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.
