TAXING THE RICH HARDER WILL NOT END POVERTY

Around this time of the year two things happen. The World Economic Forum (WEF) a gathering of the world’s rich and influential, happens in Davos, the Swiss alps ski resort town, which prompts aid agency Oxfam to release its annual report on how the rich are getting rich and the poor are getting poorer.

I don’t know who said it but when capitalists meet in a room they are conspiring against labour, the consumer and whoever else who is not them. Maybe that is why Davos has become a fly trap for all the dogooders, who want to take pot shots at the rich and influential. Maybe for good reason.

The WEF is described as a lobbying organization, which turned 50 a few years ago. When the rich and influential meet at the WEF the conversation is not about who is seeing who or who has been naughty or what did you do during the holidays. With all that concentration of power you can expect its more about scratch my back and I scratch yours. National policies are shifted, billions of dollars are committed in investment, research and charity and the geopolitical map is reordered.

So the envy is understandable.

Oxfam have taken it a step further and pegged their call for a reduction in wealth inequalities to the event. Oxfam has worked out among other things, that world poverty is related to the greatest accumulation of wealth the world has seen and one way to redress inequality is by taxing the wealth of the world’s richest.

"I am a big fan of people accumulating as much wealth as they can within the law. Its good for the economy if people can be incentivized to be wealthy....

But first let us clear up some misconceptions. If Elon Musk is the richest man in the world and his wealth is valued at $300b or ten times the GDP of Uganda, it does not mean that Musk has $300b seating in the bank. His wealth is held in shares that he owns in his various companies, which if quoted on the stock exchange, see their value change from second to second.

Its only poor people and thieves , who hold on to cash.

For all his billions Musk may have only a few thousand dollars in the bank. The story is told that when he sold PayPal he took all the money and used it to invest in his electric vehicle company, Tesla, his space exploration firm, Space X and Solar City, his green energy company. For a while he was so “broke” he would borrow from friends to meet his living expenses and was not averse to sleeping in their guestrooms or at the factory. The rich are in a constant effort to deploy their cash to make more money.

And that seems to be what piques people like Oxfam’s ire. “Why do they need all that money?” The truth is they don’t.

How is money made? At a fundamental level money is made by trading a good or service. To be extremely rich you have to trade your good or service to more and more people. To wake up suddenly and decide you have made enough money and therefore you should stop deploying your money to trade your good or service, would be to deny people who don’t have the opportunity and make the world a poorer place.

But even then you may place your money in a bank, which money will be used to finance other companies, increase production and consumption.

What us mere mortals don’t seem to understand is that money is the by product of delivering a good or service, it is not an end in itself. Its only the poor who think money is the end...

I agree with Oxfam and company to worry about growing inequality but I disagree (not that it matters to them) that the way to redress is to tax the wealth of the rich.

It’s interesting they are going after their wealth because many of the rich don’t earn much salary from the companies they won.

US investor Warren Buffett who is worth more than $100b has earned $100,000 annually for the last 40 years. So even if you taxed him at the highest rate it would be a miniscule fraction of his total wealth.

Besides that the rich pay less tax because their income often comes from dividends, which are taxed at a lower rate than personal income. But then there is Buffett who has received only one dividend payment from his company Berkshire Hathaway in the last 50 years.

So because we cant get much in tax from their incomes let us go for their wealth. Good luck!

A bad idea if ever there was one and suggests a lack of appreciation of why the rich are where they are and the rest of us are where we are.

If we got all the wealth in the world and distributed it evenly to every one within a few years the  original wealthy will be back at the top of the pile.

It has happened before.

"On the collapse of the Soviet Union the communist economists thought they could privatise all the state enterprises by dishing a piece of the companies to all the workers. The financially literate among them borrowed money and bought the shares off their less financially literate colleagues and that is the genesis of the oligarchs in Russia. It happened in South Africa as well, after the fall of apartheid....

