Tuesday, July 13, 2010


The International Monetary Fund has predicted that Uganda’s economic growth will slow down this year, but it still predicts strong growth in the 7% range – strong when compared to Africa’s expected 3% growth.

In the last financial year the economy grew by 9.5%.

The IMF attributes the continued strong growth largely to the increased investor interest following the discovery of oil in western Uganda.

Bank of Uganda governor Emmanuel Tumusiime-Mutebile has said in reply to questions about how we will feel the effect, that reduced private remittances from abroad, kyeyo money, aid cuts and drops in foreign direct investment would be immediate consequences.

Basically the Gross Domestic Product (GDP) is the sum total of economic activity in a country. The components of GDP are private consumption, investment, government expenditure and the balance of trade or the difference between exports and imports.

So as the Governor’s analysis suggests we can see lower growth in coming years as private consumption, investment and government expenditure are negatively affected.

The silver lining in this scenario is that we may suffer some aid cuts.

In the last 25 years aid has been important in rehabilitating our dilapidated roads, revitalizing key institutions and funding health and education.

However, donor largesse has lulled us to sleep, and we have neglected to mobilise our own resources.

It is true that government has significantly reduced the share of donor aid as a percentage of the total budget through increased revenue collection, but aid still accounts for significantly more than 70% of the development budget, which deals with infrastructure development, building of schools and health centers.

So a drastic aid cut today could put paid to UPE, USE and universal primary health programs with one swoop with far reaching repercussions for the nation.

In addition our savings rate, about 6% of GDP remains woefully below the regional average of about 16%.

No country has developed without putting in place mechanisms to mobilise its own resources.

In Singapore workers at one time saved as much as 60% of their incomes via government-mandated pension and health insurance schemes and through the mortgages on their houses. That number has reduced somewhat in recent years but the legacy of those policies have made Singapore—a virtual rock in the ocean with no natural resources to speak of but its people and its strategic location on a international seaway, a developed nation in one generation.

Much is made of south eastern Asia’s cultural inclination to save but it is true that in all those countries there are government mandatory saving schemes that are lacking in Uganda.

That your population saves a significant proportion of its incomes is critical because then local businesses can have access to long term funds, which they can use to start-up, grow or sustain their enterprises.

One of the major bottle necks for businessmen in this country is a lack of long term funds, which makes available funds very expensive.

We have made little or no effort in the last 25 years to increase our savings rate through government policies so much so that workers contributions with NSSF are not tax deductible.

The argument is that you better tax at source because taxing at the end will take a huge chunk out of the savers’ eventual lumpsum payment. That argument is more populist than anything because the math will show that taxing the lump sum at the end will cost the saver less than the cumulative tax on monthly contributions during the working life of the individual.

But by postponing the tax till the end, like other economies do, while providing inducements for workers to save more than the mandatory minimum, workers save a high proportion of their incomes.

And the nay sayers argue that Ugandans do not have large enough incomes to afford to save. Those people have not visited the village banks where savings are as little as 500 shillings a week, and how they are revolutionizing villages.

And if you needed any more proof last week former NSSF chairman Geoffrey Onegi-Obel speaking on local television, estimated that as much as 60% of all money in circulation is outside the formal financial system.

What this means is that the bulk of our cash is held in small disaggregated sums and the challenge is to pool these monies so that they can be deployed to finance the private sector.

So the money is there.

My father told me they are two kinds of people in the world, those who learn the hard way and those who learn from history or others experience, which is the easy way. As a country we clearly fall in the former category.

So an aid cut while extremely painful will force us to think how we can mobilise our own savings to finance development and therefore make our economic growth more sustainable.

Published in February 2009, New Vision

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