H.E President Museveni hosts an IMF delegation

Thursday 16th May 2013

H.E President Museveni received an International Monetary Fund (IMF) delegation on the 14th of May 2013 at State House Entebbe. They discussed financial administration and tax collection. The delegation were very impressed by the President's command of Portuguese, a language close to Spanish, said they benefitted from his in-depth analysis of the African economy and commended his leadership for Uganda's quick recovery inspire of slower growth about six months ago.

"I learnt some Portuguese when I was fighting Idd Amin. I was training my soldiers in Mozambique. Back to our discussion, according to the census of 2002, 68% of Ugandan homesteads were in the subsistence economy, only 32% were in the money economy. If you don't convert this 68% away from subsistence farming you are making a very big mistake. I thought I should point out this to guide your study. The 68% produces for comida (comida is Portuguese for food). They don't care about money.

The second mistake in Africa is infrastructure especially electricity, roads and railway. I know Africa is famous for conservation, conservation of wildlife, conservation of this and that, but conserving underdevelopment should not be part of the program. You know there is positive conservation and negative conservation in Africa. Electricity affects the rate of investment - the profitability of companies. Production costs are high because transport and electricity costs are high.

The other mistake our economists make is to think macro-economic stability; control of inflation and liberalization of the economy will automatically transform lives. Yes, we have done very well at the macro-economic level, but when you are dealing with pre-capitalist systems, you must interface private sector - led growth with the traditional sector that is not part of the money economy. That is why I started rural projects that converted comida to commercial enterprises. Am always in the resistance, I will listen, but map out the best strategy for Uganda.

Therefore, if you don't factor in the traditional sector that is not part of the money economy and think manipulation of financial wizardry will transform the traditional sector, our people are not bothered. Life in Tropical and Equatorial Africa is easy, people don't die of starvation. One can live in a forest and feed on fruits and other foods available. There is poverty but it is not clear to the victims; they eat, drink alcohol and sleep. It is very deceptive. So financial instruments cannot wake up the majority of Africans, they must be physically woken up. Like I have said before many of those involved in production produce for food not money, yet they need money in the modern era.

Yes, the financial instruments are useful to protect the monetary sector, in the case of Uganda the 32%, but, the non-monetary sector will not be affected. And that is what impacts tax collection you are concerned about. The population of Uganda is now 35 million. Since an average household has 5 people, that is 7 million households. If they were all in the money economy and if you got Ugshs 300, 000 from each family, you would collect about shs 2.1 trillion in one year as direct tax.

It is important to appreciate that the traditional sector affects both direct and indirect taxation. We must first of all engage deliberate efforts to change attitude and our people's behaviour so they go into the money economy. There is no harm if you blessed our struggle with the two frontiers; attitudinal change and infrastructure development."

The IMF country representative, Ana Lucia Coronel, who led the delegation said she was pleased to be in Uganda and the hospitality of the Ugandan people is very good for their team.

"We appreciate the fact that Uganda is a duo economy. You have the other economy that uses money and the traditional one. The challenge is how to mobilise resources from successful businesses to the traditional sector so that there is good distribution of resources. We would like to support the country's views stated in 2040. What is needed in the next 3 years to achieve the objectives in the Vision 2040?

You experienced slow growth months ago, now growth is recovering. We would like to find out how growth in Uganda recovers and grows fast. We have also noted that costs of manufacturing have come down because of electricity, correct investment in energy, in Bujagali dam. There is low inflation rate. This is what macro-economy tells you.

With your clear macro-economic reforms and well-designed infrastructure development strategy, what are the other key reforms you need? One of them is tax collection and public financial management. We notice that there is improvement in spending in a more transparent way. This gives more credibility to your budget. There are also improvements in the Central bank with more modern systems and capital of the Central Bank is stronger.