And why do I think a wealth tax is bad idea? Oxfam is suggesting something like a one percent tax on fortunes above $550m. That presupposes that the tax revenues will go towards lifting more people out of poverty. In our part of the world that is laughable.

That aside the rich will have to borrow or sell off some of their property to pay the tax, but they will most likely do is hide their wealth to avoid this nuisance tax, so they can continue providing more and more goods and services.

So the man has a mansion with a hundred bedrooms, a garage with as many cars and flies his own private jet, because he does not want to mix with unwashed masses. That is his reward for risking his capital, creating jobs and paying taxes – because their companies do pay taxes.

"Leave the rich make money. Make sure they do it in legal and ethical ways. Invest in educating people in financial literacy as a way to even out the disparities, I am sure the rich would not be averse to chipping in to finance such an endevour. In addition, assure clean efficient government to properly distribute the taxes in education, health infrastructure and general rule of law, essentially ensure government is good in its distributive role....

All this presupposes they are making money legally. I am sure it is possible to be grow fabulously wealthy legally.

The people at Oxfam think that the wealth is a finite resource, that there is not enough to go around so the rich need to share what they have accumulated. That is not true. If you improve financial literacy and improve the business environment, more and more wealth will be created and we will all be just fine.

 

NSSF SHAKING OFF THE CONTROVERSY

This week National Social Security Fund (NSSF) reported on its half year performance for the period ending December 2022, which suggested the operations of the fund remain solid despite the distraction of the leadership stalemate.

The renewal of former CEO Richard Byarugaba’s contract has been held up by gender and labour minister Betty Amongi pending an investigation by the Inspector General of Government (IGG) into allegations brought to light by the minister.

The developments have kicked up a storm, making some worry that the Fund’s operations may be affected.

On the contrary acting managing director Patrick Ayota reported that contributions were up 22 percent to sh786b from sh643b over the same period in 2022. In addition, income was up to sh1.054trillion from sh900b during the same period...

Payouts to members nearly doubled to sh712b from sh364b during the same period in 2021 driven mainly by the additional sh185b paid out to those who qualified for mid-term access.

As a result, the Fund is set to grow to meet the target of just under sh19trillion by the end of June, which is the end of NSSF’s year, from sh17.9trillion at the end of December. In addition while new employers subscribing to the Fund are set to double to 4,000 from 2078, new employees saving with the fund are expected to more than double to 150,000 from the current 67,277 brought onto to the books in the last six months of 2022.

The true test of whether people were ignoring or taking the controversy seriously would be the rate at which voluntary members would signing up. Unfortunately, the gender ministry has not yet operationalised the voluntary membership clause since the law was accented to by President Yoweri Museveni in January last year, so its hard to tell whether the controversy is keeping members away or not.

NSSF is no stranger to controversy.  Its last four managing directors left the fund under a cloud – to put it mildly. None of them lasted as long as Byarugaba or controlled even a tenth of the resources that he has.

"When Byarugaba joined the fund in 2010 there were about sh2.5trillion in assets under management. The seven-fold increase in assets did not come by mistake...

This has been made possible by an emphasis on compliance by employers – contributions are up to more than a trillion shillings a year compared to sh472b in 2012; a conservative asset portfolio – about eight in every ten shillings in fixed income with double digit yields and a greater efficiency in administration -- cost to asset ratio of just over one percent compared to the global average 2.2 percent for a fund of this size.

NSSF has survived previous storms because its members are mandatory contributors by law. Workers contribute five percent of their gross pay and their employers top it up with 10 percent.

At the bare minimum members were captive, unlike banks where if there had been such controversy around a bank, savers would beat a hasty path for the door.

In addition to this NSSF now has more than a decade of stellar performance – has managed double digit interest to members in all but two years, which allows its members to give it the benefit of doubt.

"The figures suggest that for the time being the controversy around the leadership of NSSF is not affecting operations, not only does NSSF continue to collect contributions and pay out benefits, its does so at a higher level than ever before...

It may be too soon to tell, seeing that the controversies burst into the public space in December, but it must be some consolation that NSSF has not collapsed like a pack of cards at the first sign of trouble.

