LETS GO FOR EXPORTS RATHER THAN IMPORT SUBSTITUTION

One of the major challenges resulting from the three-month lock down is the collapse in consumer spending.

It’s a bit of a chicken and egg situation. Because businesses shut down workers have seen a cut in or a total loss of their wages, as a result the companies have no one to sell to.

Coming out of the lock down will require companies to jump start production on one hand but also for there to be enough spenders for the companies to sell their goods and services to.

The government has suggested some remedies to the challenge –postponing tax payments, encouraging banks to postpone loan repayments among other things.

In addition it has been suggested that import substitution, where we produce some of the things we import, can create jobs and help jumpstart the economy.

The import substitution call, first heard after independence, is an attractive one. It presupposes more jobs created locally and a reduction in expatriation of profits to foreign investors. 

The traditional way of supporting import substitution is by discouraging importation by raisinig import duties, so that local industries can grow and fill the gap. Governments can either jump in the fray themselves, start companies to import substitute or support local companies to do the same.

What the promoters fail to point out is that import substitution initiatives don’t stand up to scrutiny, often are a higher cost on local consumers, who pay for their inefficiencies and promote an entitled elite, disproportionate beneficiaries of the policy who will fight its reversal or liberalisation of markets regradless of its cost to the economy....

Import substitution has been tried out in the NRM era and some companies still enjoy protection from imports. But 30 years later consumers are willing to pay more for the imports nevertheless, because these favoured companies produce substandard goods.

Borrowing a leaf from countries like Japan, South Korea and more recently China, the more enlightened thing to do is to support companies that are targeting foreign markets.

Producing for foreign markets is a more objective measure of a company’s success. Producing for local markets, one can be successful because he is favoured by the ruling elite, while foreign markets will not be swayed by such considerations.

Secondly, because of the size of foreign markets, companies who service them will be forced to employ more and more workers and buy more and more from local suppliers, as they win more market share, which is a major intention of the authorities.

However, helping companies to produce for export will take more intelligence than is suggested by closing off our internal markets to foreign producers...

For starters government has to come up with and execute a more credible industrial policy than it currently has. The same for an export promotion policy.

The interesting story is told of our attempts to supply goats to Iran in the early 2000s. We have goats running around all over the place surely we can supply them, we thought. When the Iranians came up with their demands for the quantities – 14,000 goats a week and the quality – weight, slaughtered under Halal standards and transportation conditions, we couldn’t cut it and the deal went begging. And that was just goats.

It is clear that before we can plan for exports we need to muster sufficient volumes of whatever it is that we want to trade in. The local market will be a useful launching pad for this ambition, but supplying it will just be a means and not an end in itself...

As part of policy government would have to negotiate access to foreign markets and even give marketing support to companies intending to export to those markets. Especially as we intend to eventually export finished goods to those markets.

Also in order to export successfully we will be forced to determine what products do we have competitive advantage in, which products can we produce better than most other nations in the world. By determining this first, we will improve our chances of success in foreign markets and not support unnecessary ego trips.

As an aside too, producing for export will improve the standard of goods we consume in this country. Our lax standards regime or enforcement means we produce a lot of stuff that foreign markets would not touch with a ten foot pole, this is detrimental to our health and general standard of living.

The real Asian tigers – South Korea, Taiwan and China, have learnt this lesson and are executing it really well. They also tried import substitution too but realised it was a losing strategy and promptly ditched it.

We have products already that can be tweaked to enter foreign markets – our sugar, our alcohol (waragi), dairy products among others.

Producing for export is not easy and the respective companies cannot be left to go it alone, a coherent national strategy and  systematic government support are key.

Doing this through public enterprises would see the inititiave dead on arrival. The more sustainable way is to do it through the private sector, a whole science on its own.

If we want more jobs, more revenues to the treasury and more technological transfer, lets muster the strategic vision and implementation discipline  to produce for export over the less ambitious import substitution strategy....

IF YOU WANT TO MAKE GOD LAUGH

They say that if you want to make God laugh tell him your plans.

Never has this been more apparent than in 2020.

A little known virus, the corona virus,  at the end of last year found fertile ground in Wuhan, China to fester and incubate, then sped all around the global via the air routes of the world.

By February it had landed in Europe and in March exploded in Italy and Spain and threatened a dystopic landscape by year end.

Before Europe had it under control it crossed the Atlantic to the US, where if they don’t do it big they go home.

And only last week we heard that in Brazil they were exhuming graves to make way for new deaths.

