By Wilson Manishimwe

Data from the Office of Auditor General’s report indicates that domestic arrears increased from UGX 4.65Trillion in 2021 to UGX 7.55Trillion in 2022, and they keep on accumulating, despite the Finance Ministry’s Strategy to address them.

Domestic arrears are generally defined as financial obligations of the Government that remain unpaid beyond the fiscal year in which they were incurred and due. Arrears arise in many categories of public expenditure including compensation of employees, purchases of goods and services, court awards, and development/capital projects. Arrears are a form of debt and pose a serious risk to the financial management, sustainability, and reputation of the country.

According to media reports, UGX 200b was recently released by the Finance Ministry to settle domestic arrears. The move is commendable and will undoubtedly provide a much-needed boost to businesses across the country. This injection of funds will help to stimulate economic activity, create jobs, and support the recovery of businesses that have been hard hit since the COVID-19 pandemic.

However, compared to the huge UGX 7.5 Trillion domestic arrear amounts, this release isn’t sufficient. Going at this rate of UGX 200b payment per financial year, according to some CSOs, it would government 35 years to clear the current stock of arrears, assuming that no more arrears will accumulate.

Furthermore, the government’s failure to make prompt payments on arrears has consistently stifled the growth of an economy primarily driven by the private sector. This delay in payment undermines business operations and undermines the overall economic progress.

Government should address these enforcement gaps and improve mechanisms for controlling domestic arrears. For instance, according to the Finance Ministry’s Strategy to Clear and Prevent Domestic Arrears 2021, accounting Officers who subsequently accumulate arrears will be subject to sanctions allowable by Sections 79 and 80 of the PFMA, 2015 (as applicable) and subject to termination or not be reappointed.

However, no Accounting Officer has so far faced consequences for contracting services with no clear payment plan, hindering the timely payment to service providers.  Without a timely and proper resolution, the arrears will continue to adversely affect the private sector’s business expansion and the ability to create more jobs for the population.

In the first place, the circumstances under which the Government has accumulated such huge amounts of domestic arrears are a symptom of a broader issue; the lack of effective cash flow management and planning within Government institutions.  The problem of arrears impacts the implementation of the budget which results in the potential delay of planned services to the public. It also disguises the true level of the liabilities the government has to resolve.

Additionally, while the payment of this debt will provide a short-term boost to businesses, Gov’t should address the structural challenges that many businesses face, such as high interest rates, limited access to credit, and a complex regulatory environment.

According to the Finance Ministry’s Strategy to Clear and Prevent Domestic Arrears, improving fiscal transparency provides a greater understanding of the financial position and the exposure to fiscal risks.

The accumulation of arrears can be prevented with a strategy where each Accounting Officer is responsible for their budget and accurate record keeping, with managing the Vote’s expenditure within the appropriated budget as a direct reflection of an Accounting Officer’s performance.

Therefore, the payment of UGX 200 billion is a welcome move because it will boost cash flow for businesses that supply to the Government, and reduce bad debts. Businesses receiving payments on time can improve their creditworthiness, accessing credit facilities and loans more easily.

However, the payment must be accompanied by a broader commitment to reform and improve the way the Government does business with the private sector. Solving the issue of accumulation of domestic arrears involves implementing several remedies and it will require the discipline to live within the means of a realistic revenue forecast. Only then can we ensure that businesses are able to thrive and contribute to the growth and development of our economy.

Public Relations and Policy Manager, Corporate Image Limited