Economic Diversification and Growth

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Chapter 4 Figure 4.13: Sustainable Budget Index in Uganda Source: Uganda MACMOD and authors’ calculations. Figure 4.14: Tax Revenue Inefficiency and Non- Oil Domestic Revenue (Percent Non-oil GDP) Figure 4.15 : Real GDP Growth and low tax revenue adopted a wide variety of fiscal rules to promote sound fiscal management of natural resources. Botswana, for example, adopted in 1994 a Sustainable Budget Index, which rules that the ratio of non-education, non-health recurrent expenditure to non-mining revenue should not exceed unity. The policy allowed Botswana to prevent excessive spending and ensure fiscal sustainability in anticipation of the future depletion of diamond deposits. 17 As shown in Figure 4.13, both the fixed and the flexible fiscal deficit rules of scenarios 1 and 2 would comply with a Botswana type system. Moreover, combined with an explicit savings target for each year, as discussed above, the NONG rule would also have advantages compared to Ghana’s widely praised petroleum revenue management law, which establishes that 70 percent of the benchmark annual oil revenue is channeled to the budget, 15 percent allocated towards a stabilization funds and the remaining 15 percent saved for future generations. The main shortcoming of this rule is that it does not impose limits on government expenditure. In effect it allows the Ghanaian government to comply with the saving rule while borrowing for additional expenditures. Since the onset of oil production in the 2011, recurrent spending has already risen by 10 percent creating serious risks for Ghana’s near term economic outlook. 18 Under Uganda’s NONG fiscal deficit rule, such an increase in spending would not be possible. Source: Uganda MACMOD and authors’ calculations. Source: Uganda MACMOD and authors’ calculations. 17. Kajo (2010): “Diamonds Are Not Forever: Botswana’s Medium-Term Fiscal Sustainability”. 18. The most recent joint IMF and World Bank debt sustainability analysis shows that overall debt vulnerabilities have increased. Whilst total public debt reached 57 percent of GDP in 2013, rising debt service could be absorbing more than 40 percent of government revenue in the long run. Consequently, the spreads of Ghana’s Eurobonds are now the highest among its peers in Sub-Saharan Africa. 78 Uganda Country Economic Memorandum: Economic Diversification and Growth in the Era of Oil and Volatility
The efficiency of methods of tax collection on non-traditional economic activity like transport will determine if the tax is viable. Uganda still lags behind in tax collection capacity. C. Other issues: mobilization of domestic taxes 4.34. So far all simulations assume that the government will continue ongoing efforts to mobilize more domestic taxes to ensure that higher oil revenue does not come at the expense of non-oil revenue. Although Uganda’s tax administration performance recently improved, the ratio of tax revenue to GDP continues to stagnate and Uganda is behind all the other East Africa Region countries in terms of tax collection capacity. It is therefore assumed that improvements in non-oil revenue will be gradual, as the tax base is widened and tax exemptions are phased out. Projected efficiency gains in tax collection for each of the different tax items are captured in Table 2.2. Overall non-oil domestic revenues would increase from 13 percent of GDP today to around 15 percent in the medium term. 4.35. Increased fiscal space due to oil revenue may lead to lower tax mobilization in other sectors. Many resourcerich countries experience a decline in non-oil tax revenue when the government begins to receive a substantial inflow of oil revenue. A decline in tax revenue would have negative macro-fiscal implications. If for instance recent efficiency gains would fall to zero with the coming on stream of oil production, the ratio of non-oil tax to non-oil GDP would fall from 13 percent today to less than 10 percent in the medium term (see low revenue scenario in Figure 4.14). The government would have to reduce expenditure to meet the 3 percent maximum deficit of the EAC (see Figure 4.13) and GDP growth rates would be significantly lower than in the baseline scenario (see Figure 4.15). By the end of the projection period, the GDP would be 35 percent lower than in the baseline scenario. 4.36. Improving domestic revenue mobilization will have critical long-term growth effects. Using the OLG framework developed for Uganda, it is estimated that increasing the tax revenue-to-GDP ratio from 12.7 percent of GDP to 15.1 percent - the average ratio for low-income countries estimated by Baldacci et al. (2004) – will lead to a 1.5 percentage points increase in the steady-state growth rate. Moreover, a more ambitious tax reform program aimed at increasing the tax revenue-to-GDP ratio to 18 percent - the average ratio for low-income countries estimated by the International Monetary Fund (2010) – will result in higher long-run growth of the order of 3.3-3.7 percentage points. 4.37. Consequently, Uganda needs to pursue ongoing efforts to improve tax collection. 19 These efforts could be accompanied by fiscal rules that incentivize improvements in tax administration and collection. In fact, one of the advantages of a NONG fiscal deficit rule is that the incentive to mobilize non-oil domestic revenue remains high when oil revenues start to flow. Using a NONG fiscal deficit as a fiscal anchor implies that a drop in non-oil tax reve- 19. Belinga et al. (2014) found that it would take significant efforts in institutional strengthening for Uganda to prevent a reduction in its tax effort. 79
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Report No: 97146-UG Economic Divers
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Contents Contents List of Acronyms.
