THE CASE FOR GOVERNMENT INTERVENTION IN THE ECONOMY

The future seemed very bright for Samson in 2011 when he borrowed sh100m against the family home to beef up his maize garden in Mityana. He had been growing maize for two years on 20 acres and had ready buyers from South Sudan, ready to pay for his crop while still in the field.

With the money he hoped to double the acreage under maize in the next season and steadily grow his enterprise to cover the entire square mile of land he had access to in five years.

But no sooner had he borrowed the money than interest rates were adjusted upwards. A season down the line war broke out in South Sudan killing his market. Maize prices collapsed. HE shifted out of maize into higher value crops like vegetables but the losses he had sustained in his previous endeavour meant he couldn’t set properly.

Today Samson’s house in on the block with the bank seeking to recover about sh200m, the latest victim of circumstances out of his control and not of his making.

“I am too small to be bailed out."

"The current economic slowdown that has prompted the debate of bailing out distressed local companies has its genesis in Uganda’s three decade long economic recovery, recent world events and an ongoing jostling for power and influence with the highest office in the land...

In a recent days a list has been published of companies allegedly tilting over the edge into financial ruin seeking help from government to pull them back from the brink of disaster.

The list, included companies in steel manufacturing, the hospitality industry, manufacturing, general trade and real estate development. The public outcry was as a result of the perception that many of these companies were connected to the ruling NRM government, fuelling the suspicion that these were payoffs for support during the last election.

But Ashie Mukungu, a former economist at the African Development Bank (AfDB), is concerned that a genuine economic challenge in need of urgent solutions is being politicised and even trivialised. He argues that if the situation is not arrested in time the repercussions can set the economy back many years.

“In 2011 with inflation out of control and lending rates increasing some businessmen started complaining. At the time government thought there was no need for government intervention and that the economic conditions that were causing the stress would play themselves out and everybody would be fine,” said Mukungu, who has been studying the situation for the last five years.

Following the 2011 polls inflation hit a 20-year high peaking at 30 percent in October of that year.

In scrambling to contain the price increases the Bank of Uganda using its Central Bank Rate (CBR) sent a signal to the banks to increase their lending rates. This had the knock on effect of reducing borrowing and loan defaults, as businessmen couldn’t keep up with the higher lending rates for projects that were premised on lower interest rates.

Inflation figures fell back to single digits in 2012 but just as the economy was beginning to gain traction at the end of 2013 civil war broke out in South Sudan, which accounted for an estimated one billion dollars (sh2.5trillion) in trade with us annually. Trade with our northern neighbour has never recovered to the pre-civil war levels falling to as low as $100m or under $10million a month.

“We have forgotten or ignored that this money was being made by Ugandans up and down the value chain. But the bigger players took out loans to finance these endeavours and are suffering under the weight of increasing interest when they don’t have the income,” Mukungu explained.

"But closer to home government is seating on at least sh1.5trillion in unpaid bills to suppliers according to the auditor general’s recent report to parliament. Some people believe this figure is grossly understated as the sums have been rolled over for as long as a decade. Businesses who had taken out three year loans and have not been paid for four years are in pain, Mukungu said...

And as if the inability to pay due to unmet projections wasn’t bad enough lending rates are already high in the market a situation not helped by governments increased borrowing from the public.

In last week’s treasury bill auction the yield on the benchmark 91- day bill stood at 15.64 percent, so banks’ lending rate to their best clients is at about 20 percent and to the rest of the public nearer to or above 30 percent.

Other issues including the depreciating shilling which has shed more than 40 percent in recent years, the shut out of Ugandan manufacturers from supplying the Multi-billion dollar Karuma and Isimba dam projects, the delay in oil production and the lack of long term financing have all conspired to aggravate an already less than ideal situation.

That there is a case for a second look at the plight of our businesses seems to be borne out by the evidence, the question is what would be the nature of the government intervention or bailout.

A lot of the outcry seems to have come from the perception that a bailout for distressed companies would targeted at a few favourites and would involve free money doled out in spadefuls.

