Tuesday, August 11, 2015


Last week MPs passed the Parliamentary Pension (Amendment) Bill 2014 in which among other things they would be able to borrow from their own pension fund.

If we had any doubts that MPS were financially stressed, leveraged up to their eyeballs and tethering on the edge of financial ruin this single act dispelled them. In order to alleviate their own suffering, with the unintended consequence of creating more financial distress in the sunset of their lives, they have leveraged their power to legislate for their own immediate benefit.

We will not discuss the morality of that here.

"There are a few home truths that the MPs need to keep in mind. One, that it is not prudent to dig one hole to fill another and secondly, when you are in a hole you are best advised to stop digging.
Our honourable members financial indiscipline aside, the more universal problem is the high lending rates that prevail in our economy...

In a liberalised economy like ours high prices can only mean that the product on sale, in this case credit, is in short supply and does not match demand.

Of course the bankers shall argue that the cost of money as referenced by the Bank of Uganda’s central bank rate (CBR) is high to begin with. Also that the rate at which government borrows from the public – through its bills and bonds is high as well. It would be imprudent of banks to lend in the market at a lower rate than the double digit rates government is offering, since government is the safest borrower.

Parliament several times in the past have tried to bring pressure on the banks to lower the rates but the economic logic was such that they had to stop chasing that bone.

However there maybe something parliament could do for all of us and themselves to lower lending rates.

In 1985 when the government created the National Social Security Fund (NSSF), that was probably the last act they did to encourage savings. Now NSSF is the biggest financial institution straddling the sector like a colossus. NSSF has grown to a sh5.4trillion fund, monies which can have a real transformative effect on the economy.

Thirty years down the line it might be time to do something again.

What if parliament amended the existing law to increase the mandatory savings for employees by two percentage points to become seven percent. Even assuming employers do not double the workers contribution and maintain it at ten percent going by the current planned  monthly contribution of sh58b this would mean an increase in collections from the current pool of contributors of sh8b a month or about sh100b annually.

NSSF has various avenues to which it can deploy these funds. It can either bank them, buy government bills and bonds, invest on the capital markets, buy into existing businesses or invest in real estate.

Out of necessity their bank balances would increase and the banks would be pressed to shift more and more of that money out the door, after all banks make their money by lending it out. With too much supply, lending rates would have to collapse out of necessity.

However the threat of inflation will grow as the banks lend more and more.

But by the nature of its balance sheet it does little good for NSSF to be lending to commercial banks, which can only offer short term deposits. So NSSF would focus on development and mortgage financiers who need long term money. The beauty of this is that as the money will be used to boost the productive sectors of the economy, the increased productivity will stave off inflation.

Of course this hypothesis is rough around the edges.

But the principle that our honourable ladies and gentlemen should in legislation look to improve the general economic environment for the whole country and not only for themselves is a sound one, whichever way you look at it.

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