REDUCING TAXES ON SMARTPHONES IS SMART ECONOMICS

In 1999 Uganda’s GDP growth jumped to 8.1 percent from 4.9 percent the previous year. There was no coffee boom that year. There was El Nino, the freak weather pattern which manifested itself in Uganda as an unusually long rainy season, in 1998 which affected the harvests.

But something else happened in 1998 whose effect rolled into 1999. A second network operator was licensed in 1998 and in 1999 Uganda became the first country in sub-Saharan Africa were mobile phone coverage exceeded the number of land lines.

It was not saying much at the time seeing that Uganda only had 50,000 landlines, but it illustrated the explosion in mobile phone uptake. Essentially mobile users had skyrocketed from about 4,000 the previous year to beyond 50,000 in about 12 months.

So the spike in growth in 1999 was in no small part to the heavy investment required to roll out the network across the country but also, down to the increased economic activity the little gadgets stimulated...

While around that time it was reported that Ugandans were burning the wires talking to all and sundry – each user was earning the networks about $8 per month or about $100 a year, this was not only idle gossip. They were saving time and money finding out about markets, supervising projects remotely and catching up with relatives and friends at less cost to both sides than previously.

Then the only service provided was voice there were no text messages, no WhatsApp and no Facebook.

I couldn’t find any research in Uganda on how much economic activity has been generated as a result of mobile phones and more specifically smartphones, but the anecdotal evidence cannot be ignored.

Businesses are growing up around smart phones.

Numerous goods and services can now be bought off the phone from food to houses to counselling services. Then there is mobile money which in 2016 saw sh44trillion changing hands on all platforms. A figure that continues to grow. This is not only one and half times the current national budget but it is almost half the national GDP.

How do you think this money was being shifted before mobile money?

My guess it only a fraction of these sums were changing hands. Think what it took to get money to the village those days. One would often have to know someone who was going in that direction and then there had to be the happy coincidence that when they were going you also had money on you. 

And when the messenger reached the village he did not necessarily make a beeline for the beneficiary’s doorstep meaning the person may get the money days or even weeks after it was sent or not at all.

What happened when you got home and found that your power had been cut off?

 If you were law abiding you grit your teeth through a candle lit night, go to the bank then go settle your bill at power company and then beg them to reinstall the fuse – which was what they confiscated when you hadn’t paid. There was no guarantee the man with a fuse would reconnect you that day.

And what would happen if you jumped into a cab and at the end of the journey you didn’t have enough money for the fare?

You did surrendered some item in your possession as compensation or as collateral for when you could pay the taxi driver, but in worse case scenarios you might beaten to within an inch of your life or worse.

Long story short. These maybe small transactions but they are economic activity that was not there before and when aggregated is significant and growing every year.

"The growth in internet connectivity Uganda, now at about 30 percent of the population – below Kenya’s 68 percent,  has seen a jump in recent years with the falling prices of smart phones. It therefore follows that a fall in taxes will lead to an increase in smartphone users who can then be exposed to and take advantage of this new economy...

The conservatives will argue that smart phones will only be abused for their social media applications, so why should we forgo revenue for unserious people?

Mobile phones demonstrate the network effect, that a mobile phone becomes more and more useful the more people have one. And the more people have one the more people will get one – a virtuous cycle.

In the early days of mobile phones when they were just a handful of them snapped to their owner’s belts, mobile phones were merely a status symbol – people used to walk around with them even when they had no credit or the battery was flat, just to be seen.

Today a mobile phone is not just a necessity, it is  an appendage to ourselves. No one leaves home without their mobile phone. It would mean being out of touch, unreachable by your business partners or unreachable from your bosses at or from the interviewer for your next job.

And its not the most radical tax reform we have done in recent memory.

In the 1980s at time when we need every penny we could get as a country, we scrapped taxes on coffee exports – which accounted for at least seven in every 10 shillings in revenue the government collected. The leap of faith was taken because it was believed the sacrifice would stimulate coffee exports and pay off in higher exports, more jobs and higher hard currency earnings. Even then there were loud naysayers and prophets of doom – mostly older technocrats who couldn’t fathom a country without the coffee export tax (where are they now I wonder).

They say that a normal phone has more processing power than the computers that put a man on the moon in 1969. Smart phones have multiple times more processing power than a non-internet enabled phone has. Imagine how that economic activity that a phone connected to millions of other phones can unleash?

HOW TO GET MORE OF THE ECONOMY IN LOCAL HANDS

Over the last thirty years the government’s adoption of liberalised economic policy has resuscitated an economy that was all but buried.

The key pillars of the shift in economic thinking were the privatisation of parastatals, the liberalisation of produce marketing and foreign exchange trading and removal of all price controls.

The truth be told, Uganda did not adopt these donor prescriptions willingly. The reality of empty coffers and a gutted productive sector, necessitated the shift that would have been political suicide for a new government trying to find its feet.

"Resistance to the changes were based on the fear that the “commanding heights of the economy” would be taken over by foreigners, that the shift would be painful and drawn out, and that it wold make an already poor foreign exchange situation worse...

