The current debate on the bailout of private local companies
signals a cross road in the management of the economy, which will have far
reaching repercussions into the future, market players and observers say.
A few weeks ago a list of 65 companies and individuals
allegedly seeking financial help from the government was published. The
entities on the list argued that government policy and regional instability,
none of which they had any influence over, had conspired to stress their
business and they faced the real danger of collapse if government did not step
in.
With memories of the most recent high profile bailout of
businessman Hassan Basajjabala fresh in the public’s mind, the reaction to the
recent development was loud, angry and averse to any help being extended to the
businessmen.
In 2011 a parliamentary investigation heard that Basajabala
was compensated sh142b to hand back the three markets he had taken possession
of – Balikudembe, Nakasero and Shauri Yako markets. Previously he had got a
sh20b bailout from government to salvage his hides and skins export business.
"Beyond the public uproar the lines seems to have been drawn between the government technocrats who argue that a bailout is uncalled for, unless for industries that have a strategic importance to the economy. Local businessmen and those who believe government should support the growth of indigenous capital are lined up against this thinking, arguing that they create jobs, pay taxes and earn the country much needed hard currency and it would be a mistake to allow them go under...
In 2011 inflation peaked at 30 percent, a 20-year high, due
to regional food shortages, a falling shillings and an increase in money supply
due to the just concluded general elections. The Bank of Uganda using its new
Central Bank Rate signalled an increase in lending rates in the banking sector,
which reduced private sector credit, loan defaults and subsequent collapse of
scores of businesses.
Another round of lending rate hikes happened starting last
year when the central bank again raised their key policy rate starting in April
2015. Because of the pre-emptive action – in April 2015 inflation was under
three percent, inflation peaked at 7.6 percent and has fallen back to 5.1
percent in July.
The businessmen argue that the central bank’s
anti-inflationary stance is central to why businesses are weighed down by
unsustainable debt.
“If you haven’t run a
business, 28 percent is a nominal figure but if you are in business it’s a
matter of life and death. It’s not a joking matter,” businessman Andrew
Rugasira, said during the recent Joseph Mubiru Memorial Lecture hosted by the
Bank of Uganda.
He said that the stressed businesses were symptom of wider
structural issues in the economy and argued that monetary policy – the
regulation of money supply, the central bank’s main mandate, on its own would
not fix the problems of job creation, affordable credit and increasing
production.
"The businessmen argue that to allow these businesses to collapse would be to set back the growth of a local capitalist class which has been growing for the last few decades and to affect the jobs they have created, the taxes they collect and other indirect and intangible benefits they bring to the economy...
“The young people look to us as people who through hard work
are able to make it in this economy. If we go down they will see no hope in
trying to do things the right way and turn to corruption,” said Kampala
businessman William Kajoba, whose Hotel Sojovalo is under threat.
Kajoba, who started out as a spare parts dealer but has now
branched out into commodities trading and real estate, said they are not even
asking for free money.
“Let government talk to the banks to ease their conditions,
to extend repayments for instance or government takes over the loans use our
properties as collateral and we pay them off. We don’t want charity, “ he said
in a recent interview.
Ashie Mukungu, who worked previously as an economist at the
African Development Bank is squarely in Kajoba and his contemporary’s corner.
However he argues that to narrow the debate down to the bail out of private
businessmen is to miss the bigger picture.
“I don’t know where this bail out word came from. There is a
general sluggishness in the economy that needs to be addressed and government
has the power to address this. Let us not lose focus,” said Mukungu, who claims
authorship of the “bailout” list.
He recommends that government pay off the huge domestic
arrears, about sh1.3trillion, owed to the business community, recapitalise
Uganda Development Bank (UDB) to open the option of long term money, inject some
liquidity into the economy by buying back some of the government paper and create
an agency to takeover distressed debt from the bank and restructure it.
But economic managers remain unimpressed and maintain that
there is no real threat to the general economy.
“The evidence that high bank lending rates have caused distress among private sector companies is weak, for two reasons (i) the bank lending rates since the BOU began raising its policy interest rate in April 2015 has been relatively modest (ii) the non-performing loans of commercial banks are not currently out of line with historical trends, ” according to an internal official document the Business Vision has seen....
According to the research on which the document was based
high interest rate was the last factor in accounting for bad loans in the
banking industry. But at the top of the list was delayed government payments,
cost overruns, diversion of funds and political instability in south Sudan were
among other factors – in order of importance that accounted for bad loans in
the industry.
In fact the research shows that only 0.3 percent of the bad
loans above sh500m are due to higher interest rates. While six in every ten
shillings of bad loans was due to delayed government spending, cost overruns or
diversion of funds to issues other than the funds’ intended purpose.
Going into the wider issue of what can be done to jump start
the economy one official said the issue of providing economic stimulus does not
arise in Uganda’s case.
“You stimulate the economy, essentially inject liquidity
into the economy when there is no growth but we are growing at five percent a
year so the justification is not there,” said one official at the center of the
debate, speaking on condition of anonymity.
He however said a case can be made for stimulus for the
agricultural sector and pointed to the
Operation Wealth Creation as a good
initiative in this direction if managed well.
The offset of government arrears is a good idea, he said,
“But who really knows how much government arrears are? Finance (ministry) has
asked for verified lists and they pay and the responsible ministries are failing
to provide these.”
The general tightening of money conditions in the economy has
to do with the tightening of government expenditure in recent years.
“Two things have happened you are seeing all these corruption cases in public service and prime minister’s office? Those holes are being plugged and It turns out they were responsible for a lot of the liquidity around. Secondly with government’s emphasis now on infrastructure development the recurrent expenditure has shrunk in relative terms, that is where a lot of the leakage was...
Finance ministry permanent secretary Keith Muhakanizi
alluded to reduced corruption in government when he was before parliament last
month. He said greater efficiencies in the accounting system was key to his new
trend.
He acknowledged though that outside the managing monetary
and fiscal policy there is case for government being more proactive in
developing the private sector, without any policy reversals.
“We should not be stampeded into
doing the popular thing at the expense of the right thing, which is maintaining
macro-economic stability for everybody not just a select few. Anything else we
do should be within that context” he said.
In 1992 the finance ministry as
merged with the planning & economic ministry bringing greater discipline to
government spending which up to that point was out of control with the result
that inflation had burst past 200 percent a year.
This reorientation also signalled
the shift towards a more market driven economy characterised by liberalisation
of produce marketing, foreign exchange and the privatisation of state
enterprises. The change came after six years of intense debate on how the
economy should be managed after the NRM came to power in 1986.
Government technocrats argue that
this is now another key turning point in the economy.
"The debate has come back almost full circle to one between more government intervention in the economy versus a continuation of the liberal economics of the last three decades that has accounted for the country’s prodigious growth figures during the period....
“Every economy has a right to
determine its economic path,” says Rugasira. He argues for more deliberate and
systematic intervention by the state as markets are currently constrained and
cannot be sorted out by monetary policy alone.
“We need to reorient the economy
towards export. Start with agriculture improve credit terms to the sector,
expand extension services and expedite land reforms,” said Rugasira who exports
processed coffee to Europe and the US under his Rwenzori Coffee brand.
The technocrats advise caution.
“There is renewed debate not
restricted to Uganda about the role of the state in the economy with the people
pointing to what the US and EU had to do to pull themselves out of the recent
global financial crisis. But in prescribing we should look at the respective
contexts, what works for them may not work for us and vice versa,” a senior
finance official advised.
Warning too, that once we open
the “pandora’s box” it will be very difficult to shut it back again and will
very well determine how the economy is run from here onwards for better or for
worse.
