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?.”
