NIGERIAN CENTRAL BANK GOVERNOR ON SUBSIDIES

"If you will patiently read this mail to the end you will understand my position. I am not complaining about insults I am used to that. I just believe that an insult is not an argument and when people resort to personal abuse they have run out of logic.
But to then go beyond me and extend it to my dead grandfather and his "descendants" ie my late father his siblings etc I think goes beyond the pale. As a Nigerian-and as an economist-I can take a position on economic matters and this position is one I have had for years even before coming in to the Central Bank. I have also explained the position on several occasions and criticised government for not doing this before.

"In 2010 at a public hearing in the House of Reps on the 25pct saga I alerted the nation of what I considered a potential big scam around subsidies and urged for its removal. No one paid attention. The economics is very clear to me. That it is unpopular is also understandable. The British public is unhappy with Tory budget cuts. The Greeks went on riot over austerity. Italian parliamentarians came to blows before Berlusconi was thrown out of office. The US congress is yet to approve Obamas tax increases.

"Economic decisions-by definition-ALWAYS must involve a cost or an opportunity cost since for them to qualify as economic they must involve a choice in resource allocation among competing uses. An enlightened debate is one that weighs the pros and cons of removing subsidy and continuing with it.
Removing it has costs in terms of Nigerians paying more for PMS-which by the way is not the fuel for generators, power plants, production facilities, heavy duty goods transportation trucks and even luxury buses. It is fuel used by the middle class and car owners to drive around town and from city to city not to employ workers and produce goods and services. Diesel which is critical to manufacturing and employment creation is not subsidized as the subsidy was removed years ago by Obasanjo. Nigerians said nothing then because it was blue collar workers that got retrenched by factories. Those speaking now on the Internet and Facebook and Twitter and newspapers are not workers but middle class elite who use PMS in their smart cars so let's stop all the ideological pretence. This is not about elite and masses but an intra-elite discourse.

"I will summarise the issues and I write as a Nigerian economist and public intellectual not as a public servant:

1. I am a strong advocate for subsidies if they are for production and not consumption, and if they benefit the poor and not middle men and rent seekers. The US government subsidizes cotton and wheat farmers and Nigeria spends its reserves importing wheat from America and keeping American farmers employed. The OECD countries pay subsidies to cattle farmers. Today Promasidor imports powdered milk from New Zealand and packages in Nigeria using our foreign exchange while we have cattle. WAMCO imports milk from the UK and adds water and tins it and calls it "production" of Peak milk. We use our Forex to import petroleum products and keep refineries and jobs open in Europe. Meanwhile precisely because of market distortions there can be no private sector investment in refineries since no one can make profit selling at the regulated price unless we are going to provide private refineries with crude for next to nothing. Certainly no one can purchase crude at market price, refine it and sell at N65 without huge losses so this explains why there are no private refineries.

2. What I mention above is the heart of the problem with government economic policy which needs to be changed. The economy since SAP is one that supports imported consumption and not local production, perpetuating dependency, non inclusive growth and insecurity. Why is it that the economy is growing at 7pct annually but the people are getting poorer. Because growth gains are not evenly distributed. Personal income is skewed towards people in the oil industry, telecomms, high finance, stock market, real estate and yes civil servants and politicians who feed on corruption. We produce crude oil but import petroleum products (today the UKs highest exports to Nigeria are petroleum products). We have a large cotton belt but import textiles from China (thus keeping their subsidized factories open and jobs in China). We are the world's number 1 producer of cassava but import cassava starch from Europe. We have a huge tomato belt in Kadawa, Jigawa and Chad basin but are the world's largest importer of tomato paste-from China and Italy. We can produce rice but we import rice from Thailand and India-most of it from grain reserves that have been in stock for over 5 years...I can go on and on
3. If above is clear then it is evident that this trajectory can only lead to disaster. We will continue to spend our resources promoting growth and employment in our trading partners. Terms of trade shift against us, we can only have foreign reserves because by the good grace of God we have Oil which will be exhausted soon and with new discoveries may become so cheap it loses value. We don't create any value added jobs as the only real production is peasant farming. Oil, telecomms, finance and real estate are not employment intensive. So everyone becomes a civil servant as the economy cannot create jobs. Result? In 2012 budget out of a total N1.8tr recurrent expenditure for the executive arm N1.6tr is on personnel costs not overheads. To reduce this you have to cut salaries or pensions or retrench civil servants. This is the classic trajectory of underdevelopment, de-development and de-industrialisation.

