiscal aggregates and adequately advanced to provide mid-year and end-of-year data (and reports) in a timely manner. In addition, the internal and external audits need to be strengthened to ensure that public resource utilisation is fully accounted for. Lastly, if a national debt rule is adopted, the government would need to draw up a clear enforcement procedure and back it up with a sufficient political commitment to pursue it.