Tuesday, June 26, 2012


Almost  15 years ago the then Secretary to the Treasury and Finance ministry Permanent Secretary Emmanule Tumusiime Mutebile said the government was considering floating bonds to finance infrastructure development.
Months later the Mutebile said they had shelved the idea because borrowing locally was much more expensive than taking out a World Bank loan.
The World Bank’s   concessionary loans often cost about 1.75% over 40 years with a 10 year grace period.  Uganda’s ten year bond, the longest tenure we have had has rarely dipped below double digit yield at the best of times. So on the surface of it the mathematical logic behind government U-turn cannot be faulted.

However government went ahead to start issuing two, three, five and ten year bonds but solely for use as monetary instruments – to mop excess liquidity and keep inflation in check.
As a result the market has developed a level of confidence in our bond auctions, setting the stage for further developments in our local bond market.

Enter President Yoweri Museveni and his proposal two weeks ago that government would look to tap NSSF’s  sh2,800b war chest to finance its infrastructure ambitions. The suggestion threw up an uproar with the consensus being that given the government’s corruption record workers’ were wary of lending to government.
To be charitable, the furor could be put down to knee jerk reaction. NSSF is already the single largest participant lender to government through its participation in the treasury bill and bond auctions.

If workers really wanted to complain about lending to government it would be on the grounds that the yields on bills and bonds are the lowest borrowing rates in the market. This is so because governments are supposedly the safest borrowers. Government  does not default on its loans.
But as Museveni admitted even NSSF’s holdings in their entirety are not sufficient to bankroll a road construction program that could cost sh4,000b over the next five years.

This speaks to the issue of our saving culture or lack of thereof. Currently the savings as ratio to GDP is only 10 percent much lower than the sub-Saharan Africa average of 18 % or East Asia’s 43%. Of course the argument is that we do not save in the formal financial system but in brick and mortar and other alternative means – cows, chicken and ducks.

That kind of saving because it does not aggregate funds, is very inefficient with little society wide benefits. One financial expert estimated that at three in every five shillings in circulation is not in the formal sector, but scattered under our mattress, in our ceilings and holes in the ground.

Now that donor money is going to be constrained for coming years government needs to help push up savings rates. The statute that governs the NSSF was a good start mandating all workers to save five percent of their pay to go towards their retirement benefits. The employer contributes and additional 10% of the workers salary. NSSF does not only have the largest pool of money  of any financial institution but also the largest pool of long term savings in a country which as none to speak of.

For starters government can expedite the liberalization of the pension sector. As it is now we are all mandated to contribute to NSSF . Liberalization would introduce competition into the sector  and workers may get much better terms elsewhere.

In addition government should make saving for retirement tax deductible. As it is now income tax is levied on salary gross giving little incentive for workers to save more. If for example government said that  workers saving up to 20% of salary will not suffer tax on those savings, it is possible people will store away more money for their retirement increasing  the much needed pool of long term financing.

Of course with more long term finance sloshing around it will be much cheaper to finance industry and even real estate development hence create much needed jobs.

Back Museveni’s plan to “raid” workers money. If government issued an infrastructure development bond, NSSF would not be the only participant, with interest coming from any other number of players locally, regionally and internationally.

Government’s repayment record in the bond market is not in doubt the only question is can government execute the projects properly that these funds are intended for.

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