In the greater scheme of things this controversy is a bleep and probably a useful test of the robustness of NSSF’s systems. The challenge for NSSF’s management is not to let this learning opportunity go to waste. Larger controversies are going to come in the future – sh17trillion attracts a lot of flies, and they should not be found wanting in the same way in the future.

That being said resolving the leadership question urgently, cannot be overstated and even more importantly assuring the membership that grubby fingered officials will not have easy access to their funds is critical.

While operations seem to going on unhampered, leadership ensures the strategy continues to be executed and the company culture allows that.

 

USAIN BOLT AND LESSONS FROM THE BANKS

Last week it was reported that former speed demon Usain Bolt had lost much of his retirement nest egg – about $12m (Sh45b) when a company it was invested in went under. The company suffered internal fraud which accounted for among others Bolt’s money.

This is a retiree’s worst nightmare.

I don’t know the details but I can imagine how such a thing came about. The little-known company Stocks & Securities Ltd probably approached Bolt and his management team and promised returns above the industry average if he invested with them.

They probably bad-mouthed established wealth managers who were offering, say single digit returns annually as “conmen”, spending most of the money on fattening their owners at the expense of their clients. They were a company with a difference. Probably spending next to nothing on marketing with the savings being enjoyed by the clients.

"Given the short career spans of athletes, they hit their peak earning potential before they are 30, one can understand the anxiety to seek the best returns for their money. Better established firms, with time tested records but lower returns, seem boring and worse, thieves, exploiters, neo colonialists …and any number of expletives that can turn a poor black kid’s head.

We hope Bolt recovers his money from the fraudsters.  But for us mere mortals, there is a lesson for us in how we seek to grow and keep our money.

Banks are borrowing businesses. They receive money from the public and lend it back to the public with their margin added on. They rely on volume to make money because the margins are a bit thin, Very boring.

Even more boring is their investment process. They first keep cash, when that becomes surplus to requirements they invest in near cash instruments – fix money with other banks, buy treasury bills and bonds and then maybe build or buy a building. The last to show they are solid, to the gullible public who see brick and mortar as an indication of being solid.

With most transactions becoming digital a lot of those bank buildings do not pay their way, dead weight on their balance sheets. But that is a story for another day.

"The point is we need to invest like banks.

Stay in cash and move up the asset classes, cautiously and systematically. But no! What do the rest of us do? We start by investing in the mortar and brick as soon as we have some cash coming in. We climb the tree from the top...

Real estate is used as a store of wealth. The wealthy make their money in trading goods or services and then store it in real estate.

The logic is simple. Our initial investments need to be as near to cash as possible to cater for our daily needs and emergencies, once this is covered, we move on to invest in more fixed assets, which by definition are hard to dispose of quickly. They often have low cash-on-cash returns but can show dramatic appreciations over time, which value is unlocked on sale. That’s the sexy part.

The banks’ time-tested formula is important because when the savers come to withdraw their monies the bank cannot turn them back with explanations of how they are illiquid because they parked their money in real estate.

"Greenland Bank, which was shut down in 1999 learnt this lesson the hard way. They behaved like us, rushing to build themselves a fantastic headquarters, hotels and other illiquid assets. They made the cardinal sin of using short term liabilities to finance long term assets. This mismatch cost them. Of course there was the issue of being in bed with shady fellows, but again that is a story for another day.

Stanbic Bank, which is many times bigger in value now does not own its own headquarters choosing to stick to their core business as a financial mediator. The building I am sure, will come.

Many of us who are in employment can get away – for a while, with this inversion of the wealth creation process, because any bumps in the road will be papered over with our monthly pay check. But it would do us well to keep this logic in mind even if we have a regular paycheck.

As Bolt’s experience has shown going for the best return is good but steady and consistent returns are better...

Good and consistent returns add up over the long term. Higher returns suggest higher risks, which means that eventually the high risk will come through and God help you!