Covid-19, the disease caused by the corona virus, is not a particularly lethal infection. On writing this the death toll  came to about 5.4% of total infections, this translated into 446,000 deaths.

Why the corona virus has broughtthe world to a stand still is its high infection rate. Scientists have determined that one covid-19 infects about2.5 others in five days, the similar stat for the common cold is 1.5. 

"Doesn’t look like much difference but by the tenth level of infection the one covid-19 patient will be responsible for infecting 78,000 as opposed to 3,800 for the common flu....

 Uganda has been spared the apocalptic scenarios in Europe by taking firm preventive measures – the lockdown, that ensured that the rate of infection was slowed to a minimum.

The lockdown, the restriction of movement and congregation, however, has brough the economy to standstill.

We never saw it coming, when we were drawing up our New Year resolutions. It has been so devastating that Chinese billionaire Jack Ma said, that if your business survives the year consider it a win. All profit, gowth and investment projections are out the window.

In times of crisis whether you, your business or country survive will depend on the foundations on which they are built.

But now spare a thought for political aspirants who have invested millions, even billions of shillings in readiness for next year’s elections.

The Electoral Commission (EC) has said there will be no mass rallies, an announcement that has unsurprisingly  thrown up a lot of criticism. 

The EC say the recommendation was made under the advisement of the health ministry, which insists and rightly so, that social distancing protocals should not be ignored.

I see two critics of this announcement. First, there are those who trying to break into politics fear that without mass rallies there is little chance of winning enough face recognition. 

"Their insistence that mass rallies should be allowed regardless of the health situation is based on them unwilling to wait another five years to shoot their shot...

The second group are those whose knee jerk reaction is to see conspiracy in every thing that is proposed by government or its agencies. That whatever government or its agencies decide is intended to perpetuate the NRM’s hold on to power. Many of these are opposition politicians, who wouldn’t be worth their salt if they didn’t view every thing government did with a jaundiced eye. That’s the hazard of their station.

The first group needs to take a chill pill. It would be irresponsible to the point of being criminal for government to put thousands of people’s health at risk for politics. The US is learning that lesson, as are the UK and Brazil.

"Covid-19 is real. Just because the government’s resolve in enforcing an unpopular lockdown, we have been spared the worst of it, does not mean it is a figment of the NRM’s imagination....

What would be fair criticism would be that if the health system was better, we would be able to afford a few thousand infections as our system would be able to cope better. Maybe that can be a campaign slogan for someone.

But this situation probaly makes the case for the opposition to focus more o n beefing up representation in parliament, rather than fixating on the presidency. In that way they would have been able ti muster the numbers to cause an amendment to the constitution to postpone the elections to a later date.

Okay you can shoot me now.

BIG NEWS: MTN GOT THEIR LICENSE RENEWED BUT …

Last week it was announced that the government had finally renewed telecom company MTN’s operating license.

This comes after nearly two years of hard negotiation that included such tactics and brinkmanship as can only be found on the Hollywood screen.

MTN is to pay $100m (sh370b) for a 12 year term. MTN’s Second Network Operator (SNO) license  expired in November 2018.

The announcement last week not only brought to an end the protracted negotiation between Kampala and Johannesburg but also finally clarified on government’s position on telecom licensing going into the future.

The ICT minister Judith Nabakoba last month gazetted licensing requirements for operators in the industry. 

This is the tail end of the  process that led with the unveiling of the Broadband Policy in 2018.

The gazette promises to bring some order to an industry by formalising the licensing of infrastructure and service providers, greater clarity on bandwidth usage and the regulation of other accessory services.

Attracting more players up and down the value chain will be good for the customers as the competition will ensure not only choice but quality service at an affordable price.

But of course the highlight was the telecom licensing.

Under the new rules there are now provisions for nine categories of licenses that range from the National Telecom Operator (NTO) to the community operator license. Each has the fees and obligations of the operator outlined.

For the first time it clear that if you want to invest in the sector this is what it will cost to get a license and your obligations under the license.

So for instance if you apply for National Telecommunications Operator license the least you can pay for the license is $21.3m (about sh80b) that’s for a new entrant into the market. 

That would allow you to lay down your infrastructure and provide a full spectrum of services from voice to data around the country.

If you are an existing player and  want to renew your license you would pay 1.84% of the previous year’s revenues multiplied by ten, the first half of the 20 year license.

So under these circumstances Airtel, whose license comes up for renewal in July, given their annual revenues of about $380m last year, would pay about $70m.

