Posted by Enock Bulime[1]
There is considerable uncertainty about the effects of the COVID-19 pandemic for Uganda’s fiscal policy and public debt. The government has rescheduled some debt repayments and obtained debt forgiveness thus reducing the pressure to borrow. The current projected fiscal deficit (including grants) to GDP for 2020/21 is 8.6 percent and the projected public debt to GDP in NPV terms is 33.5 percent. Unfortunately, due to the COVID-19 effects, the fiscal deficit and the public debt could be higher than projected due to disruptions in domestic revenue mobilisation, low economic activity and expenditure increases, tax rate reductions, and tax deferrals to mitigate the impact of the pandemic. For example, the cost of emergency expenditure increases is estimated at XXX, equivalent to YYY percent of GDP, and tax reductions/deferrals could add a further ZZZ to the government’s borrowing requirement.
This upward pressure on borrowing could put Uganda’s fiscal rules to the test and increase the public’s concern about the government’s readiness to undertake such actions. In other words, does the government have a credible fiscal strategy? The Charter for Fiscal Responsibility (CFR) for 2016/17–2020/21 represents the government’s fiscal strategy to ensure that the fiscal balance (government revenues minus government expenditures) and the total public debt level is sustainable over the medium term and in the long run. Therefore, the government’s fiscal actions during the present crisis as in normal times should be guided by the CFR.
Based on the CFR, the government has adopted two fiscal rules including (i) reducing the fiscal balance (including grants) to a deficit of 3 percent of GDP by 2020/21, and (ii) maintaining the public debt in net present value (NPV) terms below 50 percent of GDP by 2020/21. Fiscal rules are long lasting constraints on fiscal policy aimed at providing a credible commitment to fiscal discipline. These numerical targets are useful in reducing the budget deficit bias (the tendency for governments to run perpetual budget deficits) and ensuring fiscal and debt sustainability. However, the current fiscal pressures raise concerns about whether these fiscal anchors (rules) will be steady and credible guides to fiscal policy.
Current fiscal pressures do not imply that the CFR need to be abandoned as a policy tool. The Charter 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 and (iii) any unforeseen event that cannot be funded under the Public Financial Management Act, 2015 (as amended) or using prudent fiscal policy mechanisms. The government can thus deviate from the fiscal objectives or rules, while ensuring fiscal and debt sustainability.
During this fiscal storm, moreover, the fiscal anchor that will hold or guide fiscal actions is the debt rule 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 deficit is expected to increase beyond the expected target in order to contain the effects of the pandemic. 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 on strategically reducing government expenditures and changing social norms that perpetuate borrowing.
The fiscal balance rule, though ineffective now, could have delivered better fiscal and debt sustainability outcomes once adhered to because of its 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 effective, will 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 a fiscal anchor, because, if followed blindly, it will lead to more debt, which could prove unsustainable when the present storm, like others, is past and runs out of rain.
This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.
[1] Young Professional, Economic Policy Research Centre, Makerere University, Uganda.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