Patrick Bitature, chairman of the umbrella body the Private Sector Foundation of Uganda (PSFU) in a recent interview said the intention was far from that.

“My agenda was not necessary to bailout a certain number of businesses. No I wanted a solutions for all businesses operating in Uganda because there was a change in the macroeconomic environment,” he told Business Vision in a recent interview.

"Supporters of the bailout have recommended a battery of short to long term policy shifts, not targeted at specific businesses but to the general economy that would jump start production and demand....

In the short term a clearing of domestic arrears – which prime minster Ruhakana Rugunda has already directed on, the expediting of businessmen who lost property in south Sudan, the capitalisation of Uganda Development Bank (UDB) and buy back of some of government paper would be useful.

In addition an easing of regulations on the classification of bad debt. As it I snow if a debt is not serviced for three to six months to is considered delinquent. This has the carryover effect of lowering banks’ capacity to lend as they would have to provide for the bad debt from their capital and harm the borrower’s future ability to borrow.

In addition a lifting of the cap on restructuring of loans. As it is now regulations only allow that a loan be restructured twice but this should be extended to at three to five times before the loans are declared bad loans.

On Monday it was reported that the central bank said the proposals on reclassification of loans was unacceptable because they were set by international standards and were agreed upon by the region’s central banks.

In the medium term is It has been recommended that an independent agency, the  Asset Recovery & Reconstruction Company is set up to take over non-performing loans and offer the banking sector some relief.

And finally in the long term there has to be a determined effort to boost production all around by support the manufacturing, agriculture and other productive sectors of the economy.

“This term bailout I don’t know where it came from what we are talking about is a stimulus package,” Mukungu said.

Bitature weighed in calling for a strategic intervention from government, “It is imperative that the intervention be done quickly, transparently and with specific focus on businesses in key sectors and which employ a large number of Ugandans,” he said.

"Hinting on the critera that would determine who benefits from the suggested intervention apart from job creation would be tax record, foreign exchange earnings and social corporate responsibility.
Mukungu is adamant that it would be full hardy to let the market correct itself, that is the distressed companies fail and more efficient players take off where they left off...

“One, like them or not these distressed companies are the base on which our nascent middle class stands. It has taken us 30 years to build it you let it go and you will have to start again and it will take more than 30 years to build another crop of capitalists like we have now,” he said.

But he also argued that this situation left to its devices will lead to a larger problem for the financial sector.

“And if that happens you will have to bail out the banks anyway most of which are foreign owned. So would you rather offer some relief to local Ugandans or wait and bail out foreign banks?.”

TO BAILOUT OR NOT TO BAILOUT, THAT IS THE QUESTION

It has been a tough eighteen months for the business community and the general economy as a whole.

Recent stress maybe traced back to the Bank of Uganda’s move to raise its policy Central Bank Rate (CBR), which banks look to, to determine their lending rates, in April last year. The central bank anticipating huge depreciation in the shilling against major currencies made the pre-emptive move to reduce money in circulation and head off anticipated inflation.

"While the central bank were largely successful in this, restricting inflation in the last year to single digits, the move has had the knock on effect of raising lending rates, which are only now coming down, putting the brakes on private sector borrowing and, in severe cases, leading to business closures....

It has not helped too that South Sudan has imploded once again. Before the 2013 fighting our businessmen were doing at least $200m of business with our northern neighbour. And that is only the official figure. Who knows how much more was happening through unofficial channels.

The recent fighting that flared up at the beginning of the month could not have come at a worse time. 

The uneasy peace was seeing trade beginning to resume and in a situation where business was struggling here, it was expected that demand from South Sudan woUld carry us over the worst.

In addition the six month electioneering period put a further damper on the economy, as investors stayed away or adopted a wait-and-see posture aggravating the log jam in the economy.

"So it came as no surprise that the issue of bailouts for the distressed business community has been mooted...

Prime Minister Ruhakana Rugunda is leading the effort on the government side and the Private Sector Foundation of Uganda (PSFU) is making presentations on behalf of the business community. A list, which it turns out is fictitious, has been published of possible beneficiaries of this government bailout.

