Uganda lists fiscal risks that could undermine budget for FY2024/25

The Ministry of Finance, Planning, and Economic Development has listed climate change and natural disasters among the different fiscal risks that could impact the implementation of the national budget for the Financial Year 2024/25 and beyond.

Other fiscal risks listed are unforeseen expenditure pressures, revenue shortfalls, terms of trade shocks, exchange rate volatility, and materializing of Government guarantees.

According to the Fiscal Risk Statement released by the Ministry of Finance on Thursday, while conventional approaches of fiscal analysis and estimation of budgets largely do not take climate change risks into account, they may lead to deviations in expected revenues, expenditures, assets, or liabilities.

 “Climate change presents serious threats to our budget, including more frequent natural disasters, disruptions in agricultural productivity, and unforeseen expenditures for disaster recovery,” Finance Minister Matia Kasaija said in a statement.

“Therefore, we must incorporate climate risk assessments into our budget planning processes. We also continue to refine our analysis of public debt risks, ensuring that our debt management strategies remain robust and responsive to both economic and environmental changes,” he added.

According to the Finance Ministry, natural disaster events have been increasing in frequency over the past 20 years, with annual economic losses estimated at S$87 million (UShs 309 billion), and are expected to rise as the global climate continues to change.

The ministry also warns that revenue shortfalls, or expenditure overruns can lead to borrowing pressures and consequently, higher debt levels.

“The fiscal deficit has been notably higher than the forecast in the past two years, reflecting revenue shortfalls as the economy recovers from a collection of shocks, and high expenditure demands. Total revenue as a percentage of GDP is forecast to be 16.97 percent in 2023/24. Given historical forecast errors, there is a 70 percent chance that revenue as a percentage of GDP will fall between 15.00 and 18.94 percent,” the Fisk Risk Statement reads in part.

The ministry also warns that Uganda’s public debt outlook continues to be faced with moderate risk of distress, with the major vulnerabilities to the outlook relating to the slow growth of exports and the increasing debt service burden on revenues.

As of June 2023, debt service as a percentage of revenue amounted to 32.6 percent and is expected to remain above 30 percent over the next two fiscal years, especially due to high domestic interest rates as well as the increasing cost of external debt as global financing conditions continue to tighten.

The ministry further says external risks arising from Geopolitical tensions, tight Global financial conditions and volatility in Global commodity prices are a significant source of fiscal risks to public finances in Uganda.

In recent years, the global economy has been marked by rising geopolitical tensions like the RussiaUkraine war and conflict in the Middle East. These conflicts, the ministry says, have the potential to further disrupt global supply chains and cause volatility in commodity prices.

“In addition, the recent instability within the East African region like the conflict in South Sudan and Democratic Republic of Congo could disrupt regional trade and increase Government spending requirements especially on security, thereby posing significant fiscal risks to the budget for FY 2024/25,” the ministry says.

As advanced economies tighten monetary policy to curb rising inflation, capital flight in search of higher returns abroad may affect forex inflows to Uganda thereby exerting significant pressure on the Ugandan shilling which can in turn give rise to risks on the cost of living, production, and debt servicing.

Furthermore, tighter global financial conditions particularly make the cost of external 6 borrowing significantly higher. This, combined with a decline in access to concessional financing poses significant financing constraints on the national budget.