 

 

THE WISDOM OF SHIFTING TO EQUITY RATHER THAN INCOME

Many years ago I read an article about how rap artists in the US were shifting emphasis towards equity or ownership of their music and away from income, being paid for concerts and a share of their album sales.

This mindset shift now means you have dollar multimillionaires like P-Diddy and 50 Cent and even billionaires like J-Zee and Dr Dre.

And explains why we have active sports billionaires like Tiger Woods and LeBron James. Michael Jordan led the way, but he hit the billionaire mark after he had retired.

First a few clarifications when you are a millionaire or billionaire it does not mean you have a million or a billion in your bank account. It means that difference between what you own and what you owe is more than a million or a billion. So you can be millionaire and cash strapped because your assets, what you own, do not throw off enough cash.

So, the rappers of today have huge asset bases, dwarfing their earnings, unlike their predecessors who had cash flowing out their wallets, hanging from their necks, pinned to their ears and welded to their gums. The rapper of today is much better off than his predecessor as he does not have to keep performing to sustain his bling...

The lesson is obvious, when given a chance take equity rather than cash.

The story is told of in the early days of microblogging site Twitter, Beyonce was contracted to perform at their end of year party and rather than take cash she got paid in Twitter shares. Those shares at last count were worth $300m.

Of course, this is a counter intuitive thing to do as one suggests immediate gratification and the other delayed gratification. Not to mention in owning shares you share in the risk of the enterprise, meaning if it collapses you lose your investment, while even if the company is loss making the company may still pay you.

However, if the company is wildly successful it will show on your bottom line as well.

It makes sense so why do more of us not do it?

The excuse makers complain that the opportunities are not there to do such deals. That’s not true. The truth is that we are psychologically not wired to take a long-term view, we would rather have the bird in the hand than the two in the bush.

And secondly, the people who benefit from these deals tend to keep quiet about them and not shout from the rooftops about their “good fortune”. These are the five percent in society who own more than everybody else.

They have been able to reorient their minds to thinking long term and broken away from what the majority of us do, which is to eat what we have now rather than save or invest for a future date.

It is not easy. But we do it all the time.

When given a cob of maize you have the option to roast and eat now or store it away and plant it. How many cobs can be harvested if you plant the seeds of one cob? When you send your kids to school the return on investment may only be enjoyed 30 years from the day they start learning their ABCs.

 

"A cob does not look like much nor does your toddler son, but if you can just exercise your mind, stretch your vision into the future, you might just be able to see the possibilities and do what it takes and be patient to reap way into the future...

But that is not sexy and does not play well on social media. Instant gratification is more interesting to people watching you.

And for us salary earners it is a no brainer, we negotiate our salary according to our needs or our previous salary. Few employers would pay you in equity—partly because they have no clue about the option themselves. But If you were thinking in terms of benefitting from the future fortunes of your employer, it might make you look better at the financial health of the company you are joining.

How many times have you seen a colleague join a company at higher salary than his previous one, only for the company to sack them or fold altogether because, as it turns out they could not afford him?

Everybody is talking about wealth creation, but what does this actually mean? We think it means earning more, which it may very well be, but wealth creation entails accumulation, beyond just spending more and more money.

What is the point of working if you can not accumulate assets that ensure you work less and less, while still able to maintain or improve your lifestyle?

In 2023 while we should look to improve our earnings, let us also start to think about accumulating equity by building it or buying it.

THE CHALLENGE OF RUNNING KAMPALA

Capital cities the world over, are hostile territory for the ruling party.

Maybe its because the city voters are closest to the center of government, see it in all its glory and grime. A classic case of familiarity breeds contempt. It is safe to say that most times capital cities are the best served in terms of infrastructure and public services, so one would think the residents should be a bit more grateful for their higher standard of living. But no sir.

Again, a classic case of if you give them an inch, they will take a mile.

Kampala is no different.

"The last time the ruling National Resistance Movement (NRM) had its candidate ensconced in City Hall for almost 30 years. Christopher Iga who served until 1997 was the last NRM mayor of Kampala....