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Contents Figures Figure 1: Export D
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Contents Tables Table 1: Summary of
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List of Acronyms ACD AFCE AFMUG AFR
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Contents Preface For about ten year
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Contents Acknowledgments The World
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Acknowledgements Credits Regional V
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Exuecutive Executive Summary Figure
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Uganda’s Executive Economy Summar
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Executive Summary longer term as it
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Executive Summary Contractors handl
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Executive Summary was mentioned bef
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Executive Summary 48. Excessive bor
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Executive Summary be met by 2020, w
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Executive Summary Value addition to
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Executive Summary going through the
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Executive Summary Table 1: Summary
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Part I An Economic Development and
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Chapter One 1 Key Messages and Conc
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Chapter One 1 Table 1.1: Poverty Tr
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Chapter 1 is viewed as a promising
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Chapter One 1 also claim 15-17 perc
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Chapter 1 Table 1.6: Savings-Invest
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Chapter 1 significantly by other se
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Chapter 1 Box 1.2: Country Experien
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Chapter 1 Table 1.8: Diversific tio
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Chapter 1 Box 1.3: Product Complexi
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Chapter 1 Box 1.4: A Short-term Exp
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Chapter 1 Figure 1.20: Uganda’s P
Page 65 and 66: Chapter 2 Development of Oil and Ot
Page 67 and 68: Box 2.1: Three exploration areas in
Page 69 and 70: the oil price will recover in the m
Page 71 and 72: Figure 2.7: Uganda’s Real GDP Gro
Page 73 and 74: Much of Uganda’s oil deposits are
Page 75 and 76: 2.18. The overall impact of the eme
Page 77 and 78: IV. The Macroeconomic, and Fiscal I
Page 79 and 80: Containers loaded with crude oil re
Page 81 and 82: and other financial institutions to
Page 83: poor performance of state-owned ent
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Page 88 and 89: Chapter 3 Key Messages and Conclusi
Page 90 and 91: Chapter 3 can have a negative impac
Page 92 and 93: Chapter 3 Box 3.2: Financing of Oil
Page 94 and 95: Chapter 3 are required to notify su
Page 96 and 97: Chapter 3 Table 3.1: Mapping of Con
Page 98 and 99: Chapter 3 Figure 3.2: Horizontal Di
Page 100 and 101: Chapter 3 Table 3.2: Addressing Hor
Page 103 and 104: Chapter 4 Strategic Implications of
Page 105 and 106: Figure 4.1: Average Adjusted Saving
Page 107 and 108: Box 4.2: Angola Case Study When fou
Page 109 and 110: time, raising investment spending t
Page 111 and 112: Figure 4.3: Uganda’s Infrastructu
Page 113 and 114: Figure 4.7: Cumulative Spending on
Page 115: Figure 4.11: Overall Fiscal Deficit
Page 119: nue will need to be accompanied by
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Page 124 and 125: Chapter 5 Key Messages and Conclusi
Page 126 and 127: Chapter 5 i. Highly skilled technic
Page 128 and 129: Chapter 5 Table 5.1: Summary Instit
Page 130 and 131: Chapter 5 Table 5.2: Governance Ind
Page 132 and 133: Chapter 5 PFM also creates addition
Page 134 and 135: Chapter 5 not published, creating a
Page 137 and 138: Chapter 6 Implementation of the Str
Page 139 and 140: consistent with local needs and org
Page 141 and 142: earth moving equipment and bitumen.
Page 143 and 144: Steel wire Seamless iron tubes M
Page 145 and 146: 6.31. The government and Total are
Page 147 and 148: 6.36. Several policy interventions-
Page 149 and 150: Chapter 7 Implementation of the Str
Page 151 and 152: Figure 7.2: Share of Intra-EAC Expo
Page 153 and 154: Table 7.1: Decomposition of Uganda
Page 155 and 156: Figure 7.8: Transit Traffic t ough
Page 157 and 158: sures aimed at reducing the time an
Page 159 and 160: to the Port of Lamu in Kenya. 4 The
Page 161 and 162: Table 7.7: Labor Migration Policies
Page 163 and 164: References: 1. Acemoglu, D., S. Joh
Page 165 and 166: September 2010, 28 (5), 553-571. Wa
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Annexes: Annex 1: Non-hydrocarbon G
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(3) • Consumption basket: composi
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(12) • International commodity pr
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Annex 3: Key Features of the Uganda
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Rural Activities: Exportable and Se
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Level of Prices • General Level:
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Total Expenditures: • Primary: NG
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Annex 4: Key Features of the Uganda
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Recursive dynamics o Following prev
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o where: is total consumption in ad
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Human Capital Formation • Schooli
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• Assuming again full depreciatio
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• Thus, an increase in the saving
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Annex 6: Econometric Results of Fir
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Table A6.3: Probit Estimates of Exp
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Economic Diversification and Growth

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