Absa Bank 2021/2022 budget review: financial sector anxiously watching
After last week’s budget speech, we were welcomed to a budget review meeting by Absa Bank Limited. After the events of 2020 in which the coronavirus pandemic hit home with frightening consequences and the country entered an unprecedented lockdown, it is evident that there are going to be tough times and we need to tighten our belts to face the shakedown.
As we discussed the fiscal year 2021/2022 budget statements, it was obvious, except to the uninitiated, that there was no easy way out. It is easy to criticize players, until you are asked to play yourself. Our panel, which included, among others, the Budget Director of the Ministry of Finance, the Commissioner General of the Uganda Revenue Authority and the CEO of Absa Bank, had no illusions about the future. For once there was more to agree than disagree with the money guys.
So what are these things that we have agreed upon? First, the fact that due to the pandemic, the economy had contracted by 2.1% in 2020 due to a slowdown in activity due to the Covid-19 pandemic and containment . Tourism and hospitality have been hit hardest by travel restrictions and containment measures around the world. Other sectors affected included manufacturing, commerce and education.
Second, our total debt as a percentage of GDP had grown to 49.8% and there was little room for maneuver. At this point, public officials turned nothing and assured us that they did not intend to increase domestic debt by more than 1% of GDP. We are waiting to see. Third, due to the contraction in economic activity, tax revenue collection has also been affected, despite increasing demands on the resource envelope to fight the pandemic. These questions should concern us all.
We then turned our attention to the fiscal policy statements in the budget and their impact on the financial sector. What were the key issues here? In general, we have noted that the financial sector will come under increasing pressure due to the aforementioned economic contraction. As a result of this contraction, many small and medium-sized enterprises are under pressure and NPLs have increased to account for around 6-7 percent of private sector credit (around Shs 7 trillion).
In order to avoid a collapse, the Bank of Uganda had put in place credit relief measures which allowed up to three restructurings of this debt. It was like kicking the box on the road. We wouldn’t know the true extent of the problem until October 2021!
Regarding tax policy, we have also noted the following. On the positive side, the capital gains tax exemption for venture capital funds had been allowed, and for group companies, shared services (provided in different geographies) were now also exempt. VAT. For financial institutions eyeing venture capital and group companies, it was a godsend. The proposed parish development model also offered possibilities for financial intermediation, if it did not become synonymous with similar poverty reduction programs that had failed in the past.
In contrast, potential minefields included the 12% excise tax on digital data that would replace OTT. This was likely to increase the operating costs of financial institutions trying to implement digital strategies in the post-pandemic era. A reduction in usury allowances was also likely to increase the incidence of direct taxes.
All in all, this was an intense and compelling review of the 2021/2022 budget. One key area we all failed to mention in our review was the continued failure to implement a national health insurance system. If this pandemic had shown us anything, it was the scarcity of our emergency response system and the inability to provide a health security network for all citizens. In that regard, then, this was another missed opportunity. In these uncertain times, one can only watch and wait to breathe out.
Professor Sejjaaka is Country Team Leader at Mat Abacus Business School.
[email protected] @samuelsejjaaka