THE COVID WAR IS TAKING NO PRISONERS BUT ....

The COVID-19 pandemic forced the lockdown in March – the restriction of movement and congregation, which ground the economy to a near a halt. 

For the first time since the second world war, the effect was felt globally, nobody was spared.

In Uganda economic growth contracted in the first half of the year, after growing about seven percent in the last half of last year. As a result the economy grew by 3.1 percent in the financial year that ended in June. For the whole of 2020 we will be lucky to make three percent growth.

But those are the big numbers. The smaller numbers, which add up to the bigger numbers, are beginning to trickle in to confirm the anecdotal evidence all around us.

As far as James Ngetich was concerned 2020 was going to be his year. He had secured land in eastern  Uganda on which he was growing to grow barley and sorghum, key inputs in the beer industry. He had been preparing with the local agent to go in aggressively – he was going to put just under 10  acres, under grain hoping to scale up in coming seasons to 50 acres available to him.

"When he toasted to the new year, Ngetich was seeing only dollar signs, well into the future...

He was not alone. Easily another hundred farmers around the village were also throwing in their lot with the project or were already actively involved.

Then Covid-19 happened. The hospitality industry – bars, restaurants hotels and concerts were shut down. The breweries demand for his and his friends crop evaporated and literally collapsed the economy of the county.

People dug up their fields and replaced their crop with maize and beans. This whole event left a bad taste in their mouth.

The partial lifting of the lock down in June did not salvage the situation. 

The events of the last week, with the hosting of an illegal concert and the arrest and release of the Nigerian highlighters, only served to accentuate the pain the hospitality industry is going through.

Using the beer industry as a proxy the effect up and down the industry has been nothing short of devastating.

"While the bar owners have been the loudest in advocating for a reopening of the sector, with good cause, as they are the biggest employers along the value chain, millions are licking their wounds in relative silence....

Grain farmers like Ngetich saw their revenues plummet sh19b from the pre-Covid figure of sh76b. And that is an average figure some farmers suffered a total loss of income as their harvests were not taken up or they didn’t bother planting.

The numbers while dramatic belie a greater suffering than they can capture.

Oguttu who found work as a turn boy loading and offloading beer crates off distributor trucks in Kampala, was laid off unceremoniously and this meant more than loss of income. 

His sh7500 daily income – lunch was provided, allowed him to propose to his girlfriend with the Kwanjula set for June. With the loss of work in February, his girlfriend got tired of endless stories and drew the line on  postponing the Kwanjula. He is now single, searching and trying hard to get back on his feet...

Oguttu's earnings, while merger are life changing to him, can be counted among the sh1.7trillion lost in the distribution arm of the beer value chain.

"Bar" owner Mama boy in a Kampala suburb is thankful too that schools were closed otherwise she doesn’t know how she would have paid for her six  school going children – two are her own and the other four are nephews and nieces.

As the “manager” of a bar, whose whole furniture component is two benches, outside her friend’s shop she has seen a total collapse in her take home, even despite the June secret reopening of her bar – everyone has to buy at least a samosa before they can buy a beer, to justify the addition of restaurant to the establishment’s name.

She maybe one of the smaller ones but bars have seen their revenues more than halved to sh1.1trillion from sh2.8 trillion according to industry numbers.

And  the bleeding goes on and on wherever you look.

"Its hard to be sympathetic to the breweries, revenues are down by  sh416b  from the pre-COVID number of about sh900b, but they anchor a value chain that sustains more than six million people....

These standard Operating procedures (SOPS) in the fight against COVID are washing hands, wearing masks in public and social distancing all of which are hard to enforce in the hospitality industry, which by their very definition require a coming together of people.

But like all else in life, there is the other side of the coin, which in this case is the millions of Ugandans deprived of a livelihood because the hospitality industry continues to be under lock down. 

Infections have been spiking in recent days – we are set to hit 30,000 cumulative infections by year end, but the case for loosening the restrictions on the hospitality industry is a hard one to ignore. This is bigger than the beer companies and the bars.

Let government talk with the industry to determine how they can hold them accountable in enforcing SOPS, let the industry organise themselves to ensure its members adhere to the SOPs.

WHAT TO DO ABOUT THE HIGH LENDING RATES

About two weeks ago in a seminar hosted by the Bank of Uganda the vexing question of what is causing high lending rates rared its ugly head again.

In one presentation, “Determinants of interest rate Spreads in the Uganda banking system,” presented by financial sector deepening, Uganda boss Rashmi Pillai narrowed it down to the high cost of capital our banks are working with.