Previous communication was that government was going to, look into the domestic arrears with renewed urgency, press for compensation for businessmen affected by the civil war in South Sudan and looking into the issue of bad loans.

People familiar with the negotiations are clear that any government intervention has to be well thought out, transparent and sustainable and discussions are far from being concluded.

Be that as it may, if a bailout is organised we need not reinvent the wheel.

Former US treasury secretary Hunk Paulson, who was at the center of the massive bailout of US companies during the global financial crisis, was quite clear about which had to be aided.

He went in support financial institutions who by the nature of their operations were not only massively exposed to the bad debts coming out of the real estate sector but had their finger in every sector of the economy by virtue of their nature.

In addition he bailed out the car industry which employed thousands and whose activities supported whole cities.

The idea being that the failure of these companies would have a ripple effect on the economy beyond their individual industries.

At the best of times and even with the best of intentions a government bailout of the private companies will always come under heavy criticism, but Paulson decided that it was better to make a bad decision than not make one at all.

His consolation as he said in his book “On the Brink:  Inside the race to stop the collapse of theglobal financial system,” was that history would vindicate his actions. 

The jury is still out on whether his intervention was good but the US economy is steadily recovering and were it not for a lack of similar momentum in the European Union (EU) growth would have been much more robust in the US.

The point is that no government has the resources to bailout all distressed players, however many political points this will win.

A strategy has to be adopted that allows us the biggest bang for our buck.

"In theory the failure of companies would lead to greater efficiencies in the long run, as more credible companies rise up to take their place. The political fallout from such a strategy however may be too high to stomach for the powers that be...

The move to resolve domestic arrears is a good place to start. A government owes trillions upon trillions of shillings to Ugandan businessmen which has a knock on effect down the chain as suppliers are not paid, jobs are not created or cut all together and the expansion plans are put on hold.

Helping with distressed debt would be a hot potato, as accusations of favouritism are bound to arise. Maybe a way to have a win-win situation is in that in return for government’s help either in helping write off loans or win some relief from the banks the affected companies should be encouraged to list their businesses on the stock exchange.

With one stroke we will have greater external scrutiny of these companies, which may lead to greater revenue collections and even open the doors to more sustainable financing for the companies in the future.

That would be an unpopular trade-off for many businessmen but it will be a way to hit two birds with one stone – rescue ailing companies and two ensure that the improved future fortunes of the companies are shared by a wider pool of people.

PEOPLE POWER CANNOT BE IGNORED … ANYMORE

If the democratic ideal is that people have a say in how their society’s are managed, events of the last few days suggest that the actualisation of this ideal is not very far down the road.

Last week opposition leader Kizza Besigye was released on bail and as he wound his way from the Nakawa court to his Kasangati home, police escorting him were recorded swinging at will at bystanders on the roadside.

The recording went viral prompting a global (?) outcry against the Uganda police. Initial attempts to brush off the incident fell flat and the police were forced to engage in the PR exercise of reading the riot act to its own in the controlled environment of their disciplinary committee.

"It can be argued that if there was no video evidence of the act the police would have not gone through the motions to placate an angry public...

Earlier this week US republican presidential candidate Donald Trump’s wife, Melania addressed the party’s congress. Unfortunately parts of her speech had been lifted from Michelle Obama’s speech to the Democratic Party eight years ago when her husband Barack was first running for the presidency.

Social media was ablaze with the transgression. In more developed economies infringements on intellectual property are taken more serious than we do here, so apart from the political undertones there was real cause to bring a powerful individual to book. Unfortunately social media has a long memory and now everything the prospective first lady of the US says in future will be picked over with a microscope.

And finally the government’s evacuation of the thousands of Ugandans caught in the renewed fighting in South Sudan between rival government factions. Government this time unlike in 2013 sent a joint military police force to help Ugandans out. Initially it seemed as if they were going to let events sort themselves out even vowing not to deploy troops in the area. However one has to be believe that distressed communications from relatives and friends on social media got to the right ears and a wait-and-see posture was not an option.