Resigned to this position, the government created the Kampala Capital City Authority (KCCA), essentially beefing up the power of the town clerk under the old arrangement and effectively taking over management of the city.

Under the current arrangement, a convoluted system, the Executive Director Dorothy Kisaka reports to the Kampala Capital City & Metropolitan Affairs minister and not the Lord Mayor Erias Lukwago. Lukwago, who heads the legislature of the city, which oversees KCCA’s affairs and passes budgets.

Immediately you can see the conflict. Lukwago is like a member of parliament, he can huff and puff but he has little say over the running of Kampala.

Interestingly Lukwago was a member of parliament when the law creating KCCA was debated and passed.

As a host of a talk show in our sister radio XFM – it was Vision Voice FM, I remember interviewing Lukwago after he had declared his intention to run for Mayor of Kampala. I asked him given the new arrangement what he was hoping to achieve in the hollowed-out position. He replied something to the effect that he will have the mandate of the people of Kampala and will be effectively in control of the city’s affairs regardless. Nothing has been further from the truth.

"One is tempted to see Lukwago’s latest outburst about overinflated roads and imaginary land purchases by KCCA in this light, an attempt to ensure KCCA pays attention to him Others suggest it is a way to divert attention from the leak that suggested he and General Salim Saleh have been working together....

Two weeks ago, Lukwago called a press conference to complain about the “overinflated” cost of a project to rehabilitate and construct roads in Kampala. Lukwago pointed out that at $288m (about a trillion shillings) for construction of 69km of road, meant a kilometer of road would come to about sh14b.

As it turned out the project’s conception begun in 2016 when Lukwago was in office and not Kisaka the current Executive Director. That the project has gone through various levels of vetting with the finance and works ministries, the KCCA council, the solicitor general and the funders, The Africa Development Bank (AfDB).

The full scope of the project, which actually will cover 100km of road and include widening and paving roads, the traffic junctions, covered drainage, construction of non-motorable roads and other amenities, which means the road project is not just about laying tarmac.

But Lukwago knew all this or he should have at least, if not because his council was involved in signing off on the project, but also because it has taken seven years before ground is broken.

So, what was his outburst about? Lukwago would want to position himself as the champion of good governance and his constituents are cheering him on, but on closer scrutiny this would be a hard story to sell.

It reminds me of former KCCA boss’ Jennifer Musisi challenges in trying to make Kampala work and her being second guessed by the politicians – Lukwago was the mayor then as well. The story too is the heckling from the city’s politicians eventually cost her, her position.

"It is clear that the way the management of the capital city is constructed with the political head a member of the opposition and the accounting officer appointed by the ruling government is fraught with problems. It does not augur well for the future development of Kampala, or does it?

It doesn’t have to be so. In theory both leaders whatever their shade of politics, sould work towards the betterment of Kampala. The reality though is that an opposition leader, who wakes up every morning to discredit the ruling government would struggle with his or her conscience to oversee the successful implementation of the government’s manifesto.

 

WHY WE SHOULD BE CONCERNED ABOUT KCCA ROADS

Last week Kampala Capital city Authority (KKCA) boss Dorothy Kisaka announced plans to pave roads around Kampala, a project that would cost $288m (one trillion shillings).

Her political boss Mayor Erias Lukwago quickly jumped into the fray accusing KCCA of overinflating the cost of the project which by his calculation the 69km of road earmarked would cost sh14b a km to build. For a long time we have known that to build a kilometer of road costs about a million dollars or about sh4b.

KCCA are yet to respond to their boss.

The need for a functioning road network cannot be overemphasized especially in the capital.

"Speaking from personal experience without traffic I whiz to work in less than 15 minutes without pressing the accelerator to the floor. This is a far cry from 15 years ago where I would have to navigate badly rutted roads for most of the way to work. My productivity has increased as I can do more as I do not have to stay too long on the road....

