Wednesday, March 26, 2014

“HOT” MONEY AND THE DISTORTIONS TO OUR ECONOMY



The mathematics was rudimentary.

So this big shot goes to Kololo and buys a plot of land for a million dollars, for ease of calculation let us say Sh2.5b. He builds a house on the land for another sh500m for the grand total investment of sh3b. He then seeks to rent the house and gets $3000 a month or $36,000 annually or about sh90m.
The return on his investment would be three percent. But in Kampala if he placed this money with a bank I could manage at least ten percent or sh300m a year.

What explains this gentleman or lady forgoing sh210m a year or almost sh20m a month?

Speaking at a recent dialogue on the recently passed Anti-Money Laundering bill and Anti-Corruption bill MP Nandala Mafabi could see on l one reason.

“This individual is cleaning his ill-gotten wealth through an apparently legitimate business,” the MP said.

We might cheer our connected friends when they buy us beers at the bar or invite us to their multi-billion shilling weddings or visit in their disneyesque palatial homes but the cumulative damage this “hot” money does to the economy is incalculable.

To begin with laundering of this hot money distorts the market.

Looking for land to buy how do you compete with a man who is willing to pay the asking price without bargaining? Or as a landlord who has taken a mortgage to build a commercial building how do you compete with a man content to take any rent because for him whatever income he gets is all profit? Or as business man how do you compete with a man who is willing to depress prices regardless of whether he is making a loss or not?

"What happens then is that legitimate businessmen fall by the way side and when the money launderers are done cleaning their stolen money they move on living the industry oftentimes irreparably crippled...

But even worse is that once you have had a taste for illicit funds the taste never really leaves you. Why should you have to wake up every morning to go to work or to man your business day after day when with a sleight of hand you can divert a few millions here and here to your private use?
This not only deprives the economy of useful minds but also creates a lot false idols to look up to and “career” paths to emulate.

As if things are not bad enough these same networks used to clean money do not discriminate between the clients who patronise them lending the same services to drug dealers, prostitution rings and other organised crime syndicates. Before not too long your pious looking, bible-thumping-on-Sunday public officials is in up to his eyeballs, fraternising with the kinds he wouldn’t allow his mother to know are his friends.

And it gets worse.

For some of us mere mortals we imagine that if we were in the same “privileged” position  we would take just enough to meet our expenses, finish our “site” and maybe throw in a holiday or two for the family and of course the latest SUV in the bond or make that off the assembly line.

But the amount our officials are shovelling into their trucks (pickups are too small to carry away the loot) is jaw dropping. With these colossal amounts come the challenge of how to deploy the cash.
The story is told of the fumigator who was taken – gagged, blindfolded and bound to a house whose garage was piled up to the ceiling with currency notes. His job was to spray the notes against vermin and pests.

Sometimes the money is too much and this economy is too small to invest in without making eye brows disappear into receding hairlines, so they find a way to send the money out of the country. In effect linking up with other networks abroad.

"Before not long our government officials start making startling decisions – dishing out land, selling off companies and offering questionable concessions to dubious characters. Very soon you will have a state captured by these nefarious networks, allowing gangsters to roam our streets at will and do as they please....

It is not inconceivable.

In Montenegro, to get around western imposed sanctions on the former Yugoslavia in the 1990s, they leased ports and airports to cigarette smugglers. With a foot in the door these gangs have never gone away trafficking in addition to cigarettes, in women and narcotics.

Organised crime induced corruption was so bad that Italy had a warrant out on the head of former Prime minister Milo Djukanovic for his role in smuggling cigarettes.

Observers wonder who will implement the Anti-Money Laundering bill when we are knee deep in the problem, but I guess a start is better than nothing at all.


4 comments:

  1. There is also the easy answer which is: we don't know any better. Not too many people actually do the maths or go over the logic when making an investment decision. (Which is why it's important for us to read blogs such as yours, so we change!)

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