By James Karuhanga

Senior Research Uganda GLCSS

 

The Ministry of Finance, Planning and Economic Development’s (MFPED) September 2006 Performance of the Economy report reveals an under performance in domestic tax revenue collection. This is largely attributed to the on-going energy crisis.

 

The report shows that although September’s Shs.196 billion tax revenue collection represented a five percent growth as compared to September 2005, there was an under performance of Shs.8.7 billion (4.2 percent) against the target for the month.

 

‘’The under-performance by corporate and withholding tax collections in September can largely be attributed to the negative effect of the on-going power crisis on business profitability,’’ states the report.

 

Comparisons in tax outturns for the first quarter of 2005/06 and 2006/07 indicate direct domestic tax collections amounting to shs.46.6 billion. This was shs.4 billion (7.9 percent) below the target for the month, as underperformances by corporation and withholding tax collections more than offset the above-target collections.

 

Corporation and withholding tax collections, the second and third largest items, were 57 and 16 percent respectively below target. It is worth noting, however, that the performance of direct domestic tax collections in the first quarter represents an increase of 3.2 percent as compared to the same period last year.

 

The Great Lakes Center for Strategic Studies (GLCSS) observes that the on-going power shortage has substantially affected business profitability. Businesses now close whenever there is load shedding in Kampala. The lack of adequate power interrupts businesses and increases the cost of doing business with the burden being transferred to the consumer.

 

“On the domestic front, of course, power is a major constraint to the economy,” Mr. Keith J. Muhakanizi, the Deputy Secretary to the Treasury in MFPED commented.

 

Barely six months after the last tariff increase, tariffs will again rise 30 percent and 35 percent for both domestic users and industrial users respectively from 1 November. GLCSS believes the knock-on effect of the recent power tariff rise will be reflected in higher prices of locally manufactured goods and services. It will also mean lower sales and even closure of small and medium size local enterprises.

 

Commercial consumers will suffer from erratic supply due to the long hours of load shedding as the tariff increase will not be equal to the supply. The new tariff increase will be a further burden to the already over stretched business community and will impact heavily on the entire economy. Power tariffs are expected to increase from Shs298.2 to Shs426.1 for domestic consumers, Shs300.0 to Shs434.3 for medium industrial consumers and 148.3 to Shs238.7 for large industrial users.

 

The severe power shortage arises from the reduced generation capacity due to the prolonged drought in the region coupled with increased demand for power. Uganda’s energy demand is estimated at 330 megawatts with a growth rate of 6-8 percent annually. This translates into an additional 24 MW or more each year. Installed hydropower generation capacity at Jinja’s Owen falls dam is 300 MW only. Although an additional 80 MW was installed, the effective generation capacity is continuously declining.

 

Plans are under way to increase hydropower generation at Bujagali (250MW) and Karuma (200MW). These new projects coupled with other investments in the energy sector will help curb the energy crisis when completed. The government has put in place policies and laws favoring and encouraging private investments and capital inflows in the energy sector. In the 2006/07 budget, government also allocated Shs.229 billion (US $123 million) for the subsidization of electricity costs.

 

Government has been working with the private sector to develop small renewable energy prospects like Kakira Co-generation plant to produce 14MW from bagasse and Wambuya (10MW), Waki (5.1MW), Musizi (20MW), Bugoye (11MW), Nyambuye (2.2MW), Nshungyezi (54MW), Ishasha (5.5MW) and Nyangak (3.3MW).

 

Faced by a prolonged draught and thus continuously declining water levels in Lake Victoria, the government has come up with a comprehensive strategy with short, medium and long term measures to alleviate the energy crisis.

 

Short term measures include reducing the losses in power transmission and distribution. This includes increasing the efficiency of electricity utilization including use of energy saving lamps. Government will spend $1.2m (sh2b) to purchase at least 800,000 energy-saving bulbs expected to be distributed before the end of the year. Importation of more power from Kenya (20MW) and installation of 100MW of additional thermal generation capacity will also be the short term strategies.

In the medium term, development of both Bujagali and Karuma hydropower projects and emphasizing on the above mentioned small renewable energy projects and many more are considered.
In the long term, more hydropower sites on the Victoria Nile including the Ayagos and Uhuru will be developed. Geothermal resources, mainly found in the Western Rift Valley, will also be developed. Peat resources will also be harnessed for power production. The government has also provided a shs.229 billion subsidy to the power sector to avoid a tariff shock and allow for competitiveness in industries.
The GLCSS notes that a lot of investment especially into the energy sector is needed to save the economy from a worse crisis than the current one. It is also worth noting that Uganda is a very resource rich country, a factor which will help it quickly recover from the energy crisis when proper investments into energy are realized.

James Karuhanga can be reached at james@glcss.org. GLCSS trains African journalists, offers an on-site internship to foreign African studies students, and manages an exchange program with journalists from the United Kingdom, the United States and Europe.

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