Tuesday, July 22, 2014

THE HONOURABLE SPEAKER HAS IT BACKWARDS ON LIBERLISATION



Deputy speaker of parliament Jacob Oulanyah returned last week from travels abroad.

Straight off the plane he launched a scathing attack at the country’s liberalised economy and how commercial banks are reaping off their clients with extortionist lending rates. He also argued that the parliament is too large relative to the size of Uganda, compromising the quality of output from the august house.

By design or accident, raising the issues side-by-side Oulanyah touched on an interesting causal loop.

Part of the reason the bank rates are too high is because we have too huge a public administration, in which I include parliament.

We shall come to that later.

There are many reasons lending rates are high, among them rising business costs, high lending risks, and the bankers will be best suited to talk about those, but one of the major reasons the high rates on treasury bills and bonds.

Treasury bills and bonds, also referred to as government paper, are the way government borrows from the public to control inflation on one hand or finance the budget.

As it stands now the 91-day treasury bill rate is currently at 9.4 percent and the Central Bank Rate stands at 11 percent. It is against these two rates that banks decide how to price loans.

It is only natural and prudent that banks charge individuals or companies more than they do government, which is considered the safest borrower.

"So if Oulanyah wanted to influence lending rates he might want to start with helping government lower those bench mark rates...

For a long time government paper was used to mop up excess money in the economy. This was and still remains important because too much money sloshing around causes inflation. We don’t need any lecture on the dangers of inflation in Uganda.

Inflation is often driven by government spending gone amok, as we saw after the last election. So a good place to start reducing the risk of inflation and therefore making it unnecessary for the Bank of Uganda to withdraw money from circulation, is to cut down and control government spending. And one of the best way to do this is to downsize government. Government’s don’t spend money it’s the people in government who spend money, the fewer they are the less money government will spend, beyond just the payroll.
 

So in complaining about the size of parliament he is knowingly or unknowingly touched on one of the reasons for high lending rates. 

I will put it down to Oulanyah’s speech not being reported correctly, but it’s hard to see how too much liberalisation is causing high lending rates.

The deputy speaker has it backward. The reason our lending rates are too high is because we don’t have enough competition in the banking sector and therefore we might not be liberalised enough.

It is fashionable to blame foreign banks for high lending rates but even when we had local banks they did not particularly show Ugandans any preferential treatment. Unless of course you mean the massive loans that were lent to the cronies and family of local bank owners, which eventually sank those banks.

The process of liberalisation of the economy entailed breaking up of government monopolies and selling off loss making state enterprises.

Everyone who has been around long enough knows that the economy’s liberalisation was necessary, even critical, to allowing the country progress the little way it has in the last 30 years. Liberalisation mobilised private resources and ingenuity at a time when government had little to no resources to invest in state owned industries.

Oulanyah is right, that in liberalising the economy government seems to have washed its hands of its role in directing the economy – through strategy formulation and regulation of the liberalised sectors, in order to fulfill our national ambitions.

The foreign companies, which dominate our economy, while they are predominantly manned by Ugandans, answer to their shareholders who care little about our own aspirations as a country.

"We should not begrudge these companies the profits they make, but as a country we have the right to participate in their development plans to ensure they are aligned with our own goals....

In line with that, here is a suggestion for how Oulanyah can leverage the powers of his good office to help pull down lending rates. Raise the people’s savings rates. Help legislate that all public servants be shifted to a contributory pension scheme like NSSF and in addition raise the proportion of people’s salaries that they are mandated to save.

Currently workers are mandated to save five percent of their income with NSSF, with their employers contributing another ten percent.

"Raising the level of national savings will lead to more money being held by banks. Banks make money by lending and it costs them money to hold savings. Higher savings will force banks to lower their lending rates to get more money out the door....

The east Asian nations worked that out a long time ago. Singapore for instance, a country that was poorer than Uganda in 1962, aggressively mobilised local savings by increasing social security savings requirements. These long term funds were then invested in the private sector raising production, incomes and eventually savings. A literal virtuous cycle.
The rest as they say, is history

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