4. For the above reasons I am a strong proponent of structural reform and this begins from the fiscal framework. The limited resources of government should be allocated to supporting production-especially if we are running a budget deficit. We cannot keep borrowing to support conspicuous consumption. To support a job creating economy we need to fund power, transportation infrastructure, market infrastructure and access, technical and vocational education etc. We need to build rice processing plants, produce starch and cassava flour and ethanol, process our tomato and milk locally, regenerate our textiles firms (which used to employ 600,000 workers but now employ 30,000!), refine our own crude etc. We cannot even begin to do this if 30pct of govt expenditure is on fuel subsidy, if out of the balance 70pct is recurrent spending, 10pct is debt service, 10pct goes to the Niger Delta and only 10pct is capital expenditure. So it is about a choice-what do we spend money on and how do we allocate resources?

5. We often compare ourselves to other oil producing countries like Saudi Arabia. What are the facts? With a population of over 160m we produce 2mbpd ie 1 barrel for every 80+ citizens daily. Govt share of revenues is like 50pct of every barrel so it is effectively a barrel for 160 citizens. Saudi Arabia with a 24m population produces over 8mbpd or one barrel for every 3 citizens. In fact in 2010 the nearest OPEC country to Nigeria in production per capita was Algeria with a barrel for 30 and Algeria is more gas than oil.

"With one barrel for 3 citizens daily Saudi Arabia is able to provide infrastructure, education, healthcare and social safety nets and have huge savings. It can provide subsidised fuel at a total cost that is a fraction of its savings and even export refined products. It is paying for subsidies out its fiscal savings and not borrowing to pay. We are like a poor man with a rich neighbour. The neighbour builds a good house, buys several cars, eat expensive food, travel abroad every year and still have huge balances in several current accounts. Then you choose to live that lifestyle and mortgage your house, take an overdraft from the bank to finance it. Next year it is time to repay the bank, you don't have the money so you go to another bank, borrow enough to pay the first bank principal plus interest and also fund the continuation of the lifestyle. It continues till you can't borrow anymore and the bank throws you and your family out of your house and you lose everything. A responsible father would have long since faced reality and told his family he doesn't earn as much as his neighbour and expectations need to be moderated if they to keep their roof. Of course the children won't be happy at not going to Hawaii for summer and having to take public transport rather than own cars like their neighbour's children. Maybe they will even abuse the father behind his back and call him a miser. That is the cost of leadership.

"Finally: removing subsidy is not a silver bullet that solves our economic problems. And there is a huge trust deficit that government has to address. Government needs to investigate subsidy payments and punish any violations of extant guidelines. It needs to cut on unnecessary and wasteful expenditure. It needs to fight corruption and show seriousness in that. It needs to deliver on capital projects, power and infrastructure including irrigation, farm-level storage and agri-processing. These are all valid issues that are to be taken IN ADDITION to and not in place of subsidy removal.

