Last week during the Uganda-Rwanda Business Forum. Rwanda’s
Paul Kagame said among other things that before looking to the outside for help
we should look to raise resources at home.
As if on cue Kampala City Council Authority announced that
it is looking seriously into issuing a municipal bond to fund investments in
the city. A municipal bond is debt taken out by local governments and is often
backed by the revenues they collect from their various activities.
Both events are more than welcome news.
Uganda’s saving rate is about 12% of GDP below the
sub-Saharan average of 16%. This has far reaching implications for how much and
how fast we can develop and the course our development will take.
But in order to tap the markets you have to have the
mechanism to do so. In Uganda we have the Uganda Securities Exchange (USE),
which has been in existence for close to 15 years. During this time several
local and regional companies have sold shares, issued bonds and it has served
as a secondary market for Treasury bills and bonds.
"The challenge of employing the USE to raise funds for both corporate Uganda and the government has arisen from structural issues but more importantly mindset inadequacies...
Structurally many of these entities be they corporate or
government have not been in shape or have not seen the urgency of using the
markets to raise cash.
Companies relying on huge margins have been financing their
own expansion through cash and rudimentary lending instruments. But the opening
up of the East African market and the entrance of Chinese entrepreneurs has
slashed margins, forcing our businessmen to the edge of extinction.
Under the circumstances our businessmen have two
alternatives, wither to sell out to the foreign invaders or stand toe-toe and
box it out. IN the first instance our businesses are not big enough to provide
a credible barrier to entry for foreign companies and secondly, they are so
disorganised it’s hard to determine their real value in order to purchase them.
These two same reasons also means that a last ditch attempt
to fend off the new entrants is doomed to failure. In such circumstances
business expansion becomes a survival mechanism, our businessmen need to scale
up their operations to take advantage of economies of scale to push down costs
and pass on the savings to the consumer to stay afloat.
But how do you scale up when you don’t even have a real time
appreciation of the state of the business, for lack of organised books?
And if you cannot borrow from the banks, imagine how much
more difficult it would be to borrow from the markets?
Similarly in government structurally issues abound, for
instance it’s not collecting all the revenue it can partly because our economy
is largely informal – it is estimated that seven in every ten shillings of
economic output comes from the informal sector but also, and related to the
first reason, we are highly corrupt.
But the government’s mindset has to be a major stumbling
block.
"For the last three decades or so government has been busy pigging out on cheaper financing from the donors, that the idea of borrowing at double digit rates – never mind that it was in Uganda shillings, just didn’t set our officials hearts racing...
However we have since learnt the limitations of foreign aid.
To begin with your priorities are not necessarily the donor nations’
priorities.
In early part of this century the donors made government
jump through hoops to prove that there was a market for power form the planned
250MW Bujagali dam. Then energy minister Sayida Bumba was hopping around the
region’s capitals trying to sign them to commit to taking up our excess power.
That was when less than five percent of population were on the grid. Somehow
the donors thought that the vast majority of Ugandans had rejected power?!
Similar differences in opinion slowed increased funding to
our road network, the introduction of universal education and health services
and increased funding to the army.
Borrowing domestically has its major drawbacks, government
competing with the private sector for funds being the major one. So the key
would be that as you look to get money from the public we should increase the
public’s saving rate.
Currently workers are required to save five percent of their
salaries with the National Social Security Fund (NSSF). As a result of this
single initiative, and a lot of elbow grease by NSSF, the fund is the largest
financial institution in the country.
In addition to continuing to induct more workers into NSSF,
a revision of saving rate, maybe having workers save up to 20 percent of their
income – employers need not double that or even match it, would bring a lot
more funds into the formal financial sector, not only pooling available
resources but also putting downward pressure on lending rates.
It’s a cliché that bears repeating – no one is going to
develop this country for us. We need to look more and more to ourselves to
finance our ambitions and last week’s announcements – by Kagame and KCCA, are
cause for optimism.