As it turned out all these fears came to pass.

Today the biggest companies in Uganda, easily nine in ten are foreign owned; it is true that we are still working through the repercussions of the imposed austerity measures. While we see more and more repatriation of dividends by foreign companies, we are also seeing the revival of the export sector, growing income from tourism and an explosion in remittances from Ugandans living abroad – at last count this was about $1.2b (shs4.3trillion) or about four times the annual coffee receipts.

However the realisation has been growing for a while now that this growth – we averaged above five percent per annum over the last three decades, fuelled by donor money is not being felt across the length and breadth of the population and therefore it must be broken or worse fictitious.

It is not difficult to see why this has been so.

Most of the growth during the period has been in the services, construction and industrial sectors which account for less than a third of all Ugandan workers. In agriculture where at least seven in every ten Ugandans derive a living the story has not been as rosy with growth stubbornly in single digits through the period.

The logic is simple, that the biggest beneficiaries of the NRM economic boom have been mainly the urban elite. This group has seen their income jump in leaps and bounds, as the service and industrial sectors have found their feet...

However this buttered minority, while they have had it good, own very little of the wealth generating assets – the businesses and factories, that have been dragging this economy along by the boot straps.

So their affluence while not illusory, is transient and can be scuttled by the slightest distress to the economy.

Seduced by the easy picking of the aid fuelled growth they have chosen to mostly sock their money in real estate rather than the productive sectors of the economy – agriculture and industry.

This is not surprising as building an agricultural or industrial enterprise requires disciplined and diligent work and sacrifice over years, even decades.

While they have argued that the main impediment to going into business was the high lending rates that have been a feature of the last three decades, the main challenge is actually a lack of organisation.

Over the last few years as economic growth has slowed, a hunkering for the days of the state enterprise is beginning to rear its ugly head. Proponents of this solution to what ails our economy say that this will help create jobs and retain more of our hard earned currency.

They argue that profit should not be an end and that a loss making enterprises – as all of them will inevitably be, will make up for this with jobs and services. When you ask them who will pay for the losses; Point out that these will mean cuts to health, education and infrastructure to plug the holes, which would mean poverty for the majority, they shrug and continue with their spluttering ranting.

They clearly did not learn or do not know the reasons, that drove the previous parastatals into the ground.

There is no doubt that a robust, vibrant local capital class is important, even critical for this country going forward, the question how to seed, nurture and grow it.

"Idi Amin thought he had the solution. He bundled off the biggest portion of Uganda’s business class, gifted his cronies their confiscated assets and hoped that with this single stroke he would have resolved the issue. The failure of these indigenous businessman, totally obliterated 40 years later, was not because they were not businessmen, conscientious workers or even intelligent, but there is a process to growing a business class that cannot be shortcut by populism...

You do not promote a P1 kid to P7 because you want him to graduate faster and start making money for the home.

So what do we need to do?

We need to get it into our heads that the journey is long and success is not guaranteed. That government hand outs, while they will put money in a connected individuals pockets instantaneously, will not build us the business class we want, no, the business class we need, to take this country to the next level.

And most importantly that our businessmen need to get more organised – in their businesses and among themselves, as a solution to the problems of high interest rates, “unfair” competition from abroad and to break into regional and foreign markets.

Happy NRM day!!!

IN 2018 LET US ADOPT THE RELIGION OF COMPOUNDING

It’s that time of the year either by discipline or to keep up with the Jones, we need to make some resolutions.

Despite popular opinion a person who makes a resolution in January and gives up on it in February is better off than a person who doesn’t make a resolution at all.

One reason people give up on their resolutions is because the completion is supposed to happen at some distant date – 31^st December.  How about we change that?

Never trust the silver bullet, the one that will solve all your problems. However there is one that might do a world of good if we slotted it in the chamber.

"Albert Einstein called it the eighth wonder of the world. It is what prompted Bill Gates to pronounce that we overestimate what we can achieve in a year and underestimate what we can do in ten years. And it is the realisation that it is not will power that will help you achieve future goals but habit...

Yes, will power is required to get started but once you establish a routine habit takes over and you often surprise yourself when you achieve or even surpass your initial goals.

Improvements in our lives assume that growth has happened. For growth to happen there has to be input. Input of time. Input of knowledge. Input of effort. Input of money. Take your pick.

V_F = V_I[1-R]^T

That is the formula for compounding.

But for the layman the rule of 72 will suffice to illustrate the power of compounding.

The rule of 72 says if you have a rate of increase say 10 percent, divide 72 by the number, the answer will be how long it takes to double what the rate of increase is being applied to.

So for instance Uganda’s population is growing at about three percent annually. When you divide 72 by three you get 24 years, the time it will take for us to go from the current 40 to 80 million citizens. 

Or the economy of Uganda is growing by about six percent a year over the last three decades, divide 72 by that figure and it shows the economy will double in the next 12 years assuming we continue growing at the same rate. 