These are just a few of the incidents in recent times. The powers that be all over the world, where previously they could assume a pointed indifference to the plight of citizens, are being forced to respond by public outcry generated on social media.

"And these campaigns will only get more determined and frequent with the proliferation of smart phones and greater connectivity...

Are we seeing the end of coups, massacres and genocides? Maybe not, there will always be the odd government which, or official who thinks they can beat the trend and get away with murder, but one has to think that the powers that be wherever they are being forced to behave with less impunity.

Which is a good thing because that is what accountability – the cornerstone of democracy, demands.

It is easy to be sceptical because these are still early days in the trend but the momentum is gathering to the point of irreversibility.

It raises very interesting issues that include but are not limited to how the powers that be choose to respond, with knee jerk attempt at clamping down on these new information technologies or learning how to leverage them for their own benefit. And us the newly empowered individuals with the capacity to move public opinion as we wolf down a rollex at the corner of our street, how do we intend to use, abuse or ignore this new found power?

"Democracy evolved in the western world over centuries, directed by powerful interest groups who controlled the means of production and the mass media, to become what it is today. Given the new circumstances our home grown democracy may be more diffused and even chaotic, as our ability to mobilise goes the same way...

One hopes that our leaders will be more accountable as a result but the possibility too is that the era of the mass party is over, with more interest groups than capital and labour, maybe environmentalists, gender activists, hedonists and other “minorities” leverage these technologies to muscle their way onto the political high table.

Futurist Alvin Toffler charted the evolution of power in his book “The Third Wave”. In the beginning the biggest strongest man became held the power. With the introduction of money you could not only hire armies but also pay for consent rather than forcing it but finally he said the people who not only generate information but control its distribution and process it will hold power.

The book, published almost four decades ago, did not forsee a situation where the ability to generate and distribute information was not concentrated in a few hands.

We are living in interesting times.

SOUTH SUDAN'S IMPLOSION IS OUR WAKE UP CALL

The flare up in fighting in South Sudan is disheartening for the disruption and loss of lives that it entails but also for the economic loss to Uganda that it signals.

Clearly the recent peace deal between the South Sudan government of Salvar Kiir and the rebels led by former vice president Riak Machar has failed to hold.

This only serves to strengthen the argument that our northern neighbours need to fight until a conclusive winner is determined, never mind how much blood letting this will cost or how long it will take.

By the time the world's newest country descended into civil war at the end of 2013, our trade with 

South Sudan had risen to $200m officially. It's hard to tell how much more trade went on informally.

"Before South Sudan attained independence in 2011, fighting there was routine. But since independence South Sudan assumed added importance as the neglected land mass, which is nearly thrice Uganda's size with only 100 km of tarmac road, demanded everything from eggs to iron roofing sheets. In addition the massive aid inflows helped shore up our shilling, inflate our real estate bubble and lit up our night life...

There are two morals to this story that leap to mind immediately.

That a nation is not a nation just because the international community wills it. A nation is more than a people cobbled together within boundaries on a map.

Secondly a scarceness of resources and sparseness of economic opportunity are a signal for chaos.

And maybe for Uganda the lesson should be that whereas exporting ourselves out of underdevelopment is an attractive option, the more sustainable thing is to focus on growing our own market to develop and sustain our companies and economy.

Economic history shows that the more sustainable development comes from launching from local markets rather than trying to first develop foreign markets.

On the continent South Africa is a classic example.

Ostracised as pariah state in the last half of the last century, the state worked on growing local demand to support its industries. Granted that the increases in income were concentrated in the hands of the minority white population, but also the development in their financial sector meant they are way ahead of the continent on access to credit, which has seen further growth since the abolition of apartheid.

Those same industries -- SABMiller and Standard Bank, leap to mind, unshackled, refocused their businesses and now compete internationally with a solid local market as their bedrock.

South Sudan was a boon for Ugandan industry while it lasted and it will again one day, hopefully soon, but in the meantime let us focus on growing our own markets.