"Since someone has decided to make insinuations about my grandfather I owe it to him to defend his record. It was my grandfather as Emir that repealed an obnoxious rule started from the days of Emir Usman that disenfranchised women from inheriting property. It was Sanusi that built the groundnut pyramids to the point where Kano NA was contributing 40pct of the revenues of the Northern region. It was Emir Sanusi who built the Bompai Industrial Estate, and turned Kano into the industrial nerve centre of the north. He was ag Gov of the northern region, Minister for Pilgrim Affairs, Chief Imam of Friday Mosque, judge and leader of the Tijjaniya order. As for his "descendants" my father was one of the very first batch of 12 Nigerians recruited by the British to set up the foreign service in 1957 and he remained in public service and rose to be Permanent Secretary before retirement. He set up in the 60s the research dept of the ministry- the present NIA so he was the first external intelligence officer in Nigeria. As permanent secretary he was the architect of Murtala Mohammed's policy on decolonisation of Africa and oversaw the independence of Mozambique and Angola and the final push to liberate Zimbabwe and South Africa.

"So yes Sanusi was not perfect. He was a feudal aristocrat. And my father was not perfect. He was also a prince and privileged to go to Oxford and LSE. But please if you want to abuse my grandfather and father kindly tell us what contributions your own grandfather and father made to the people.

"I love my grandfather and am proud to be his grandson and absolutely think it inappropriate that his name is dragged into this. "Haatuu burhaanakum in kuntum saadiqeen."

Sanusi Lamido Sanusi, CBN Governor and an activist in government
Please check the features column of the Economic Confidential to read memos and rejoinders on the positions of Sanusi Lamido Sanusi over the subsidy removal

POWER SUBSIDIES, THE LESSON

Last week the Electricity Regulatory Authority (ERA) announced up to 69% hike in power tariffs.

ERA said the increases were necessary to attract new investment in the sector and to relieve government of the billions of shillings in subsidies it has been doling out to keep power tariffs affordable.

The subsidies were deemed necessary five years ago when we had to resort to costly diesel run generators to bridge the power deficit.

"If ever there was a case study for why subsidies should be frowned on this would be a text book example...

With one fell swoop starting today Monday, manufacturers are going to pay up to 69% more for their power while domestic consumers will pay 38% more.

The unbudgeted for increase in a time of lower than usual economic activity, will lead to two things an increase in commodity prices and a possible slowdown in production. It does not take any advanced powers of prophecy to tell that this increase will be disruptive.

Price should be left to find their own level dictated by the forces of supply and demand, that way prices will move gradually up and down. Attempts to fix prices only create artificial comfort which when lifted can cause price spikes that shake out many economic players.

For instance the 69% increment if it were spread over five years would entail an annual 11% increase that would allow the economy to adjust with time.

There is the experiment where a beaker of water is heated to boiling point and when a frog is thrown in it jumps out immediately however if you put the frog in a beaker of cold water and heat it gradually the frog gets boiled to death because it adjusts to the gradual temperature increase until it’s too late.

"Subsidies are oftentimes motivated by bad politics rather than good economics. The seduction of subsidies for a government is that in the short term they appease certain constituencies in the long term however the costs far outweigh the benefits, by reducing the attractiveness of a particular sector for investors, promoting inefficiency among existing players and therefore sub-par service to consumers...

For instance power use in Uganda is slanted heavily towards personal consumption, used for powering TVs, cooking and ironing rather than industry or the productive sectors of the economy. We use power extravagantly at home because its affordable. And we continue to perpetuate this with the latest tariff hikes by penalizing the producer more than personal consumer.

One positive that is likely to come from this removal of tariffs is that new investment into generation may ensue. Our artificially low tariffs were a disincentive to investment especially in the mini-hydro dams and other alternative energies like solar power.

Hopefully we might see a boom in investment the way we have seen one in the real estate sector.

"Government resisted calls to cap rents in Kampala arguing that supply will rise to meet demand and prices will level off. There still remains a 50,000 housing deficit in Kampala but one can say it would have been worse if government had gone the spineless route of rent controlling....

It’s part of the human condition to desire certainity over uncertainity and hence calls by KACITA last week for government to prevail on banks to lower lending rates.

The raising of lending rates by banks is not to make astronomical profits, but it is in response to the prevailing circumstances.

