Friday, August 12, 2016

BAILOUT DEBATE, ANOTHER CROSSROADS FOR THE ECONOMY?

The current debate on the bailout of private local companies signals a cross road in the management of the economy, which will have far reaching repercussions into the future, market players and observers say.

A few weeks ago a list of 65 companies and individuals allegedly seeking financial help from the government was published. The entities on the list argued that government policy and regional instability, none of which they had any influence over, had conspired to stress their business and they faced the real danger of collapse if government did not step in.

With memories of the most recent high profile bailout of businessman Hassan Basajjabala fresh in the public’s mind, the reaction to the recent development was loud, angry and averse to any help being extended to the businessmen.

In 2011 a parliamentary investigation heard that Basajabala was compensated sh142b to hand back the three markets he had taken possession of – Balikudembe, Nakasero and Shauri Yako markets. Previously he had got a sh20b bailout from government to salvage his hides and skins export business.

"Beyond the public uproar the lines seems to have been drawn between the government technocrats who argue that a bailout is uncalled for, unless for industries that have a strategic importance to the economy. Local businessmen and those who believe government should support the growth of indigenous capital are lined up against this thinking, arguing that they create jobs, pay taxes and earn the country much needed hard currency and it would be a mistake to allow them go under...

In 2011 inflation peaked at 30 percent, a 20-year high, due to regional food shortages, a falling shillings and an increase in money supply due to the just concluded general elections. The Bank of Uganda using its new Central Bank Rate signalled an increase in lending rates in the banking sector, which reduced private sector credit, loan defaults and subsequent collapse of scores of businesses.

Another round of lending rate hikes happened starting last year when the central bank again raised their key policy rate starting in April 2015. Because of the pre-emptive action – in April 2015 inflation was under three percent, inflation peaked at 7.6 percent and has fallen back to 5.1 percent in July.

The businessmen argue that the central bank’s anti-inflationary stance is central to why businesses are weighed down by unsustainable debt.

 “If you haven’t run a business, 28 percent is a nominal figure but if you are in business it’s a matter of life and death. It’s not a joking matter,” businessman Andrew Rugasira, said during the recent Joseph Mubiru Memorial Lecture hosted by the Bank of Uganda.

He said that the stressed businesses were symptom of wider structural issues in the economy and argued that monetary policy – the regulation of money supply, the central bank’s main mandate, on its own would not fix the problems of job creation, affordable credit and increasing production.

"The businessmen argue that to allow these businesses to collapse would be to set back the growth of a local capitalist class which has been growing for the last few decades and to affect the jobs they have created, the taxes they collect and other indirect and intangible benefits they bring to the economy...

“The young people look to us as people who through hard work are able to make it in this economy. If we go down they will see no hope in trying to do things the right way and turn to corruption,” said Kampala businessman William Kajoba, whose Hotel Sojovalo is under threat.

Kajoba, who started out as a spare parts dealer but has now branched out into commodities trading and real estate, said they are not even asking for free money.

“Let government talk to the banks to ease their conditions, to extend repayments for instance or government takes over the loans use our properties as collateral and we pay them off. We don’t want charity, “ he said in a recent interview.

Ashie Mukungu, who worked previously as an economist at the African Development Bank is squarely in Kajoba and his contemporary’s corner. However he argues that to narrow the debate down to the bail out of private businessmen is to miss the bigger picture.

“I don’t know where this bail out word came from. There is a general sluggishness in the economy that needs to be addressed and government has the power to address this. Let us not lose focus,” said Mukungu, who claims authorship of the “bailout” list.

He recommends that government pay off the huge domestic arrears, about sh1.3trillion, owed to the business community, recapitalise Uganda Development Bank (UDB) to open the option of long term money, inject some liquidity into the economy by buying back some of the government paper and create an agency to takeover distressed debt from the bank and restructure it.

But economic managers remain unimpressed and maintain that there is no real threat to the general economy.

“The evidence that high bank lending rates have caused distress among private sector companies is weak, for two reasons (i) the bank lending rates since the BOU began raising its policy interest rate in April 2015 has been relatively modest (ii) the non-performing loans of commercial banks are not currently out of line with historical trends, ” according to an internal official document the Business Vision has seen....

According to the research on which the document was based high interest rate was the last factor in accounting for bad loans in the banking industry. But at the top of the list was delayed government payments, cost overruns, diversion of funds and political instability in south Sudan were among other factors – in order of importance that accounted for bad loans in the industry.

In fact the research shows that only 0.3 percent of the bad loans above sh500m are due to higher interest rates. While six in every ten shillings of bad loans was due to delayed government spending, cost overruns or diversion of funds to issues other than the funds’ intended purpose.

Going into the wider issue of what can be done to jump start the economy one official said the issue of providing economic stimulus does not arise in Uganda’s case.

“You stimulate the economy, essentially inject liquidity into the economy when there is no growth but we are growing at five percent a year so the justification is not there,” said one official at the center of the debate, speaking on condition of anonymity.

He however said a case can be made for stimulus for the agricultural sector and pointed to the 
Operation Wealth Creation as a good initiative in this direction if managed well.

The offset of government arrears is a good idea, he said, “But who really knows how much government arrears are? Finance (ministry) has asked for verified lists and they pay and the responsible ministries are failing to provide these.”

The general tightening of money conditions in the economy has to do with the tightening of government expenditure in recent years.

“Two things have happened you are seeing all these corruption cases in public service and prime minister’s office? Those holes are being plugged and It turns out they were responsible for a lot of the liquidity around. Secondly with government’s emphasis now on infrastructure development the recurrent expenditure has shrunk in relative terms, that is where a lot of the leakage was...

Finance ministry permanent secretary Keith Muhakanizi alluded to reduced corruption in government when he was before parliament last month. He said greater efficiencies in the accounting system was key to his new trend.

He acknowledged though that outside the managing monetary and fiscal policy there is case for government being more proactive in developing the private sector, without any policy reversals.

“We should not be stampeded into doing the popular thing at the expense of the right thing, which is maintaining macro-economic stability for everybody not just a select few. Anything else we do should be within that context” he said.

In 1992 the finance ministry as merged with the planning & economic ministry bringing greater discipline to government spending which up to that point was out of control with the result that inflation had burst past 200 percent a year.

This reorientation also signalled the shift towards a more market driven economy characterised by liberalisation of produce marketing, foreign exchange and the privatisation of state enterprises. The change came after six years of intense debate on how the economy should be managed after the NRM came to power in 1986.

Government technocrats argue that this is now another key turning point in the economy.

"The debate has come back almost full circle to one between more government intervention in the economy versus a continuation of the liberal economics of the last three decades that has accounted for the country’s prodigious growth figures during the period....

“Every economy has a right to determine its economic path,” says Rugasira. He argues for more deliberate and systematic intervention by the state as markets are currently constrained and cannot be sorted out by monetary policy alone.

“We need to reorient the economy towards export. Start with agriculture improve credit terms to the sector, expand extension services and expedite land reforms,” said Rugasira who exports processed coffee to Europe and the US under his Rwenzori Coffee brand.

The technocrats advise caution.

“There is renewed debate not restricted to Uganda about the role of the state in the economy with the people pointing to what the US and EU had to do to pull themselves out of the recent global financial crisis. But in prescribing we should look at the respective contexts, what works for them may not work for us and vice versa,” a senior finance official advised.


Warning too, that once we open the “pandora’s box” it will be very difficult to shut it back again and will very well determine how the economy is run from here onwards for better or for worse.

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