I am not alone. Sine the paving of the roads in our leafy suburb, businesses have sprouted along the roads, real estate development a little off the paved roads is on steroids and generally it’s a more pleasant place to live – we are not chocking on dust and any number of pestilences that come with it.

As a driver of economic growth and subsequent development, improved infrastructure is critical. As shown above it improves productivity and efficiency and opens up new avenues for economic activity where there was none before.

It would help even more if KCCA could decongest our roads via the use of more organized public transport – bus and rail and the introduction of tolls for people wanting to drive into the city. But that is a story for another day.

At a basic level transport infrastructure links the producers to the market. The better the infrastructure the more the potential of the producers can be actualized.

I remember years ago that matooke used to ripen on the tree in one village in now Sheema district because the rains had made the murram roads impassable. As soon as the road quality improved the economic fortunes of the farmers improved exponentially.

No lesser an authority than the International Monetary Fund (IMF) have made the connection between the speed of traffic on roads and poverty.

"In a graphic of the world published last year, the IMF showed that the countries with the slowest roads are also the poorest in the world....

Surprise! Surprise! 

But the fastest roads – where mean speed ranges were 91 – 110 kph were in north America, Western Europe, Australia, Singapore and Japan. In Africa only Morocco and South Africa made the cut.

On a recent visit to South Africa distances the equivalent of Kampala to Jinja were being done in under 45 mins, thanks to express ways, as opposed to double that time here. The quality of the cars also had something to do with it. That time differential has serious economic implications.

It is no surprise that Kampala is the economic hub of the country given its concentration of road network, about 3.5km of paved road per kilometer squared as opposed to the national average of 0.02 km per kilometer squared. Is it any wonder that by some calculations Kampala’s GDP per capita is ten times the national $850 figure.

So that is why we should care about KCCA’s plans for the road network. Lukwago’s allegations should be taken seriously to the extent that over priced contracts mean we build fewer roads.

That aside it was worrying that KCCA reported their budget for maintenance of the roads was way below requirements and hence the proliferation of port holes on Kampala roads.

"Laying down tarmac all over the place if we can not maintain it is not a very prudent way of carrying out public affairs. You spend more on building roads than if you had just maintained existing roads in good time. Of course, the increased expenditure is an attraction for certain types.

We forget but Kampala, especially its suburbs are a better place to be than 15 to 20 years ago. That is a double-edged sword for KCCA as our expectations have been elevated not only in the places that have been paved but those who wait in anxious hope for the coming of tarmac in the other suburbs.

You know what hey say? When you give them an inch they take a mile.

KCCA and government by extension, need to pay attention. While the near-term benefit is to placate Kampala’s chattering masses the long-term benefit is increased and improved economic activity, more revenues for the treasury to build and maintain more roads. QED!

PS Since this column was published in the New Vision KCCA boss Dorothy Kisaka has explained that allegations of overinflation on road costs were misplaced as the costs have been explained and various stakeholders including the KCCA political leadership have signed off on the process that begun in 2016.

EDUCATION MINISTRY HEADING DOWN A SLIPPERY SLOPE

 The education ministry’s plan to regulate school fees in private schools is baffling because it goes against the spirit of the sector’s liberalization and is curious given our history with price controls.

A statutory instrument is in the offing to put caps on school fees from pre-primary to tertiary levels for all schools.

One can imagine that the move is in response to parents’ complaints about rising fees, especially last year when inflation jumped to its highest level in eight years.

It is ironic that the ministry would even consider regulating private school fees at all.

"When the NRM came to power in 1986 the need for more widespread provision of education services were clear. Less than half the school going children were in school, a number that had to be increased dramatically as a long-term investment in the future of the country...

The introduction of UPE in 1997 more than doubled enrollment.

However, prior to this government opened the doors to private institutions, which have been critical in providing education. At last count private schools accounted for 40 percent of the enrolled students in the system.

This is not the first time calls for fees to be controlled by government have been voiced, but the government has swatted back such calls.

