TAKE ADVANTAGE OF THE "CRISIS"

Many years ago at Singo military training barracks deep in Luwero (at the time) the question was put to a group of 1000 fresh A-level graduates, “Which are Uganda’s cash crops?”.

Drilled in an education system, even then well past its sell-by date, the eager faced young men and women belted out the usual – Coffee, tea and cotton. There wasn’t very much else we were exporting in the early 1990s.

“What about maize, cassava, mangos, beans?”

The point was made. Anything can go for cash. But frozen in our colonial mold as producers of raw materials for western industry we could not see past the usual suspects 30 years after independence.

Last week in an exclusive interview with the Business Vision, central bank Governor Emmanuel Tumusime Mutebile pointed out that Ugandan export receipts had risen more than 13 times in the last 25 years.

As recently as 1997 analysts were projecting that as a result of increasing export diversification, coffee would fall below 50% of our total exports. In 2009 total exports of goods and stood at $1.5b of which coffee accounted for $280m.

Also last week it was announced that Makerere University Technology Faculty’s designed and developed battery powered car was due to be launched soon.

Our car is not the first battery powered car in the world – there are a few thousand in production already, but as a signal of what our scientists can do, it was a potent symbol.

Still wed to the notion that labour is muscle driven we forget or overlook our huge potential as exporters of services and knowledge based products. We think our exports have to be trucked out in containers.

We cannot be blamed because in addition to our pre-independence mindset, we are still firmly stuck in the pre-industrial age...

The selling of our basic education services to the children of the East African Community counts as an export, if we define exports as a foreign exchange earners. More than a decade ago health, financial and IT services were identified as fields in which Uganda could develop a competitive advantage.

The beauty of such services is that they are little affected by the weather, seasonality or disease, like our favourite export crops are. But we have seen little effort in boost the marketability of these services.

Increasingly we are talking about a knowledge economy, where knowledge is a product created by a knowledge worker as opposed to a manual worker. An economy graduates up the scale if more of its knowledge is embedded in its systems and does not walk out the door – or country in this case, with the knowledge in its head, hence the term brain drain.

Last week again there was news of a looming famine in Somalia, Northern Kenya, Ethiopia and Southern Sudan. A lot of it to do with conflict in the area but also massive crop failure as has not been seen in the last 30 years.

Uganda long touted as the breadbasket of the region, is going to feel the pain too, some because of crop failure due to erratic rains but mostly because our own food is going to be in such great demand that we can expect a continued increase in food prices for at least the next 12 months.

This should not be. Our agricultural institutes do some very useful research – ask the breweries, we just seem to have failed to bridge the gap between research and its widespread applicability....

Our difficulty in appreciating the knowledge economy is that it turns traditional economics – the management of scarce resources, on its head. How do you manage a resource – knowledge that is infinite, using traditional economics?

The point is that for a country like Uganda – landlocked, underpopulated and poor, we need to make a break with a lot of what we learnt in the past.

Right now we are in the throes of a “crisis”, but there is no better opportunity than a crisis to rejig our way of doing things.

We did it 20-odd years ago with the remodeling of the economy – who would have thought we would buy dollars off the street? This crisis is an opportunity we should not allow to go unexploited.

NO SHORT TERM REMEDY FOR SHILLING, ECONOMY

The shilling fell to historic lows last week on a rumour that central bank governor Tumusiime Mutebile had handed in his resignation. This came hot on the heels of the Bank of Uganda boss’ published reservations on the management of the economy.

Since then importers, read Kampala City Traders Association (KACITA), have been up in arms and have threatened strike action if government does not do something about the shilling. It was even suggested that the government should hold the shilling at a certain price.

The President has since penned his opinion on this current “crisis”. Given his first hand experience with the economy over the last 25 years he is understandably dismissive of suggestions that this is a crisis and has counseled that we need to stay the course, make the long term beneficial decisions and steer clear of short term populist measures whose repercussions could unwind years of economic gain.

Whether we keep a long term view or succumb to pressures for short term remedies will be determined by our politics. Let us wait and see.

There are several reasons the shilling-dollar relationship has not been in the our favour in recent months. A slow down in inflows -- investment and tourists, ahead of the February polls, lower export earnings from traditional sources – the main coffee season is over, and election related overspending. Internationally the dollar has been strengthening on growing uncertainity about the viability of the Euro zone, a hint of recovery in the US economy and rising oil prices.

As a country we can influence our level of fiscal discipline or lack of thereof and to some extent the rate of inflows into the country, we have little if no say about what happens on the international currency markets.

"The shillings decline is a symptom of structural deficiencies in our economy. At a fundamental level our currency will appreciate or depreciate depending on external demand for it. Are we producing, can we produce, stuff that will be in demand externally and therefore increase demand for our shilling, therefore causing appreciation?...

As it is we are still exporting raw coffee, tea, fish and labour. We are a commodity exporting country. The problem with commodities is that it does not take much science to replicate them and therefore they are not very expensive.

For instance fifteen years ago Vietnam was not a coffee exporter of any reckoning but have since boosted production to the point that they are second only to Brazil in Robusta coffee exports, affecting Uganda’s major forex earner.

As I see it we have two options either we grow more coffee so we can export more raw beans at lower and lower prices per kg or we start processing our own coffee and exporting it as a higher value product.

The more sustainable solution is the latter but this will take a lot of government support in low cost financing, funding of research and development and marketing abroad. A solution we should have started on yesterday and will take another generation before sustainable results are realized.

"Uganda is also especially vulnerable to currency movements because many of our manufacturing inputs are imported. In fact only a few days ago Ugandan manufacturers got another extension for some semi processed imports to continue being classified as raw material imports into the East African Community. So they suffer less tax...

In the long term we are going to have to reexamine the structure of our manufacturing sector before the unforgiving hand of the market lays down the law.

Many of our manufacturers are assemblers and packagers of already finished goods. They continue to “manufacture” goods they have no competitive advantage being involved in. This is critical because as it is now China is fast becoming the factory of the world – there are very few things that can be manufactured cheaper than in China because of their economies of scale and cheap labour.

Our manufacturing needs to be angled more towards agriculture where we have a decided competitive advantage. To reengineer our manufacturing sector in that direction cannot be done overnight.

In short there is no real short term relief to our currency woes. Politics can dictate that we put a plaster on a broken economy, but it will be a short term solution that will give the false impression of relief but in the long term come back to haunt us.

As for those people suggesting government should hold the shilling exchange they need to think again. Trader turned philanthropist George Soros cemented his reputation in the 1990s when he bet against the pound, judging rightly that UK’s economic fundamentals could not hold the pound to a certain level. The Bank of England pumped in billions to support the pound but eventually had to give up and allow the pound to find its market determined level. It is said Soros made at least a billion dollars on that trade. He did it again during the Asian crisis in 1997.

"Rest assured the moment the Bank of Uganda attempts to defend the shilling, speculators – not Soros, Uganda is too small for him, will beat a path to our shores. And when we invariably fail to defend our shilling 4000 to the dollar will not be a far off fantasy....