Mr. President, there are a whole range of measures needed in the next 3 years. We appreciate your concerns and we don't want to tax the producers for food. But we think some of the tax exemptions as incentives to production are no longer necessary. We are going to carry out a study to find out the cost of VAT exemptions, so we decide what to do with them. We are offering technical assistance from our tax expert in Washington to advise on tax policy and on matters of compliance. We have met your Revenue Authority, they are professional people and they know what they are doing."

President Museveni chips in: " I can take you through the logic behind exemptions. Originally we had abolished taxes on raw materials. We had the zero, 7 and 15 bands. Zero was for raw materials and 7 for intermediate goods related to plant machinery. In fact it is when we joined the East African Community that we negotiated for intermediate products. We had raw materials and intermediate products. We said taxing intermediate products would negatively affect our industries. So we were given a meritorium and we had what was called the Uganda list in the EAC. It was deliberately done to help manufacturers.

The other exemptions were at the time we were preparing for the Heads of State meeting from Commonwealth countries. When we looked at the stock of hotels, we did not have enough beds to host the meeting. I was told we had 1500 beds yet we needed 4500 beds. We introduced exemption on building materials for hotels e.g cement and steel bars. It worked miracles, within 2 years, tourism received a big boost. We are now getting $800 million from tourism. Now that the meeting was over, there was no need for further exemption. But we said that those who ordered on assumption that they would be exempted, be exempted and we put a stop to that.

The other point is that am a believer in factories. They create employment. This means converting someone who was idle to a useful person. What do I lose if I don't tax machinery? Nothing. Afterall I will collect indirect tax. Some of the girls employed, apart from improving their lives, will buy perfume. And you know there is tax on luxurious goods like perfumes and alcohol. To me taxing machinery is misplaced. Allow the factories to be set up and let them create employment for our youth.

I didn't study medicine but I studied biology. I know that if you want the human being to be healthy, don't disturb the bone marrow. That is the word English uses to describe what am talking about. Portuguese and Spanish is also limited, you say Medulla something. But one of our local dialects is clear, we call the bone marrow 'omusomyo'. The musomyo of business is the factory, once it is operating very well you can always get blood supply. Once you tamper with the bone marrow of business you can lead to leukaemia. So taxing the machinery is taxing the source of life. But am ready for that study, if it proves me wrong I will surrender."

Ana Lucia, IMF resident rep.:     “Your Excellency I believe you don't need any incentinves to production in terms of exemption. In Uganda you have everything to attract investment. You have nature e.g Lake Victoria to attract investment in tourism. You need clear rules of the game and easy procedures. You have the human resource base willing to work. They don't care if it is a saturday or sunday. At the time of the meeting of the Commonwealth, exemptions made a lot of sense because you were not known. But now Uganda has moved to another level."

President Museveni: "There are obstacles to investment, high transport costs from the ocean and electricity. By exempting machinery I want to reduce the burden of investment in order to create more employment. You need to convince me."

Anna Lucia, IMF resident representative: " Your Excellency you have pointed the importance of infrastructure development. Àll you need to do is finish Karuma as soon as possible. Looking at the list of infrastructure development, we noted that the road project this year went faster than expected, this is very good. Have the infrastructure right for everybody. Then let the market work for production. Better business environment, cleaner and more transparent environment will get you better companies to invest for long term."

Tax Specialist on IMF Team: " Your Excellency, in most of the countries people who dodge tax are the better off who should pay. They undermine willingness to pay taxes and compliance. There is also the Golden rule in tax collection. 10% of the taxpayers pay 90% of all the taxes. They must have the fair share of the tax burden. We need to strike a balance with the big companies."

President Museveni: "For me I thought production is primary, other things are easy”. I'd rather tax consumption not production.

I need to go for other meetings. I will wait for that study report. Thank you very much for calling on me.

Day's wrap up: In the morning, His Excellency President Museveni met UNDP delegation then IMF. In the afternoon, he met officials from our Local Government and a delegation from Kitgum, at State House Entebbe. At about 7.30 pm he made an inaugural address to the 5-day Common-Wealth Local Government Conference at Munyonyo. President Museveni is the Patron of the Common-Wealth Local Government Forum.

14th May 2013

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