Wednesday, October 15, 2014


Last week during the Uganda-Rwanda Business Forum. Rwanda’s Paul Kagame said among other things that before looking to the outside for help we should look to raise resources at home.

As if on cue Kampala City Council Authority announced that it is looking seriously into issuing a municipal bond to fund investments in the city. A municipal bond is debt taken out by local governments and is often backed by the revenues they collect from their various activities.
Both events are more than welcome news.

Uganda’s saving rate is about 12% of GDP below the sub-Saharan average of 16%. This has far reaching implications for how much and how fast we can develop and the course our development will take.

But in order to tap the markets you have to have the mechanism to do so. In Uganda we have the Uganda Securities Exchange (USE), which has been in existence for close to 15 years. During this time several local and regional companies have sold shares, issued bonds and it has served as a secondary market for Treasury bills and bonds.

"The challenge of employing the USE to raise funds for both corporate Uganda and the government has arisen from structural issues but more importantly mindset inadequacies...

Structurally many of these entities be they corporate or government have not been in shape or have not seen the urgency of using the markets to raise cash.

Companies relying on huge margins have been financing their own expansion through cash and rudimentary lending instruments. But the opening up of the East African market and the entrance of Chinese entrepreneurs has slashed margins, forcing our businessmen to the edge of extinction.

Under the circumstances our businessmen have two alternatives, wither to sell out to the foreign invaders or stand toe-toe and box it out. IN the first instance our businesses are not big enough to provide a credible barrier to entry for foreign companies and secondly, they are so disorganised it’s hard to determine their real value in order to purchase them.

These two same reasons also means that a last ditch attempt to fend off the new entrants is doomed to failure. In such circumstances business expansion becomes a survival mechanism, our businessmen need to scale up their operations to take advantage of economies of scale to push down costs and pass on the savings to the consumer to stay afloat.

But how do you scale up when you don’t even have a real time appreciation of the state of the business, for lack of organised books?

And if you cannot borrow from the banks, imagine how much more difficult it would be to borrow from the markets?

Similarly in government structurally issues abound, for instance it’s not collecting all the revenue it can partly because our economy is largely informal – it is estimated that seven in every ten shillings of economic output comes from the informal sector but also, and related to the first reason, we are highly corrupt.

But the government’s mindset has to be a major stumbling block.

"For the last three decades or so government has been busy pigging out on cheaper financing from the donors, that the idea of borrowing at double digit rates – never mind that it was in Uganda shillings, just didn’t set our officials hearts racing...

However we have since learnt the limitations of foreign aid. To begin with your priorities are not necessarily the donor nations’ priorities. 

In early part of this century the donors made government jump through hoops to prove that there was a market for power form the planned 250MW Bujagali dam. Then energy minister Sayida Bumba was hopping around the region’s capitals trying to sign them to commit to taking up our excess power. That was when less than five percent of population were on the grid. Somehow the donors thought that the vast majority of Ugandans had rejected power?!

Similar differences in opinion slowed increased funding to our road network, the introduction of universal education and health services and increased funding to the army.

Borrowing domestically has its major drawbacks, government competing with the private sector for funds being the major one. So the key would be that as you look to get money from the public we should increase the public’s saving rate.

Currently workers are required to save five percent of their salaries with the National Social Security Fund (NSSF). As a result of this single initiative, and a lot of elbow grease by NSSF, the fund is the largest financial institution in the country.

In addition to continuing to induct more workers into NSSF, a revision of saving rate, maybe having workers save up to 20 percent of their income – employers need not double that or even match it, would bring a lot more funds into the formal financial sector, not only pooling available resources but also putting downward pressure on lending rates.

It’s a cliché that bears repeating – no one is going to develop this country for us. We need to look more and more to ourselves to finance our ambitions and last week’s announcements – by Kagame and KCCA, are cause for optimism.

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