Tuesday, June 18, 2013

NO PAIN, NO GAIN



Incredible as it may sound today, inflation peaked at 215% in 1987.

Since inflation is caused by too much money chasing too few goods, to fight you either increased the number of goods produced or you reduce the money in circulation.

Producing more is not enough, you need to produce what people will buy. It takes time even for the market to determine what people want and in what quantities.

It’s easier to reduce money in circulation than it is to kick start production.

In the late 1980s early 1990s government after government was done dabbling in arm chair socialist theories they decided to bite the bullet and rein in inflation. So they cut government spending and operationalized the treasury bill auctions to suck money out of the economy.

I don’t remember the details but I remember the pain – my pocket money took a nose dive, but I remember more especially the talk – that the government wouldn’t last the year, that they did not know what they were doing and that they would have to reverse the decision to fight inflation.

When I look back I realize it was the speculators who were the chief grumblers – they would buy goods and hoard in anticipation of higher prices.

If we drew a sand in the history of our economy, that was the time the government decided to get serious about reviving the economy beyond the flowery language in the ten point program, which is still a vision worth persuing by the way.

Since then other tough decisions have been taken – liberalization, privatisation, UPE all of which have been greeted with sceptism and outright disdain by the interest groups who were seeing their meal ticket flying out the window.

This budget, Maria Kiwanuka’s third budget reading, also marked a new turning point. These turning points get progressively less dramatic, even if their effects are as far reaching as the earth shaking liberalization and privatisations moves of the 1980s and 1990s.

Many things were said in the budget but two things stood out for me the announcement that URA, KCCA and the Uganda Registration Services Bureau are going to work together to collect more revenues and the decision to borrow from the public to finance our budget deficit.
As it is now there are thousands probably tens of thousands of businessmen with trading licenses, which they dutifully renew every year for fear of being shut down by KCCA. And that maybe the last official levy they pay to authorities –until renewal a year later. But many of these players are not bit players in the economy, racking hundreds of millions, even billions of shillings annually in undeclared revenue. Now they are going to have come clean on at least more of their income than they have been declaring.

Uganda’s revenue collections as a proportion of GDP has hovered around 13% for almost a decade, lower than the Sub-Saharan average or than Kenya and Tanzania’s statistics. The donor cut back on budget support, clearly was the trigger we needed to make this bold move.

It is not as if we did not know about this. For years we have lamented how only a few people and entities were shouldering the bulk of the taxes and yet their were people in the informal sector who were minting money hand over fist and not paying their just dues.

But as long as government could fall back on the donors there was no incentive to work at widening the tax bases quicker.

Beyond the increased revenues a large population of our businessmen will get into the habit of paying taxes. Government can expect some sabre rattling from the traders just as they did with introduction of VAT, but they should expect little sympathy from the working classes who have paid their taxes while the traders lived it up.

Government has borrowed from the public using treasury bills and more recently treasury bonds for years, but that was mainly to mop up excess liquidity in the market and keep inflation under control. While everyone acknowledges the importance of this exercise, there has been some criticism of it, with critics arguing that it has been a waste of money sterilizing this money in the central bank’s vaults instead of doing something with it, build infrastructure for instance.

There is a place and time for everything, and the government paper’s roll in keeping inflation in check will always be there.

But this new initiative where we could see government borrowing from the public to finance roads, dams and other investments has been long overdue. We need to develop a culture of being able to call upon our people to finance major investments that will benefit the nation. We need to feel a sense of ownership for our roads, railways, bridges and dams.

Of course the detractors of this kind of initiative argue that borrowing from the Ugandan public is more expensive than borrowing from the World Bank which often gives 40 years loans, with a ten year grace period charging a small administrative fee for the trouble, but that is to ignore the priceless value that you can put on the ability to have a mechanism to borrow internally.

Donors will not always agree with us on our development priorities – they have frowned on building Karuma, UPE and our military spending in the past, even when we knew better. We have not been equals in that arrangement.

Let us not fool ourselves there is pain that comes with nationbuilding. If we are not willing to pay the price we should be prepared for those who are willing to pay to benefit more than we do.

What would have been icing on the cake for me would have been a more definite time table on the pension sector reform – another local resource mobilization move, but more especially an increase in mandatory savings for workers, maybe a percentage point more, employer contributions can be held to 10%.

But then again we cannot get all we wish for can we?

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