Inflation hit a 19-year high of 30% at the end of last year. The only commodity banks deal in is money so what makes the traders – many of whom have already raised prices in their shops, think that the cost of money has not risen as well?

The knee jerk reaction is to control lending rates. Controlling lending rates would reduce the incentive for banks to lend, expand or innovate and we would have poorer banking services for it. And when we inevitably have to lift controls – as has happened with the power tariffs, we will be unprepared for the spike in lending rates. And who would be hardest hit? The businessmen.

We are all hurting from the current financial crisis, the immediate pressing need while unbearable now can be made worse in the future if we panic and take short term remedial action that will have long term detrimental damage on the economy.

UGANDA FOREX TRADING HOUSE COLLAPSES CAUSING HUNDREDS GRIEF

Rachel’s (not real name) marriage got off to a rocky start.

Last year Rachel got sucked into the hype about foreign exchange trading. She was pointed to Reilag Investments Ltd the biggest forex trading house around. She signed up with an initial $2,500 based on a sales pitch that she would earn 20% per month on her money, meaning she would double her money every four months.

She got paid the first month and then the second and then she had a brainwave. In August her wedding fundraising meetings kicked off and she thought it might be a good idea to invest the collections from the meetings with Reilag.

Suddenly Reilag started falling back on its payments to her before stopping altogether.

The long and short of it is that her wedding was a lot less glamourous than was initially planned and the newlyweds are barely on talking terms.

Reilag through a Cyprus based broker, Fx Pro, was trading on the most liquid market in the world. The currency market has an estimated daily turnover of up to $4 trillion dollars or the equivalent of the total economic activity (GDP) of Germany, the world’s fourth largest economy.

"Trading involves betting that one currency will move in your favour against another in a currency pair. The forex market also allows for heavy leverage, so that with relatively small sums one can trade in volumes of as much 300 times your initial input magnifying profit but similarly affecting losses...

So for instance if you enter a trade with $50 leverage will allow you control a contract of $15,000 and assuming a one percent profit on this contract would leave you $150 richer but a similar loss would set you back a similar loss

At the height of the Naguru-based company’s operation it was said they had 700 investors and $12m having passed through their account.

Investors were seduced by the promise of a 20% monthly return on their money, which means they would recover their initial investment in five months with subsequent payments pure profit.

But in December last year Reilag management informed investors that the money was all gone except for a “meager” $100,000...

In a December 3rd meeting managing director John Kasumba blamed the collapse of the company’s accounts to a “pittance” on turbulence in the euro zone.

He pledged that the company could recoup that losses in 70 days and pleaded that investors stop harassing him and his family so he could concentrate on making the money back, according to minutes from that meeting.

Kasumba was held on several occasions on the prompting of irate investors.

It is at this point that investors in a last ditch attempt to recover their monies constituted a committee to oversee the running of the company and recover investors’ money.

Eighteen days later the committee threw in the towel, reporting that Kasumba had not been cooperative and suggesting that the case be forwarded to police.

“It is on this premise that OPH 100 has decided to compose a communiqué, which will be addressed/delivered to the Inspector General of Police and copied to the various heads of security agencies to arrest JK(Kasumba) and SK (Sheila Kagunda), such that they are apprehended and pay for their crimes according to the Laws of The Republic of Uganda,” the committee said in its second and final report to investors.

Kagunda and Kasumba were the company’s main traders.

“Finally, Operation Hope 100 (OPH100) has agreed to disband and relive itself of its duties, which involves working to ensure investors principal monies are recovered from Reilag Investors,” the committee reported at the end of last year.

Sources familiar with the events say however that Kasumba presented himself to the committee and promised to be more cooperative. No report has been released by committee subsequent to this development.

Kasumba could not be contacted for comment on the matter but several investors the New Vision talked to had no kind words for the fallen financial wizard.