However, and this probably explains the two year delay – from the passing of the broadband policy, in spelling these all out the minister curved out a special category for MTN.

In this the National Telecommunications Operator (special license category) MTN will pay $100m (no indication how this figured is arrived at) for a license that will run for 12 years.  

Immediately questions jump to mind. Why is MTN being treated differently, using subjective parameters that the public or other competitors are not privy to? Why will the NTO get 10 years, with an option to renew for another 10 years and MTN is not afforded that choice? And what will happen if another operator insist on getting their own terms like MTN? 

In a throw back to

"1998, MTN paid $6m for its 20 year Second Network Operator (SNO) license. One of the conditions of the license was that they were supposed to sign on 89,000 lines in five years. This looked an insurmountable  task given that Uganda Telecommunications Ltd (UTL) had only managed 50,000 subscribers since independence and Celtel had about 5,000 subscribers....

But when MTN signed on more than 100,000 subscribers in the first year the six million fee begun to look like a bargain.

Interestingly MTN won the license partly because they offered the highest price of any bidder at the time in an open and transparent process.

With that in mind it is not inconceivable that with the rapid developments in technology, that five or 10 years down the line the $100m license fee may very well be a bargain. And then other license operators may want to be in the special category, which for the moment is only for MTN.

In rule based environments these kind of disparities are a recipe for all sorts of misplaced perceptions and complaints.

And if you think about it the distinction was not necessary. The  ministry could have kept MTN in the NTO category and they can get renewal after 12 years.

Interestingly in both licenses the holders are expected to list on the Uganda Securities exchange (USE) within two years of signing on.

An investor looking to invest would not be looking at operators with the same license. On the one hand would be the “special” MTN for who it is not clear the license would be renewed after 12 years and the other operator who has the option to renew after ten years.

It is always difficult to price for these long term investments, see the brouhaha in the electricity sector in recent years. Keeping this in mind

the wise thing to do is to reduce discretion to the minimum to make the affected businesses viable, but also as a signal to intending investors that you, as a government know what you are doing.... 

 The devil they say is in the detail, let’s mark this anomaly for future reference.

 

GOVERNMENT BETWEEN A ROCK AND A HARD PLACE

In last week’s state of the nation address President Yoweri Museveni announced a battery of things the government was planning to jump start the economy after more than two months of lock down.

The restriction of movement and congregation, meant to slow the rate of infection of covid-19 the diseases caused by the Cororna virus, has ground the economy to a halt not only Uganda but all over the world.

The corona crisis is a health crisis that has escalated fast into an economic crisis.

The expectation has been that there will be a wave of business collapses and the subsequent job losses that could potentially spill over into social unrest and political upheaval.

To stave off this last scenario, governments around the world have opened the taps of government spending, economic stimulus, to help support their respective economies.

Unlike another crisis since the second world war, the economic dislocation has been swift, massive and global in its reach. But it has been unique in the total collapse in demand, in a situation of over capacity.

To illustrate, while many people –

up to 80% in certain segments have lost their incomes, the capacity to produce, to feed or service all those people is still there. It has just been switched off..

.

The companies that have been shut down are facing the real possibility of closure, depending on the robustness of their balance sheets, but the most vulnerable members of our society are falling deeper into poverty and facing real existential questions.

The two are related. To the extent that people are unable to get back to spending money because of the uncertainties of the economy or because they have no money all together, is how long it will take for businesses to get back to full production and employment.

So the effectiveness of a government stimulus will depend on how well this reality is appreciated.

It is particularly important in Uganda where more than seven in ten dollars of economic output is attributed to the informal economy.

More formal economies in western Europe recognise this and their stimulus packages while shoring up big business, have emphasised support from Small and Medium size enterprises (SMEs) and individuals out of a job.

It is a lesson many learnt after the second world war. As they embarked on reconstruction they realised too that while industry was getting back on its feet they had to provide unemployment benefits. These monies provided the demand that helped spur industrial growth.

Many of them have maintained and even widened the nature of welfare benefits. While its critics have seen this as wasteful and prone to political manipulation, their criticism might be because they would rather those monies be used to support big business than disperse it among the masses.

The supporters of these “handouts” also argue that

if you give your everyday man sh50,000 he will buy from the local shops, seek treatment at the clinic and pay the boda boda....

These in turn will pay local suppliers and the local economies badly hit by this crisis will at worst not collapse all together.