She showed that

viewed against regional operators our banking industry is not abnormally lucrative and neither are the costs of doing business unusually high....

She showed that  only between three to 38 percent of the people use the banks. The lower figure representing the poorest 40 percent of the population and the higher percent is the Kampala population.

Interestingly between 28 and 45 percent of Ugandans belong to savings groups. Even 41 percent the poorest 40 percent use the savings groups.

They didn’t examine in much detail why we opt for the savings groups over the banks, but I imagine apart from ease of dealing with the savings groups for most, people are intimidated with dealing with banks.

Despite the strides the industry has made in opening more branches, though the truth be told their coverage is still anemic at best, and easing  their processes people are still wary of the banking system.

"What mobile money has shown us is that we are not averse to saving we just need more convenient channels. A few years ago it was reported that on people were living a few hundreds of thousands on their mobile money accounts for months untouched.

To lower the cost of funds to the banks we need to save more with the banks, which are now relying on the more expensive shareholders funds and high cost fixed deposits to finance lending.

The question is how to incentivise people to save more?

It helps that inflation is within managable levels, the average inflation rate overt he last decade is just above seven percent, it could it be lower were it not for the 19 year spike in 2011, when inflation peaked at 30 percent.

Encouraging, rather than discouraging savings group is also good, because these deposit their funds with the banks. The ten year moratorium on tax on income for SACCOs was useful.

In the new NSSF bill it will affect employers with less than five employees  as was required in the old law. Hopefully this will encourage more people to save or at least NSSF will compel more employers to sign on their workers.

Unfortunately, efforts to make monthly savings tax deductible was defeated. In western economies they make retirement savings tax deductible to incentivise people to save more. Maybe more negotiations are in order to allow this to pass. It should be that the more one saves the better the tax break.

Government should even consider increasing the mandatory savings for retirement to as much as ten percent of a workers’ income.

Increased monies flowing into the banks will force them to shovel it out the door any which way they can. Banks making money by lending – to government or private sector. Government  appetite for debt while huge is finite and as this wanes, as it should, banks will have to create new products for their clients.

As it is banks are seating easy with on average less than 50 percent of their assets in credit to the private sector.

It is why you can be a client of a bank for more than 10 years and only doing salary loans. They have little to no incentive to wonder what you do with their credit and how can they interest you in other products – a mortgage or asset financing or something. They have it too easy.

Of course there are people who want things to remain just the way they are. Who don’t want to rock the boat. 

Bankers looking to meet their profit targets easier, for one. With lower lending rates they would have to work harder to meet targets.

"It seems like high lending rates will have to stay for us for a while. With tax revenues slipping and the donor community looking more inward to their own countries, government is being forced to borrow more and more from the public...

Given a chance between lending to government and the public the decision is an easy one for any bank manager. While individuals pay higher they are a higher risk proposition.

In India a few years ago as a way to curb corruption they banned all high denomination notes. They gave people are deadline to submit these notes and of course if you parked a bullion van outside your bank the revenue authorities would be on hand to get their pound of flesh and the equivalent of the financial intelligence authority got a chance to ask some tough questions. 

In our case we ban the use of sh50,000, sh20,000 and even sh10,000, not too far fetched given our increased use of electronic means of pavement. The poor who rarely interact with these notes and also have no access to electronic payment means, would barley feel the inconvenience.

One of the by products of this exercise in India was that bank deposits jumped and there was fall in lending rates.

There will be a lot of gnashing of teeth in the hills of Kampala – Nakasero, Kololo, Mutungo and Naguru, but they will be fine and we would all be better for the exercise.

THE EAST AFRICAN COMMUNITY MUST WORK FOR UGANDA

In December 1987 there was shoot out in Busia, on the Uganda-Kenya border. Kenya claimed that Ugandan troops entered their country and were stopped in their tracks. Uganda at the time complained of rebels attacking Ugandan villages from the Kenya said. Presumably our soldiers were in hot pursuit.

There was exchange of fire for a few days until President Yoweri Museveni and his Kenyan counterpart Daniel Arap Moi broke bread in primary school compound in Malaba, the other major border town north of Busia.

At the time there was some mickey mouse outfit – The Force Obote Back Again (FOBA), which was more bluster than substance allegedly operaing in eastern Uganda and working out of western Kenya.

The hostilities were snuffed out within the week.

The Kenyans closed the borders and we had a fuel shortage, which did not do any good for our inflation which that year was running high at 215 percent. 

There was a parallel narrative behind the shooting. 