“I had $20,000 with Reilag and that has all disappeared, we will not let Kasumba get away scott free, if he thinks he will get away with our money he is joking,” one investor said on condition of anonymity.

Money managers in Kampala would have predicted the collapse if they had been consulted and felt investors did not do enough due diligence. Theye were seduced by the huge returns and ignored the risk.

“Before you invest the key thing is to find out whether the industry is regulated, a regulator will ensure that operators meet set standards, fully disclose the risks of the ventures and ensure that players are run by credible managers. If there is no regulator as an investor you have no fallback position,” fund manager African Alliance boss Robert Kitariko said.

Reilag was a company set up under the company’s act and was not supervised by Bank of Uganda, Capital Markets Authority or any financial industry regulator.

The police said they had recorded no complaint yet but Kampala Metropolitan Police spokesman Ibin Ssenkumbi, was reported to have said that since the victims willingly entered into a contract with the company as shareholders, they know that they have to share the risk of their business except if fraudulent activities can be proved.
“If it was a case of fraud, then it would be a criminal offence and the culprit would have to be arrested and prosecuted as a criminal,” he said. “But if it is a business loss, then it is a risk that they should be ready to bear.”
This will serve little consolation for James (not real names) who ploughed a huge chunk of his retirement benefits into the scheme.
“I cannot afford the loss at this stage in my life. What am I supposed to do now?” he asked tears welling up behind his spectacles.

WARREN BUFFET’S LESSONS FOR THE NEW YEAR

My banker friends tell me 2012 is going to be a tough year. They are already chasing down defaulters, slowing down on lending and bracing themselves for layoffs and branch closures.

Banks are normally a good indicator of where the economy is going. And then you have to love a democracy KACITA last week gave banks an ultimatum to stop charging higher interest on running loans that were contracted before the rate increases (a fair request) and vowed to stop paying UMEME bills because they are too high and they don’t like the distributors contract. They have given government 10 days to respond after which they will shut their shops in protest. Maybe the opposition should also stop paying taxes because they don’t like the government regardless that they use our roads, enjoy police protection of life and property. Actually if KACITA really wanted to make appoint they should draw up a list of protesting traders sending to UMEME asking them to come and disconnect them and take away their meters.

Anyway that aside I thought I would reharsh a column form March this year. These were excerpts from the world’s best investor Warren Buffet, who over the last nearly 50 years has built a company, Berkshire Hathaway which is valued at three times the economy of the East African community.

He is talking about America but looking to the New Year – one will call for serious belt tightening for everybody, the lessons are very applicable in Uganda.

On the economy,

“Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and a Civil War – remains a live and effective”



On Managing managers/companies,

“At Berkshire, managers can focus on running their business: They are not subjected to meetings at Headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish….. There are managers to who I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A “hire well, manage little” code suits both them and me”

“Berkshire’s CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required.”


On Corporate culture,

“Cultures self propagate …. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behaviour. … As long as Charlie (Munger, vice-chairman) and I treat your money as if it were our own, Berkshire’s managers are likely to be careful with it as well.

“Our compensation programs, our annual meeting and even our annual reports are all designed with an eye to reinforcing the Berkshire culture, and making it one that will repel and expel managers of a different bent. This culture grows stronger every year, and it will remain intact long after Charlie and I have left the scene.”

On Investment,

“You can be highly successful as an investor without having the slightest ability to value an option. What students should be learning is how to value a business. That’s what investing is all about.”


On corporate governance, (in letter to his managers)

“The priority is that all of us continue to guard Berkshire’s reputation. We can’t be perfect but we can try to be. As I’ve said in these memos fro more than 25 years: “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.” We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”

“Sometimes your associates will say “everybody else is doing it.”… It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as rationale, in effect they are saying that they can’t come up with a good reason. If any one gives this explanation, tell them to try using it with a reporter or a judge and see how far it gets them.”

The 26-page letter is devoid of illustrations and graphics but still makes for compelling reading.