If NSSF continues paying double digit interest on your savings – say 10 percent a year, it will take just about seven years for your savings to double, assuming you never added any more savings during the period.

So assuming we need our business to double revenues by December 31^st all we would need to do is divide 72 by 12 ( six percent) to determine what rate our revenues need to grow a month or divide by 52 (1.4 percent) to  determine the weekly increase or even 365 to determine the daily increase (0.2 percent).

Here are a few things we can compound in the New Year.

1.       Reading

Imagine if we commit to waking up 30 minutes earlier than we have and read for thirty minutes a day. That would mean 3.5 hours of reading a week, 14 hours a month and 168 hours a year.

But that is all linear progression.

To benefit from the compounding choose a subject – geography, investing, anatomy, any subject you want to understand and the benefits begin to compound. With every new reading you will be building on prior knowledge, this will deepen your expertise in the subject. This important because eth experts get paid better.

2.       Saving

Let’s commit to saving dollar a day. At the current exchange rate that would be sh3680. At the end of a week you will have sh25,760, a month sh103,040 and at the end of the year sh1,236,480.

To let compounding come into play, if you put your money in a savings account at say three percent a year you could double this money in 12 years. But if you keep with the formula maybe even increase to saving two dollars a day in 12 years there will be a lot more money than we are talking about now.

3.       Investing

I read an interesting article a few weeks ago in our Harvest Money pull-out about a man who had grown his chicken population to hundreds from an initial group of under 10 birds. The science of breeding not withstanding this compounding.

Or imagine you plant a tree a day for a year you will just about cover an acre of land using a 3 by 3 metre spacing. At sh2000 a seedling with an expectation of getting sh20,000 a tree in 10 - 15 years, you could cash out sh9m or a compound of 25 percent annually. It could be better or worse.

The point is let us break up our goals in to bite size portions that we can start executing, create the habit and voila!

IT’S GRADUATION SEASON

Thousands of young men and women have been and will be, over the next few weeks, graduating from one or the other university in the land.

Graduation is the culmination of years of sacrifice (often times we would rather have been playing), pain (corporal punishment is still alive and real) and tears (invoked by the first two but also by exam failure, puppy love gone sour and everything in between).

It is also the time when, whether all that hard work was worth it.

Not to rain on any ones parade here are some hard truths about the real world our graduates will find themselves flung out of the gates of university on to.

1.       Your degree means nothing

I lie. But hear me out.

Our current education system is a carryover from industrial age Europe and is designed to churn out automatons to work in factories. Seeing as we are not yet an industrial nation there is a place for the education you have amassed. However the suggestion is that we may leap frog this industrialisation thing altogether, which would be a worry for the tens of thousands filing out of campus this month.

With technological advances we do not need all that labour, to put a bolt on a screw all day long for instance.

What this means is that school is not yet out. The biggest lesson from all those years in school is that you now know how to learn. To be a winner in a world of fast change, you have to able to learn faster and faster, discard old perspectives and even dare to reinvent oneself entirely – scientist becoming writers and artists becoming accountants.

2.       Hunger, load shedding and the midnight cold will not kill you

It was a blast while it lasted. In the real world you can’t party till the morning and appear blurry eyed for an eight o’clock. You can’t just reach into the fridge and pull out a soda unless you put it there yourself. And if it rains turning over in your bed to catch a few more winks is not an option.

In short you have to grow up. And grow up fast.

Going without a meal because your salary can’t take you through the month will not kill you. Load shedding – or running out of yaka, is not the end of the world. And enduring the biting cold of a night shift does not make you a lesser man.

In fact the sooner you experience all this the better for you. There is nothing as pathetic as learning these lessons in your middle age.

3.       Humility will be your best ally

You might have been the big man on campus, the guild president or the sports captain. Leave all that at the gate. Humility will be your biggest ally in manoeuvring through life from here on. You might know more than the boss, speak better English than the traffic policeman or even smell better than the taxi tout but it will serve little good to point it out. There are some battles you will do well to pass on.

Humility will help in keeping your eye on the long term and not get distracted by the rabbits on the path of life.

4.       The consequences of your actions will live with you forever

Your transgressions can no longer be overcome with a teary outburst and feigned apology. Your actions have real consequences that will live with you for a life time. Staying on the straight and narrow is the best percentage play. Aim for sustainability over the one off pleasurable experience; accumulate experience rather than seek the elusive deal of a life time; treasure the quality rather than hanker after quantity in your relationships. And have a higher calling than just your egotistical desires to steer you on.

5.       Amidst all this you must keep hope alive

Many times, hopefully only sometimes, life is going to come at you from all angles, throwing you challenge after challenge and it would really be bad form, not to mention bad manners, to go wailing to your mummy every time this happens.

You are young and alive. Going on probability you are going to live a long life – well at least until you are 59 (the national life expectancy), it is not the time to give up.

Through it all keep hope alive. Hang on to it like your life depends on it, because it does.

Otherwise congratulations to you all and may you come out the other side with a smile on your face and a spring in your step!