If on the other hand you give a handful of suppliers sh80b, which is the sh50,000 distributed among the 1.6m families living in poverty, they will save it in his bank, import new furniture and vehicles, pay school fees for their children or seek treatment abroad and even invest abroad. True, they may also buy some land (keeping the money among the fellow rich) or build a new mansion, and even pay school fees for some village orphans.

It is hard to argue against a direct injection of cash into local communities, which incidentally, will still find its way into the pockets of big business, eventually. A trickle up effect. But

the connected don’t want these drip, drip returns, they want the money to be gushing hard and fast and to hell with the rest of us...

 

Beyond the pressure from the connected few, the idea of handing out cash to the vulnerable as part of package to jump start the economy is met with the argument that it will create dependency. We just sounds like a logical assumption to make but falls flat in the face of the evidence, which shows that most people who are beneficiaries find a way to wean themselves off the benefits to become more productive members of society.

The argument may mask the real reason. Many political disturbances have resulted when faced with worsening economic conditions, governments withdraw these benefits. 

To sustain a welfare system over generations, requires disciplined budgetary processes, so when the bad times come – as they inevitably do, you can still sustain welfare payments to your people....

The mixed Scandinavian economies could teach us a thing or two in this direction. 

In vulnerable economies like ours, financing even a minimal social benefits scheme would mean borrowing from abroad and there our fear – reasonably so, of donor interference rears its ugly head.

A running scale of benefits to small business and the poor, going from cash handouts or grants, to soft loans and all the way up would be a good idea.

WHY NSSF AS A PENSION FUND IS A GOOD IDEA

Just when we had forgotten about the National Social Security Fund (NSSF) than it is back in the news.

A few weeks ago, an opinion hazarded in parliament that the Fund should payout 20% of members savings to help them over the corona crisis, caused an uproar.

On one side of the argument the NSSF management argued that the proposal was impractical, would hamper and even jeopardise its operations and above all they couldn’t execute it if they wanted to under the current law. 

The supporters of the  proposal argued that it was their money and it should be released, fear their money may have been pilfered and they are seeing ghosts and conspiracies lurking around every corner.

An amendment of the NSSF law currently winding its way through parliament has served to stoke the flames of the debate.

In the original amendment bill mid term access was restricted to access to funds for mortgage, medical, education and unemployment. But the committee that is working on the amendment has proposed that in addition people above 45 years or who have saved for at  least 10 years should be allowed to withdraw some of their savings.

No sooner had the dust settled on that discussion than it was proposed that NSSF be turned into a pension fund from its current status as provident fund. 

The difference is to shift away from a lump sum payment to workers when they retire to a monthly pension for the remainder of their lives.

The shift to a pension fund is likely to be an unpopular one. 

"For most members the expected payout at retirement is the most money any of them have had at one time. The mentality is that when they get their money their money problems will be done for good....

Unfortunately the numbers don’t support this feeling. According to NSSF eight in ten of its members have nothing to show for their money after two years following retirement.

The horror! You retire at 55 and probably have twenty years of life ahead and you have gone through your savings in two years.

But that shouldn’t be surprising.

If you get your current savings with NSSF and divide it by your annual salary, it is unlikely it can last you five years at your current standard of living..

 

I was amused to hear one person say that the people who wipe out their savings are only those with small take outs. That those who withdraw sh100m and above are doing well.

I would put my money on it that it’s the other way around. It’s the ones with big cash outs that blow up their savings and are back on the street looking for a job within two years.

"We seem to think that to improve our financial literacy we need a lot of money and we will be fine. And that is the problem....

If you can not manage the little you have, a lot of money will only serve to magnify your indiscipline with money. Hence the reason why the people who get the most money blow their money faster than the smaller savers.

So

a shift to a pension fund would actually save us from ourselves....

The compromise would be for members to be allowed to withdraw between 30 and 50% of their savings in a lump sum with the remainder being paid out as pension over the remainder of their lives.

There are other reasons why the turning NSSF into a pension fund makes sense, not least of all the anticipated massive payout in 15 to 20 years from now, when the majority of the current members seek to cash out, but keeping members living in dignity for the remainder of their lives has to be at the top of the list.

In the new law there is a provision for voluntary savings. While this is targeted at the informal sector it would do wonders for those in the formal sector, who can save over and above the mandatory 5% stipulated  by law. This allows one to have a bigger pool of cash from which to draw at retirement.