Our macro economic policies have shown themselves to be effective in producing general growth, without which development is impossible.

However we struggle to translate that into equitable improvements in living standards for the masses.

"For starters someone has to bell the cat and tackle corruption more decisively. On many levels corruption is hurting any efforts to grow local demand...

Not only does it concentrate resources in a few hands, it affects service delivery and distorts the market for genuine business men and other economic actors.

When a handful of individuals appropriate a few billion shillings that is money government budgets for thousands of out patients or primary school children or a few kilometers of feeder road it's hard to justify.

In denying thousands healthcare or education you deny them the tools to climb out of poverty, with the funds a few technocrats use to school their own mediocre offspring abroad or on lavish holidays or lavish lifestyle in the midst of poverty.

Just as devastating is that these same officials in an effort to launder their money dabble in agriculture, real estate or general trade. Their free money distorts the market as they undercut the genuine businesmen who soon go out of business or fail to scale up their operations.

Of course the corrupt officials once they are out of government see their businesses collapse but the damage will already be done.

We can skirt around the issue but the truth is that if corruption is brought under control or eliminated all together every other challenge putting the brakes on our development will be sorted.

"It is a delusion to think that by allowing corruption we shall build a middle class that will carry the rest of the country along. The nature of corruption is that it's never enough. For its practitioners every corrupt act is a stepping stone to the next act in an never ending cycle that can only end in doom...

Eventually of course they murk the whole environment even for themselves but the pain is felt more by the masses.

Let the general global economic depression, the slowdown in China and the implosion in South Sudan wake us up to our responsibility to improve incomes at home before we looking abroad for markets.

REVIVING COOPERATIVES IS GOOD BUT LET US DO IT PROPERLY

The collapse of cooperatives in the 1980s has stunted rural development and killed an emerging saving culture, moves to revive them are good but we are best advised to do it properly if we are to reap the long term benefits.

The collapse of the produce cooperatives was a result of bad management, which was exposed with liberalisation of produce trade. A lot of ills in a company can be papered over when it is a monopoly but when competition comes they catch up.

The savings cooperatives suffered a loss of confidence with the high inflation of the 1980s.

Cooperatives are tailor made for underdeveloped countries like Uganda, whose mechanisms for aggregating resources are underdeveloped or none existent.

"We are not poor for lack of resources but for our inability to marshal these resources and leverage them to our benefit...

The new found determination to revive them, though at least 20 years late, is welcome for the above reasons and many more. However how this is done can end up ruining them.

Already we are hearing stories of Savings &Credit Cooperative Societies (SACCOS) collapsing after promising starts a few years years ago. In several cases the seeds of their destruction were sown by the handouts they got from government to start up. Others buckled under the weight of the loans they contracted from government.

If we really want to support cooperatives we would best advised not to throw money at them.

The best thing government can do is offer sensitisation to those not yet involved in cooperatives on how to set them up and the governance issues that come with them. And for those already up and running, offer advisory services on how to be more effective and efficient.

"Cooperatives build up self sufficiency in communities, government charity short circuits the process or worse, attracts nefarious types who do not have the community's well-being at heart...

The cooperative is a powerful tool for societal transformation.

It's most obvious benefit is the mobilisation of resources allowing members to take advantage of economies of scale.

Across the border in Kenya the Mwalimu savings cooperative is the biggest in the country by membership and deposits. With more than 50,000 members and more than $200m (sh700trillion) in savings the sacco that was started in 1974 has developed so far it now offers 15 year mortgages to its members, the teachers of Kenya.

At the height of its powers the Kenya Cooperative Creameries, which was supplied by thousands of small holder farmers, was processing about a million liters of milk daily. By providing ready market for farmers' milk it helped develop the dairy industry to the point that Kenya is a leading dairy producer on the continent.

"Beyond aggregating resources and also because of that cooperatives can serve as powerful attractors of investment. Often working in places out of reach of conventional investors, they serve to stimulate new production and open up markets where there were none before...