BESIGYE EXIT POINTS TO POLITICAL SHIFT

Weekend reports that Kiiza Besigye is stepping down from the helm of FDC will predictably weaken the party in the short run as they adopt to changing political priorities.

Besigye, who in the last ten years has come through as the most credible challenger to President Yoweri Museveni, it was reported was taking the action to give his successor sufficient time to plant roots ahead of the 2016 elections.

However according to the FDC constitution the party’s leader need not be its flag bearer in a presidential election, so one cannot count out a fourth bid at the presidency for Besigye.

But the alternative, that the pugnacious doctor from Rukungiri has thrown in the towel and moved on, makes for more interesting speculation.

Speculation has already turned to who will replace Besigye as the de facto leader of the opposition. The usual suspects have already come up for mention; the genial Major General Mugisha Muntu, the reinvigorated Nandala Mafabi and even a few dark horses like the irrepressible Salamu Musumba have enjoyed a passing mention.

"The major pitfall for the opposition can be found in the constitution or more specifically in the way we carry out elections in this country...

Unlike in the UK but like in the US, our presidents are elected directly. In the UK the electorate votes for the party and its leader becomes prime minister. This system as has been shown in the US, means that the electorate is wont to vote for personalities over policy, and therefore likable, well known personalities are likely to be successful as opposed to technocratic, doers with wooden personalities.

This is an important distinction that should not be overlooked.

When asked at the end of her husband’s term in office why a woman has never been US president while UK has already had a female prime minster, Hillary Clinton said in the UK a woman can propel herself to the top of her party and during election time the party machinery will ensure she is elected while in the US presidential candidates – while helped by the party, find that they are running more on personal merit.

Over the last 25 years no one comes closer to near universal face recognition in this country than Museveni and that gives him a few yards over his challengers in any electoral campaign.

"So by bowing out, Besigye has with one hand given a chance for renewal while with the other taking away arguably, the only other politician with a national profile...

In the run up to the last election some members of his FDC party grumbled that Besigye was so seduced by the possibility of making it to state house as leader of a badly cobbled opposition alliance, he paid little heed to building his own party structures.

The dissenters argued even then, that a win was impossible because there was no impetus behind his race from the party, beyond the feel good anticipation of an opposition alliance. The rest as they say is history.

But there too lies another problem. In building parties around personalities, the party structures – if there are any, are subjugated to the leading personality of the day to the detriment of long term sustainability of the party.

As a result we can expect to see infighting in the FDC as the contenders jostle for power without credible party structures to moderate tempers and mediate between contending factions.

"The Honourable Ronald Reagan Okumu fired the first salvo, declaring shortly after the polls, that no “westerner” will succeed Besigye as the leader of the FDC. This ourtburst was triggered by the frustration felt by a fringe element in the FDC who felt that Besigye, a “westerner” was in the way of their plans of ethnicising the last campaigns, which they felt was their best hope of a smash-and-grab victory against Museveni...

One can expect ethnic undertones will continue to colour the debate in FDC for some time to come.

But that could be a mistake if the last election were anything to go by.

Observers were convinced ahead of the last election that with the northern war over for all practical purposes, the main issue will be Museveni’s record and more specifically his government’s perceived tolerance of corruption.

However the opposition were caught flatfooted when the Museveni team made the campaign about the future, read the youth and less about the past – textbook tactics for a running incumbent.

Besigye recognized this probably a bit too late, as evidenced by his championing of the walk-to-work demonstrations earlier this year.

Barring any accidents expect subsequent elections in this country to be about cross cutting issues, namely the economy and less and less about tribe or religion.

"So if Besigye’s exit sharpens ethnic lines within the party, expect that FDC and the leader who will emerge to be less of a threat to the NRM in 2016...

2011: THE PERFECT ECONOMIC STORM

According to the statistics the year started on a rather benign note.