I expect the conversion to a pension scheme will be an unpopular one, but it will be the right thing to do, just as government compelling workers to save with NSSF 35 years ago was the right thing to do.

I can bet that even then people argued against handing over their monies to NSSF, arguing that they should be allowed to save how and where they wish. 

The figures again show that easily for nine in ten savers their NSSF stash is the biggest asset after years of hard work and squandering the remaining 95% of their income.

NOW GIVE US MONEY NOT POSHO

In starts and fits, government has been distributing maize flour and beans to the vulnerable populations of Kampala and Wakiso.

The program that has been in motion since the beginning of April is still ongoing, despite earlier plans to complete in two weeks.

Apart from a few questions of quality, most recipients seem to have been grateful for the handout.

As the government slowly lifts the lock down, it will have to contend with the economic debris left behind.

The lock down, the restriction of movement and congregation, was intended to slow the rate of infection, which for all intents and purposes we have done very well.

At the time of writing this the number of recorded infections was shy of 300, about two months since we recorded our first case. Going by the rate of infection elsewhere we should have crossed the 1000-mark by now.

The lock down’s secondary reason was to allow government improve its capacity to test, track and treat eventual infections that will occur.

 " With the lifting of the lock down infections will rise and time will tell whether government was ready enough...

The lock down also brought economic activity to a near standstill, the net effect of this is that many businesses will shut down and jobs will be lost as we try to come to terms with the after effects of the lock down.

 

We are opening up to world where there is a lot of idle capacity but little demand to take this up.

So the New Vision for instance has seen its sales fall to below 20,000 copies a day, but the machinery and people to produce the paper are still largely in place.

Ideally what should happen is that as soon as people get back on the streets our sales jump back to pre-covid-19 levels immediately. That is unlikely to happen.

This scenario is being replicated across the economy, across all industries (except the telecommunications companies maybe).

During the global financial crisis that happened about a decade ago, western economies grappled with how to handle the situation.

The US sought to bail out its giant companies in industry and finance, the argument being they were too big to fail. That if they did fail, the ripple effect across the economy of lost productivity and job losses would be catastrophic.

Europe did a bit of that but emphasised more shoring up the social security net for its people.

The result,

while the US on paper came out of the slump faster, wealth inequalities widened and the most vulnerable people in that society were badly affected...

Europe was still in recovery mode by the time the Corona crisis came around, but recovery was more spread out among the population.

Given the experience of the western economies, it seems obvious that Uganda will have to thing deeper about social security if it is to come out of this crisis with some hope of future prosperity.

This week the US, through their USAID office here announced it will be handing out cash – sh92,000 a month for three months to a few thousand people around the country.

The money is supposed to help these vulnerable people get back on their feet during these hard times.

From a purely humanitarian standpoint it  is hard to argue against helping the least of our brothers.

However, plans to do this have come against two roadblocks. One, isn’t this a sure way to encourage dependency among our people. And secondly, how long can such programs be sustained.

Thankfully we need not go on guess work. The government has been running a pilot unconditional cash grant to the elderly, SAGE (Social Assistance Grants for Empowerment) for the last decade.

The government gave people over 65 were being given sh25,000 monthly in a program that expanded to 57 districts from less than 20.

A study done by UNICEF showed that these grants had had far reaching benefits not only to the recipients but their respective communities as well.

The benefits  included more employment, improved school enrollment and better feeding.

Its an expensive endevour to carry out all year around, that’s why government has raised the age requirement to 80 to spread the initiative across the country.

Beyond the feel good factor of helping the most vulnerable members of the society there is some hard economic sense for government to be making these handouts, especially now.   

"Most welfare programs in the western economies took off after the second world war. It was a way not only to aid the people but also to jump start industry, what is the point of manufacturing all those bicycles or shoes or plates if there is no one to buy them?....

So by helping the common man back on their feet they were creating a market for industry.  

The spillover into economic growth is quite obvious. There are studies which show such grants have a comparable return on investment as infrastructure.

Thankfully the tools to make direct payments have already been tested and explored under SAGE so delivery shouldn’t be a problem if we committed to the program tomorrow.

So instead of a handful of people benefitting from government relief aid more people will benefit.

You are giving me maize and beans,  thank you very much but I might need soap or charcoal or medicine more urgently now. If you give me money I will make those decisions for myself much more efficiently.

The question though, how is government going to afford it? Given the anaemic state of our coffers now there is no doubt that government would have to borrow to support such a program, but given that these monies will be used to support  local business it would have to be considered a good spending of tax payers money.