Tuesday, October 25, 2016

CRANE BANK AND WHAT IT SAYS ABOUT OUR ECONOMY

Last week the central bank took over Crane Bank. Bank of Uganda (BOU) said the bank was significantly undercapitalised and was putting its depositors’ money and the entire financial sector in danger.

Industry sources say all stops were pulled out to prevent Crane Bank’s eventual fate but they came to nought.

There is little else you can say about that story without making a bad situation worse, but if there was any doubt about the shakiness of this economy, the bank’s takeover should put these to rest.

It is true that the economy has become more sophisticated in the last 30 years. In 1986 coffee exports accounted for more than 50 percent of taxes and more than 80 percent of export receipts. Today coffee exports provide little revenue to the treasury and accounts for less than half our exports of goods and services.

It is also true that the economy has been growing consistently over the same period but this growth has been lopsided towards construction and services, with agriculture the biggest employer, growing at relative anaemic rates to the economy as a whole.

The net import of this is that the created wealth is being concentrated increasingly in to a few hands.
The national household survey carried out in 2013 showed that under two in every ten Ugandans or about 7.2 million Ugandans earn more than a million shillings a year or about sh80,000 a month. 

Think about that!

"Our ability to speak passable English, wheeze around in second hand cars and wear suits to work is but a thin veneer for an economy that is actually not very deep...

What this means is that all our thousands of businesses are scrambling for a small piece of a small pie. So when there is any stress in the economy – a slow down or disturbance the fall out is bound to felt by more people.

A few months ago when the debate about bailing out businesses struggling under the cloud of a underperforming economy were muted Ash Mukungu, formerly of the African Development Bank warned that the business failure will soon lead to bank failures. I thought he was hyperventilating.
And clearly our bureaucracy does not feel a sense of urgency around this subject. According to the finance ministry report for the first quarter of the financial year sh68b was budgeted for debt arrears but only sh28b was released.

The main cause of stress for our businessmen is the government not paying for supplies and services it has contracted. As at the last financial year this figure stood at sh1.3trillion. Other sources say however that even this figured cannot be nailed down.

So you have an economy that is barely trudging along and a government biting off more than you it can chew and you wonder whether Crane Bank’s woes are not just the tip of the iceberg.

One can expect that as a result of Crane Bank’s fate, it is the third largest bank by assets, there will be a slowdown in lending by mere virtue of the bank’s situation and as other managers make sure they are not haemorrhaging cash at a time when BOU is on the prowl. This does not help the economy’s growth prospects.

Clearly the need to return to the drawing board came yesterday, but today will do.

"We need to include more people into this miraculous economic growth we have been enjoying for the last three decades, if only so that businesses can stop depending on the small pool of Ugandans who earn more than a million shillings a year...

In the short term you focus on increasing agricultural productivity in a more systematic way than empty sloganeering. Invest in extension services so that our farmers can improve their practices. In the medium to longer term improve our health, education and other social services, its common sense that a better educated, healthier population will be more productive and earn more.

Secondly we need to take the burden of driving this economy off the backs of commercial banks. Commercial banks ideally should be financing going concerns not dominating the lending to startups, agriculture and development financing none of the latter do they do well. We need angel investors, venture capitalists, small business grants, trade financing and development financing.

Greater specialisation at these different levels will ensure better support for various sectors of the economy, more credit dished out and at lesser risk.

And finally there is no getting around it, we need to be more determined against corruption. Not only do the corrupt take money from the mouths of babes but they distort the business environment -- inflating asset prices and undercut genuine businessmen. But they also overturn the incentive system with people uninterested in innovation and focusing on being commission agents and rent seekers.


We need to be more interested in boosting the substance rather than shining the form of his economy. Crane Bank’s fate is our wake up call.

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