SPEEDING TOWARDS A CASHLESS SOCIETY

Two weeks ago the Bank of Uganda released the quarterly ”Financial Stability Risk Assessment Report” for the last quarter of 2023.

Long story short most risk in the banking industry is under control and the sector is generally in good shape and has come some way from Covid-lockdown crisis.

That  should be a relief to any one who has an interest in the economy. More interestingly for me is the rate at which cashless payments are  increasing every quarter.

In the last three months of 2023 debit card payments rose to sh581.1b from sh532.9b in the previous quarter a near ten percent jump. In the meantime mobile money transactions  increased in value to sh62.2trillion from sh60.5trillion. To further emphasise the point of the shift away from cash mobile banking transfers increased to 2.4 million

  from sh1.9 million transfers in the previous quarter.

Even more interesting is that over the year  mobile money transactions crossed the sh200trillion mark up from the 2022 figure of sh190trillion transacted on all mobile money platforms.

This trend is a useful one because it means more and more of our cash is being liberated from our pockets, socks, mattresses and other dark, dank places we have been storing our money. This money is finding its way into the formal financial system where it is not only beneficial to you but also  is made available to others who have need for resources when you don't. It would be interesting to track the uptake of mobile money loans, despite their eye-gouging rates.

Basically the more of currency in circulation is in the formal financial sector the better for an economy.

The mobile phone is accelerating this process in Uganda.

If you think about the sh200trillion-plus in mobile money transactions is about $52b or bigger than the economy of Uganda. We can expect this trend to continue as more people  appreciate the convenience and businessmen allow it as an option for payment.

Speaking for myself I save on a fintech app, which gives me seven percent on savings, posting the  interest daily. I borrow the savings of other users from my mobile money provider and I virtually walk around without money in my pockets, because I can pay for anything using mobile money and if the worst comes to the worst reach into my bank account using my phone to meet other needs.

This means I keep my money in the bank or on mobile phone longer. I remember a time when eye watering qeueus used to form at the bank on Fridays to withdraw money for the weekend. God help if you if you did not make it to the bank on time, which used to be 1 pm, on Friday.

The counter intuitive thing is also that money is staying more in the formal financial sector because of the ease of withdrawal.

And this trend has other far reaching implications for the economy. A major reason for the high lending rates is the low savings rates in this economy. As a result the banks charge higher rates.

Banks are often walking a tight liquidity tight rope. Lending out of their capital and the few long term savings accounts. If more of us fixed our money longterm the risk to the banks to get caught in a liquidity squeeze would reduce and they would be able to lower lending rates.

This trend being pushed by mobile money is good place to start.

Of course the major reason lending rates are high is government borrowing from the public and paying double digit interest  rates. It is a no-brainer every money manager will lend to government first and then think about his riskier customers and force them to pay a premium for the  privilege.

But with oil revenues just over the horizon, one can expect government appetite for debt to reduce and the with the trend of more money finding its way into the formal financial sector and bank operational costs sliding, lower lending rates is becoming more of a reality.

To speed up the process towards a cashless society, it would help if government scrapped the larger denomination notes – sh50,000 and even sh20,000, forcing more transactions into the financial sector and even serving a fatal blow to corruption in Uganda.

It is very likely that in five to ten years the clamouring for more  branch opening by banks will be a thing of the past. The competition to reach clients will go online with the banks with the most user friendly platforms taking the day.

 

HOW TO ENSURE “AFFORDABLE” SCHOOL FEES?

Last week parliament tasked the education ministry with outlining punitive measures for schools that charge prohibitive fees.

This is

a perennial lament that pops up around the first term, when parents coming out of the merry making of the festive season, “suddenly” realise school fees are “too expensive”.

The representatives of the people jump on the sentiment and criticise the government in general and the education ministry, in particular for the high fees schools are charging.

This time they have gone a step further and demanded that the education ministry punish schools, which charge exorbitant fees.