Inflation in December last year was 3.1%, the more than doubling of the rate from November’s 1.4% could explained away easily as due to the festive season. Petrol was selling for less than sh3,000 a liter and unsecured lending rates were just about 20%. Foreign exchange reserves stood at 5.2 months of imports.

Fast forward to today. Inflation in November slipped to 29% from a record high 30.4% in the previous month. Petrol is on the verge of touching sh4000 a liter at the pump and lending rates are now up to more than 30%. Foreign reserves have plummeted to 3.7 months of imports in October. To put that in perspective we shed about $500m or sh1.5trillion in reserves between December and October this year.

The more reserves a country holds the better a government can cope by battling inflation and stabilizing prices and smoothing out currency fluctuations, both of which if left unchecked can sink economies.

We might have to go back ten years or more to find a time when our reserves were less than four months of the imported goods and services.

But for the man on the street he did not need official statistics to tell him something was badly wrong.

"When sugar became scarce for the first time in more than 20 years, alarm bells went off. Sugar scarcity is a throwback to a time an older generation would rather forget and an inconceivable occurrence for a younger generation. As a symbol of things gone bad, few things beat sugar shortages in this country...

It is safe to say that no one saw this coming, and for good reason.

A perfect storm is used to describe the coincidence of adverse events to make an already bad situation worse.

Regional drought and famine that stressed local food stocks, an election year, with its attendant fiscal loosening, a deepening Euro crisis, which caused a dollar appreciation, dampened demand in our traditional export markets, reduced foreign direct investment and remittances from Ugandans abroad, all conspired to create our perfect storm.

Uganda’s predominantly subsistence agriculture sector has failed to respond adequately to growing regional demand. This was made worse by failed harvests in the Kenyan rift valley due to drought in the early part of the year. This was important because not only did we start feeding western Kenya but food demand, which was previously covered by our eastern neighbor, from Southern Sudan shifted to Uganda.

When food prices, which constitute the biggest single component of how we calculate inflation, rise general prices follow suit.

According to official statistics the food price increases peaked in March before beginning to slide starting in May.

The presidential and parliamentary campaigns not only served to cause more money to come into circulation but also caused some uncertainty, which held back inflows as investors adopted a-wait-and-see attitude – a now traditional occurrence ahead of the last three elections.

Diminished hard currency inflows put the shilling under pressure forcing import costs higher, most especially for fuel. Fuel prices are an important component of all product prices on our shelves or services we consume.

In a related incident the Euro crisis seemed to come to a climax this year with real fears that the Eurozone was likely to break up and the short lived Euro currency in its final days.

The crisis which has its roots in the global financial crisis that kicked off in 2008 saw the weaker European states – Portugal, Ireland, Greece, Spain and more recently Italy straining the Eurozone’s resolve to remain afloat. Massive bailouts of Greece, Portugal and Italy have cause uncertainty which has served to further strengthen the dollar.

It has been reported that as a result of our remittances have never recovered to the pre-global financial crisis $1b as our relatives in the diaspora tighten their belts in anticipation of tougher times.

All this also fed into our power situation with government being forced to make the choice between the discomfort of loadshedding or paying out billions of shillings to subsidise the expensive thermal power generators. The lifesaving hydroelectric power expected from the Bujagali power dam missed deadline after deadline and is now expected to come on line by the end of April next year.

But finance officials believe we have got over the worst part and barring any other shocks inflation should return to single digits next year, while the exchange rates have already begun to slide following determined and consistent action from the central bank all year long.

As we wind up the year there is evidence that export earnings are picking up, with export figures for September up more than 50% from the same month last year.

"The main lesson from 2011 seems to be that we need to shore up out food production. The reality is that as the East African Community takes hold and the continued free moment of goods and services gets entrenched we will not be producing for our own consumption any more. This will require a reorientation of our farming methods and a determined push into agro-industry...

With the Eurozone crisis far from resolved, the ever unpredictable weather patterns it would be full hardy to make any predictions going into 2012.