The logic as I understood it, was quite simple. The government does not have the resources to provide universal education and therefore coopted the private sector to help in this endeavor.

The private sector recognized the opportunity and have been quick to take advantage. The explosion in private schools is an indication that it is a lucrative enough market in which to play.

There was reasonable certainty that if an investor committed funds, he could cover his costs and have some profit left over from the school fees they charge. Going by the competition, school owners could only charge so much, otherwise they would collapse due to more inexpensive competition.

Over the yeas investors in the sector have found an equilibrium, with fees shifting depending on economic circumstances.

The government on the other hand continued to struggle with provision of quality education in its schools and those parents who could opted for private education.

"One of the major byproducts of this increased private sector participation is that our education is biased more than ever towards passing exams and away from building well rounded, upright citizens of the country....

It makes sense. The most objective way to measure success and therefore to market ones school is by showing that they can churn out academic successes. So many schools do not bother with extracurricular activities – many don’t have a blade of grass to call their own. Though some argue that this is down to a failure of the education ministry’s inspection and enforcement of regulation concerning the setting up of schools.

However, if government enforced all the standards, it is arguable whether there would be as many private schools as they are now, as meeting all these requirements may make the investment unviable given the fees the market currently allow.

This last point is interesting because it suggests that schools are actually charging less than they should. A business man will do just enough to earn a margin on the costs of the business. So, if he can cheat on standards he can get better margins.

Relatedly the private sector is in education because there is a gap in the sector, both in terms of number and the quality of schools. The quality of education anywhere is determined by the public schools, the better they are the less likely there are to be private schools and the few that are there will be charging a premium...

Given government’s inability to keep pace with the growth in the school going population, controlling prices will cause the very thing that they fear – higher school fees.

This is how it will come about. You control fees and some businessmen will decide the sector is no longer viable and drop out. Best case scenario, they will sell to other businessmen who want to try their luck, worst case scenario they will repurpose the building for other uses and that would be a school lost.

In the worst-case scenario that will mean more students in fewer available schools. The disparity between supply and demand would widen, which in normal times would force an increase in school fees. But because government will have put a cap on fees, schools will find all sort of ingenious ways to charge more.

Invariably there will be some proprietors who would rather not play cat and mouse with government and fall by the wayside, further aggravating the demand-supply balance. All the while you can bet that government schools will not be getting better able to sponge up these kids who have no schools to go to.

"In the end the very thing the ministry is hoping against – runaway school fees prices, will come to pass and for much poorer quality service...

 

UGANDA ECONOMY TO GET WORSE BEFORE IT GETS BETTER

Observers project that the economy will get worse before it gets better, as inflation continues to rise and expected pickup in demand continues to keep us waiting.

According to official figures economic growth rose to 4.2 percent in the last financial year, an improvement from 3.4 percent in the previous financial year. This is the lowest it has been since 1999/2000 when the economy grew 3.0 percent. The recent slump in growth was due to the shut down of the economy – locally and internationally, during the Covid-19 pandemic.

"Expectations that the economy would return to pre-pandemic growth levels were thwarted by the war In Ukraine, which has slowed efforts to resuscitate supply chains still reeling from the covid lockdown...

As a result commodity prices – wheat and other grains, which Ukraine is major global supplier, jumped as did global oil prices, which rose to $120 a barrel in February with the start of the Ukraine war but has since fallen back to about $90 at the beginning of November.

As if that is not enough, western economies have been beating off inflation pressures, a hangover from the huge fiscal expansion prompted by the Covid-19 lockdown. In the US inflation peaked at 9.1 percent in June the highest in more than 40 years.

 The US and Europe had various program to alleviate the suffering of their people during the pandemic, including in some cases, printing money to pay a monthly allowance. Those economies are now fighting to keep the ensuing inflation under control.

Other western economies have followed the US Federal Reserve, who have raised the key lending rate to four percent in November from below one percent at the beginning of 2022.

