Mobilizing more domestic revenue is critical to sustain growth
KAMPALA, May 15, 2018--Uganda’s economy is expected to grow at 5.5 percent this year, rising above 6 percent all through to 2019, according to the World Bank’s 11th Uganda Economic Update launched in Kampala today.
The improvement in performance, following two years of sluggish growth, is driven by agriculture and the services sectors. Agriculture, which accounts for 25 percent of Gross Domestic Product (GDP), grew by 6.3 percent, up from a decline of 1.9 percent in the previous year, due to good weather and pest control. Growth of services, 47% of GDP, more than doubled to 8.8 percent growth, and industry, 20% of GDP, accelerated to 6.4 percent. Low inflation, down to 2 percent by March 2018, and a relatively stable exchange rate, supported further easing of monetary policy. As a result, growth of private sector borrowing increased by 5.5 percent in the first eight months of FY 2017/18, despite the high costs of credit. Good weather and government investments in energy, roads and other oil-related infrastructure will be key to sustaining this growth outlook.
In the special section of the Update, the report analyses how Uganda could raise more domestic revenues to support its development. Uganda’s tax system is one of the most modern in the region, but revenue collections, at 14 percent of GDP, are low, and way below its tax potential. Tax avoidance and evasion, partly resulting from generous tax exemptions to investors, weak tax administration, and a large informal sector (now at 80 percent), pose challenges to increasing revenues. Up to 5 percent of GDP is lost annually in tax leakages. Personal income tax contributes roughly 18 percent of GDP compared to up to 40 percent in developed countries. VAT collections amount to 4 percent of GDP, but would rise to 6 percent if there were no exemptions. The report suggests that Uganda could widen its tax base by tapping into areas that are outside the tax net; applying tax instruments correctly and fairly; improving efficiency, transparency and accountability in tax administration; and delivering better public services.
“Making more people and firms pay their taxes rests on improving delivery of public services, and requires Government to close loopholes and stop doling out discretionary tax exemptions. Citizens are more likely to pay tax if they see public services improve,” said Christina Malmberg Calvo, World Bank Country Manager for Uganda.
The report further recommends strengthening the capacity of tax institutions, particularly the Uganda Revenue Authority, as well as local governments to enhance own source revenue. Raising awareness of citizen tax obligations and tax spending would lead to greater accountability and improve tax compliance. But this will not happen unless government enhances the transparency of revenue mobilization and improves public sector service delivery.