You never know whether to laugh or cry in these situations.

There are a number of issues here, not least of all is how do you  determine what are exorbitant fees.

A man who was used to driving free of charge on Entebbe road may think the sh5000 a trip on Entebbe expressway is exorbitant; A man who is used to drinking a beer at his local Kafunda at sh3000 may scream bloody murder when he goes to one of our higher establishments and they charge him sh10,000 for beer; A man used to paying sh1,000 in a taxi may have some uncharitable words to say when the Uber driver charges him sh15,000 for the same trip into town.

Even more fundamentally, the MPs were not calling for sanctions on government schools but on private schools, which government ideally should have no business setting caps on what they charge as fees.

"Putting a cap on fees will disincentivise investment in the sector and lead to the very thing MPs are complaining about – exorbitant fees...

About 10 million children are enrolled in primary and secondary schools around the country. In Kampala 84 percent of them are enrolled in private institutions. In the countryside this falls away considerably depending on the earning power of the population.

If parliament wants to sustainably lower school fees they need to take a long hard look at that ratio. That number screams for more investment by government in the sector.  

With the power to appropriate budgets, MPs should be talking about increasing the funding to the sector to build, man and equip more schools as a way to bring fees down.

It’s a simple demand and supply equation. The more government schools there are of credible quality the less the gap for the private schools to fill in.

In Sweden where government provides free education for every child of school going age,  private schools account for less than a fifth of all enrolment. 

ERA: THE PATH OF LEAST RESISTANCE IS A CROOKED ONE

Last week Electricity Regulatory Authority (ERA) announced a 1.6 percent reduction in tarrifs for power consumers.

They gleefully reported that this amounts to a sh40b saving for consumers.

ERA can allow these reductions because the “cheaper” power from Karuma dam was coming and would lower the average tariff price.

Everybody including me, is always happy for cheaper goods and services, but not at the expense of the quality of the product or service.

"There is a connection between the mechanical driving down of tariffs and our ever increasing power outages...

Worked into the power tariff is the cost of operations and maintenance for the power generators, transmitters and distributors. As a way to keep tariffs down ERA has severally denied the industry players optimal operations & maintenance budgets.

While this allows them to report a lower tariff it also means that the industry players cut back on their operations and maintenance, a major cause of the regular outages we are experiencing.

Imagine for instance that Umeme has outsourced its troubleshooting function to a company X. Umeme wants to get the service at the lowest possible price without compromising quality. But there is only so low the contractor can go with his price, below which he will have to start cutting back on staff, increasing response times and in some instances leading to longer power outages. Gone are the days when Umeme “Kamyufus” responded in hours. God forbid now you lose a pole or transformer you will be out for a week, as I learnt painfully recently. God help you if you are upcountry.

Secondly, depreciation of assets is another charge to be factored into the tariff. Depreciation allows asset owners to “save” money for the replacement of the asset when it has outlived its natural life.  If the industry players are not allowed adequate depreciation allowances it becomes difficult to replace ailing assets.

Is it no wonder that when South African firm Eskom handed over the Kira-Nalubale dams, there was need for $10m remedial works on the complex..

When the question of replacement of assets was raised with one official, he brushed it off by saying government will replace the assets and they are not complaining.

"Government priorities shift by the day and it is full hardy to put replacement or development of new assets entirely at their feet....

The more sustainable position is to provide an adequate depreciation charge so that the industry players can replace or develop new infrastructure in line with growing demand not according to the whims of the government.

Given the avoidable delays in development with Isimba and Karuma dams this logic should not be hard to grasp.

ERA it can be assumed is looking to implement a Presidential desire to see power tariff, at least for big industry, down to US5cents per unit.

President Yoweri Museveni’s desire for cheaper power to drive industrialisation is hard to argue against. What the technocrats need to grapple with is how to deliver on that desire in a way that will ensure the continued sustainability of the sector well into the future.