In addition they can serve as credible partners for investors looking to spread their risk of entry into markets. Say for instance a coffee roaster wants to enter the market, he may find Bugisu Coffee Union a useful partner as a provider of his raw material. It would be a lot easier buying from BCU than investing millions to build his own supply chain.

And the potential of cooperatives is virtually unlimited.

The French Credit Agricola Group, is listed as the largest cooperative in the world. A banking Union, it was founded at the end of the 19th century by farmers who wanted access to credit tailor made for them. In 2013 the group reported a net income of 31 billion Euros (sh100trillion) or greater than the size of Uganda economy.

The challenge for cooperatives in rising to their full potential for the benefit of their members is that they are often hijacked by politicians or connected individuals who run them into the ground.

The importance of a vibrant cooperative movement can not be overstated but how we pursue this project can set us on the real path to development or leave a bad taste in the months of potential benefactors and set us back many years, again.

BREXIT AND WHY YOU SHOULD PAY ATTENTION TO PEOPLE IN LARGE NUMBERS

Last week the headlines were all about the shock UK vote to leave the European Union (EU).

By a four percentage point margin the British were scared into believing that immigrants from eastern Europe, the middle East and Africa would overwhelm their shores, and a vote to keep them out would be better than staying wed to the largest economy in the world.

The size of the EU economy stands at about $18 trillion compared to the US whose GDP is $12 trillion.

"One can expect that while the pain of the UK's exit will be felt far and wide, the British will feel it more as business relocate to the main land, impediments to their products, services and people are raised in the EU and their holiday trips to the mainland become more expensive...

The UK, despite their hanging on to the prized pound have in fact retooled their economy to life in the EU. While Britain was at the head of the industrial revolution, it's great industrial concerns churning out everything from clothing to cars one end, while chugging great plumes of smoke and spewing effluent the other side, it has over the last few decades shifted away from production to services.

For every $100 of economic activity in the UK $80 is generated from service, $14 comes from production $0.6 from agriculture.

The ease of movement of goods around Europe rendered British industry, with its unionised labour and over reliance on coal, uncompetitive.

Riding on its historical links to its former colonies the UK, rejigged itself into the financial capital of the world.

This shift meant British industry was hollowed out, and with this went the low value jobs that come with manufacturing, the subsequent resentment serving as useful fodder for the Brexit champions.

The brexit lobby think they can reverse this trend and bring manufacturing jobs back to Britain. It is difficult to see how this can happen in the modern world.

The UK has no competitive advantage in manufacturing. They can attempt to throw up trade barriers to support the rejuvenation of their industry but that will only trigger a predictable retaliation from EU their biggest market and that would be that.

"Under the current circumstances even the UK's much vaunted financial services are under threat from Frankfurt and Paris. More job losses...

It's hard to see how Britain benefits.

Of course they can be more stringent in their immigration policies but as The Economist reported last week UK immigrants provide a net benefit to the economy.

Immigrants do the menial jobs the citizens can not be bothered to do, while allowing the British to engage in higher paying more productive work.

But we shouldn't wail more than the bereaved. The British will be just fine in their diminished role in global affairs.

However, their action raises some interesting questions.

The assumption that the benefits that accrue from the free movement of goods and services are obvious and that the general population will not roll them back casually has been found to be that -- an assumption.

This confirms the historical record. That development is never initiated by mass action but by visionary leadership.

It also confirms that such economic shifts as dramatic as from manufacturing to services, which demand a qualitatively better work need to be accompanied by a revamping of the education system and a mass retooling of the existing workforce. Leaving this social engineering to the devices of the market can lead to revolt that is detrimental to everyone.

"The benefits of merging markets, allowing the free movement of goods, services and people and a general improvement in welfare is hard to dispute...

The political processes that try to materialise such desires is often the problem.

Hence the need for a leadership that is not only steadfast in its pursuit for greater markets but one that can drive the consensus in that direction.

Brexit should not be brushed off as something that happened to them, but an event we should study seriously in light of our own efforts to create a regional union.