In Uganda this has had the knock effect of increasing the dollar rate. The dollar begun the year under sh3,600 almost touching sh4,000 in August, before falling back to about Sh3,750 ta the time of writing this.

By increasing the Federal Reserve rate, has seen a flight of capital back to the US to take advantage of the higher rate. As a result the US dollar has appreciated – attaining parity with the Euro for the first time in 20 years.

We have already felt the effects of the appreciation of the dollar with fuel pump prices crossing over the sh5,000 a liter mark before bursting through sh6,000 a liter mark all in August.

The jump in fuel prices has driven inflation up to 10.7 percent in October, the highest it has been since July 2012, before easing off to close the year at 10.2 percent.

On one hand the need to keep this imported inflation down while on the other keeping lending rates down to allow the economy recover, are almost mutually exclusive efforts.

"To head off the inflation Bank of Uganda has raised the Central Bank Rate (CBR) used to price bank loans to 10 percent from 6.5 percent at the beginning of the year. This has had the knock-on effect of the banks raising their lending rates....

In trying to restrict money in circulation -- the classical way to fight inflation, the central bank has with the same stroke, made borrowing for businesses more expensive putting the brakes on economic recovery.

While Uganda Revenue Authority (URA) reported record collections in the first quarter of the 2022/23 financial year, government has been doing its part not to fan the inflationary fire by cutting back on expenditure, which while it may have helped in slowing down price increases has depressed business activity.

The tax man announced that they had exceeded their target in the first three months of the 2022/23, collecting sh5.4 trillion against a target of sh5.1 trillion.  These collections were 5.6 percent higher than the same time in the previous year.

In the first quarter government released sh8trilion less than the sh12trillion earmarked for the first quarter.

It is against this rather bleak background of rising inflation, reduced government spending and higher lending rates that the economy enters 2023.

While the Bank of Uganda thinks the economy will grow by between five and six percent in 2023 they warn that,

“The risks to the growth outlook are tilted to the downside emanating from the emergence of global recession and the associated increase in the global economic uncertainty, escalation of geopolitical conflicts and the negative spill overs from the reform and higher than projected inflation. Other downside risks are a further decline in consumer and business confidence and heightened exchange rate volatility,” the central bank said in its latest “State of the Economy Report” released in September....

Their reason for higher economic growth in 2023 than last year is the step up of private and public investment in the oil & gas sector.

In February 2022 the Financial Investment Decision (FID) was reached which paved the way for the development of the 1400km oil pipeline from western Uganda to the Tanzanian port of Tanga. It is expected that until 2025, when the first oil is seen, about $20b will be invested in developments in the sector.

These new investments may lift the shilling, dampening imported inflation, allowing the central bank to loosen its monetary policy and government to increase spending.

But clearly it is not business as usual, as borrowing rates are rising around the global and it is not unreasonable to expect they will adversely affect investment plans in the Oil & gas sector.

The US Federal reserve said in November after its latest rate hike that it was premature to expect them to slow down on their rate hikes. Several more rate hikes into 2023 would increase depreciation pressures of the shilling and stretch out the central bank’s fight to bring inflation under control further into the year.

The central bank writing in September projected that inflation would peak before Easter in 2023 but this was before inflation hit double digits in October. The new reality means they will have to rethink their projections.

"Favourable, weather may put a damper on inflationary pressures as food production may not be badly affected. But there has to be a proviso on this, if drought conditions continue in Kenya and the horn of Africa our farmers may be forced to fill the gap pushing prices up and fueling further inflation....

Kenya has suffered four consecutive years of below average rainfall affecting harvests and affecting about 18 million people in Kenya, Ethiopia and Somalia according to the World Food Programme (WFP). It is so bad that Kenya’s wildlife authority reported in November that hundreds of elephants, wild beats and zebras had fallen victim to the adverse weather pattern.

For the man on the street this means that further belt tightening will be necessary in the new year. Government’s continued holding back on spending may very well spell doom for some companies, while the BOU’s continued tightening of money supply will mean borrowing rates will continue to climb.