While the contracts of the bosses of ERA are a few years, they owe it to posterity to ensure that when they have left we still have a power sector to talk of.

On my first trip to South Africa in 1996 no one knew what loadshedding was. In Uganda we were suffering daily loadshedding by then – if you had power in the day today, you wouldn’t have power in the night tomorrow. A recent return to the rainbow nation and loadshedding is now a permanent fixture in their vocabulary.

If you look back into the roots of the current dire situation, under investment in the sector is at the top of the list.

The way we are going we are heading there.

So you have reduced my tariff but for more times than I like, I have to power up my generator to produce power. Even at our current tariff it costs almost ten times more at US80cent per unit or about sh3000 per unit, to use a diesel generator than use the  power from the grid, so who is complaining about expensive power?

It is really a no-brainer. For any producer given the choice between cheap but intermittent power and dearer but consistent power supply, they would opt for the latter over the former.

Don’t take my word for it, lets do a survey especially of the big energy consumers and see what they say.

Lowering tariffs the way we are doing is good for the technocrats but not for our industrialisation ambitions.

UGANDA’S RECORD FDI AND THE MAN ON THE STREET

In November audit firm Ernst & Young (E&Y) released a report on Africa’s economic prospects.

"In the report “Pivot to growth” E&Y reported that Uganda attracted a record $10b in foreign direct investment in 2022 or seven in every ten dollars of FDI that came into East Africa that year....

This was driven by projects in the oil & gas sector.

The news left the man on the street scratch his head at how come he never saw this money.

The confusion comes from our not understanding how FDI is reported and secondly, how such monies when they do come, trickle down to the everyday man.

Reading the report one realises that when they talk of $10b in FDI booked, they are reporting the monies committed for a project. So in our case for example, our share of the $10b East African Crude Pipeline (EACOP)for which final investment decision was reached in  2022 would be included in this number.

The funds of course will not arrive in one lumpsum but will mostly be parceled out over the duration of the project.

Why we did not see immediate improvement in the contents of our pockets is largely a function of what the project will need or buy locally.

The planning, design, plant and machinery will be  bought abroad and paid for there but are factored in as project costs. Foreign contractors may very well be paid in  to their accounts at home.

Local contractors, suppliers, hospitality and service providers are beginning to smell the money.

But as we all know there is no one as quiet as a man who has been paid. The loud ones are the one who are not in the slip stream of the money...

In years after commercial viability of our oil finds was determined in 2006, government has written into law what sectors of the industries servicing the oil & gas sector can be ringfenced for Ugandans. These were mostly food, hospitality, security, logistics and other low capital intensive sectors.

So if you are a friend, relative or business partners of the local businessmen who have already seen some contracts you are not complaining.

But also while the oil & gas sector may very well effect some major changes in the greater scheme of things our 200,000 barrels per day at full capacity, is really not much to write home about.

Nigeria last year averaged 1.35 million barrels per day, Angola came in second at 1.1 million barrels per day and Algeria at 908,000 barrels per day.

That being said businessmen are reporting that they are beginning to feel an uptick in demand, starting the middle of last year and one may imagine some trickle down is beginning to show its head.

The relative stability of the Uganda shilling which traded in a a narrow band of sh3750 – sh3850  may also indicate that some of that oil money is already coming and supporting the shilling.

Kenya across the border saw its currency cross the sh160 to the dollar mark before Christmas, a trend that continued into January. Some of the reasons were falling commodity prices and a flight for the exit on indications our eastern neighbour is set to default on some key international loans.

Whether you will earn from the oil & gas sector or not will depend on how you are positioned. As a worker the industry has stringent accreditation standards that have to met before they can look your way, for contractors and suppliers the same.

"The expectation is that at least $20b will spent until first oil in 2025 and so it may not be late to position oneself to draw from the oil wells...

The money will not come dripping with oil and easily recognisable as coming from the sector, but it will come.

Many have been called to partake  but few will be chosen.