"That Kenya having considered Uganda a captive market, for almost two decades by that time, was not amused at Uganda’s noises about economic self sufficiency....

The industrial base in western Kenya was predicated on Uganda continuing to be a basket case for a long time.

So the shoot out and subsequent border closing was a shot across Uganda’s bow. A warning that our eastern neighbour can do major damage to our economy if they want. That we should just lie down and continue to be Kenya’s market for finished goods.

Fast foward to today and it seems Kenya is up to its old tricks.

Ugandan exports to its eastern neighbour has been growing in leaps and bounds. So much so that in 2017 we reversed our trade balance – we started exporting more in value than we import from Kenya.

Whereas that is mostly the export of raw materials from Uganda, our manufactures are beginning to  climb as well.

In fact, one of the major drivers of our increased exports to Kenya in 2017, was a jump in processed milk.

In 2019 Uganda’s exports of milk to Kenya came in at $150m bettered as an export earner by only gold and coffee.

Uganda Manufacturers Association (UMA) complained a week ago that Kenya was throwing up non-tarrif barriers against Uganda exports that went against the spirit of the East African common market protocals.

Kenyan technocrats and enforcement agencies, were questioning the origins of Ugandan products, claimed our exports were counterfeit, had institutionalized  harassment of our exporters, raided Ugandan warehouses and were issuing quotas on how much Uganda could export to them. 

"These were all the more painful because Kenyan products were being allowed free access to Ugandan markets....

The EAC common market is a godsend for businesses in the region. It expands markets, can lead to greater job creation and eventual economic transformation.

It also should sharpen competitive advantages. With Uganda beginning to live up to its potential as the regional food basket, it will become increasing obvious that food production should be left to us.

"Trade wars are often triggered by one country trying to protect powerful lobbies at home...

. The offending country will try to couch their actions  in populist rhetoric, claiming to be protecting jobs but in truth it is to protect the interests of a well connected elite.

On the surface of it Uganda’s bargaining position seems weak – we are a landlocked country, who need the markets to expand production at home.

But on the other hand even if our trade balances with Kenya has shifted we are still a major market for their goods. 

Government should consider some retaliatory action against Kenyan goods, which will at least make the EAC secreteriat in Arusha seat up and take notice.

"While an eye for an eye will eventually mean everybody goes blind, its hard to see what choice Uganda has at this point....

IS IT TIME FOR UGANDA TO REMOVE THE KID GLOVES?

Last week the Uganda Manufacturers’ Association (UMA) complained that unfair trade practices by our East African Community (EAC) were proving detrimental to our local businesses and that government should muster a more robust response than it has currently managed.

According to UMA, Uganda which has served as a market for Kenyan industry for decades is finally coming into its own, seeking to not only manufacture things we previously imported but also to export the products of our factories.

However, they complain that while EAC common market guarantees the unfettered free movement of goods and services between member states our neighbours are not playing ball.

Kenya for instance continues to throw up non-tarif barriers – questioning the origins of our goods, they claim they are counterfeit, smuggled, there is institutionalized  harassment of Ugandan trade, road blocks and raids on Ugandan warehouses and issuance of quotas, all of which are against the spirit of the common market.

UMA complains too that frequent tariff tampering by Tanzania and the border closure by Rwanda has shrunk their share of regional trade.

"These are important complaints that need to be taken seriously in the context of our drive to transform the economy and eliminate poverty...

At the heart of the idea behind the common market was that it would boost our individual industries, create jobs and spur economic transformation. When some countries thin they would rather be protectionist rather than open the cause will be lost.

That being sad this kind of shenanigans are not unique to us. Building common markets is a labour of love that takes ages to create anywhere  in the world.

However, there is a genuine need to speed things along.

It seems Uganda is getting the short end of this stick. While diplomatic protests have been made to the offending parties they seem to ignore them.

President Yoweri Museveni, for who this has been his pet project for decades, should jump into the fray and try and get his counterparts to orgainise their technocrats and enforcers.

"And if we cannot rely on the goodness of the hearts of our neighbours, though not desirable, restricting their access to our markets must be considered until we get an amicable settlement. 

WHILE YOU WERE AWAY, THE ECONOMY HELD UP

While we were all fixated on the drama surrounding the presidential campaigns this week, the World Bank released its Uganda Economic Update, a forward looking report that rose above the noise of the day.

The bi-annual report titled “Investing in Uganda’s demographic transition,” addressed itself to the ongoing demographic transition from a largely youthful population to one, which in a few years will have a much huger workforce that can either be a loadstone on the economy or a force for continued growth.