UGANDA LESSON 2011; FOCUS ON THE PRODUCERS

Aga Sekalala Senior is easily Uganda’s largest agro-industrialist.

Over more than 30 years of deliberate, painstaking work Sekalala has built a multi-million dollar operation that processes animal feeds, chicken, fish, vanilla and its derivatives and extracts plant oils.

Tucked away in Namulonge, off the Gayaza-Zirobwe road, his industrial estate employs more than a hundred people while providing income for hundreds more local out growers, suppliers and retailers.

But the reclusive Sekalala, more likely to be found overseeing his enterprise in overalls and gum boots than decked out in a power suit and poring over revenue projections, is not a happy camper these days...

In the space of two months the shilling has appreciated nearly 20% from the September low of sh2,900 to the dollar, threatening to decimate his margins and forcing him to wonder aloud about the priorities of the country’s economic planners.

People respond to incentives -- factors that enable or motivate a particular course of action, or counts as a reason for preferring one choice to the alternatives. That is as much an economic truth as a universal truth.

This year’s economic crisis – a delayed reaction to the global meltdown that kicked off in 2008, should force us to take a hard look at our own economy and the incentives we provide.

Inheriting empty coffers in 1986 the National Resistance Movement, under pressure to generate revenues fell in line with the World Bank, IMF-led donor community.

This entailed reining in government spending, privatizing inefficient public enterprises and allowing the free flow of capital into and out of the country.

Subsidies for production were frowned upon under tightly prescribed spending plans, which were flaunted at the risk of losing regime-propping aid.

"The net effect of this is an economy, which subsidises the urban elite at the expense of the rural masses by cutting government spending in agricultural extension, health and education to a bare minimum while keep exchange rates stable, allowing for importation of luxury goods to stoke the insatiable appetite of the urban wannabes...

In all fairness, that is the price we as a country had to pay to stabilize the economy up to this point.

Now that we are generating up to a thousand times more revenue than we did in 1986 a rethink of the way we do things is long overdue.

A budgetary shift away from consumption towards production would be welcome. Support for big agricultural concerns that incorporate local farmers in their plans, in the way of tax breaks, infrastructural aid, concessional loans, a focus on research and marketing assistance for exports would be useful.

I shudder to suggest a discretionary process overseen by our local technocrats because it can easily succumb to corruption, politicking and mismanagement, but the point is government needs to step up its game if we are to become a middle income country in our life time.

It has taken 25 years to stabilize the economy, we can expect that a properly designed and executed incentive program for our productive sectors will probably take just as long and cost as much to show sustainable results.

This year government has ear marked about sh350b in interest payments, largely to service its treasury bill and bond obligations, which are issued to manage inflation. So the cost of supporting our industries is not one we would be unfamiliar with.

The point is that if Sekalala and company identify an opportunity to produce fish feeds say, because local and regional markets demand them, he should be able to go to government with a well prepared business plan and government formulates a way to meet him part way.

"As it is now when entrepreneurial spirits have an idea, their last port of call is the government. Government technocrats are clueless about what it takes to do business (forget their little village ranches subsidised by office imprest) and worse still a request for concessions is always viewed with a jaundiced eye....

It is a no-brainer. Supporting agro-industry has the greatest potential to raise rural incomes, mobilise savings and jump start another surge in tax revenue growth.

This is all text book economics with numerous case studies in western economies, Asia and even on the continent. So why aren’t these things happening?

One, because as suggested earlier the government technocrat is not wired to create wealth but to allocate already present resources, the diametrically opposite mindset to that of an entrepreneur.

And secondly, our industrial base is still small and disunited – with each businessman suing for his own selfish interest, oftentimes subverting the general good.

Regardless, the writing is on the wall the sustainability of future growth and the very existence of our nascent producers will depend on whether we starting paying more than lip service to the producers of our economy or not.