But while that was happening a report from financial information services provider, Bloomberg filtered through, which said that Uganda’s economy is set to grow by 2.1  percent in 2020. Much lower than in 2019 when the economy sprinted to a 6.7 percent growth, but still amongst the fastest growing economies in the world.

The report said that Uganda will  be the fifth fastest growing economy this year, behind Bangladesh, Ethiopia, Vietnam and China and ahead of Cote D’Ivoire, Egypt, Ghana, Rwanda and Kenya.

The report gave no details about Uganda’s growth outlook but noted that

African countries, which made up seven of the top ten fastest economies, had seen the shift away from raw material exports to becoming ICT hubs accelerated by the COVID-19 crisis...

Local observers pointed out that ICT output grew 33 percent compared to contraction in the last two years, driven by an increasing reliance on e-commerce and mobile money.

It was also reported that agriculture was among the sectors that grew, as rural-urban supply chains were left open and recent initiatives to push up farm production continued to pay off.

However, while this macroeconomic resilience is cause for celebration but will mean nothing to the everyday man, if they don’t trickle down to the man on the street. 

"The trick to doing this is building an economy that not only fosters economic activity but also uses these gains to ensure continual improvement of the business environment and invest in its citizens, through education and health services to make them more productive....

Unfortunately for Uganda, after years of neglect and mismanagement, we have huge deficits in infrastructure and human capital.

This is a dilemma because we have the choice to try bridge all these deficits simultaneously or on the other hand try and sequence the investments.

We don’t have the luxury of doing either. In the first instance because of our wanting resources and in the second instance, because it cant be an either or question – do you let school enrolments stagnate as you build transport, communications and energy infrastructure or the other way around.

Truth be told we have leaned towards the latter rather than the former.

The World Bank counsels though, that a better balance has to be found if we are to reap a demographic dividend in coming years.

The demographic dividend refers to the benefits from a huge working population that is skilled and productive and contributing to the country’s growth.

Uganda will have to double its annual investment in education and health over coming decades if it is to reap this dividend.

Given our current population growth rate the population is doubling every 25 years, which means beyond the doubling growth in these investments, these will have to at least match population growth rates.

The World Bank doesn’t say it but

a huge youthful population without gainful employment is a recipe for social unrest and chaos...

The challenge is financing these investments – at the same time ploughing money into infrastructure.

We have to collect more taxes. The existing tax payers are already overstrained and hence a need to rope in more people into the tax base. Taxing land – all land, can not be put off much longer. With one stroke we will collect more, while making the land more productive.

Secondly, we have to plug the leaks. We cant have a connected few plundering state coffers to finance their first world lifestyles while the vast majority cant get quality health care or a decent education, ensuring that income and wealth disparities are perpetuated down the generations...

And then we must save more, by force if necessary, as a way to increase domestic long term funds to finance this same development.

Our ability to feed ourselves as a nation has continued to  support us in our hours of need – our lockdown experience would otherwise have been worse, but

if we do not take a long view and make the hard decisions that need to be made to ensure sustainability, even quack prophets can see the future.

THE CASE FOR SOCIAL SECURITY IN UGANDA

Last week Scotland became the first country in the world to make sanitary products free, including sanitary pads and tampons,   which they said was to help eliminate period poverty.

They recognized that one in ten Scottish women struggle to afford sanitary products on a monthly basis and half of the girls surveyed missed school on account of the monthly event.

In Uganda school drop out among girls were higher than those among boys, lack of adequate facilities to deal with their periods being a major contributor.

This speaks to the larger issue of social protection. The recognition that while we should all receive according to our needs, some classes can not meet their basic requirements of life. This maybe due to their low incomes or disability.

In the same week our finance ministry reported that people living in absolute poverty in Uganda had increased to 28 percent during the COVID -19 lockdown compared to 16 percent prior.

"With the effects of the COVID-19 pandemic not expected to let up for at least another year, it is unlikely that most of those who have fallen into abject poverty will be able to dig themselves out in a year....

As it is now our social security safety nets are too thin and those who are covered are largely already in gainful employment.

Hence the case for cash grants to the most vulnerable members of our society.

A few weeks ago government put a halt to an NGO sponsored scheme to provide monthly cash grants to poor they had identified and who they could afford to support.

Government is within its rights to be wary of any foreign sponsorship of such schemes, as long as it is not in control of the process. But it then has the obligation to provide an alternative solution.

The world over there has been huge controversy about welfare payments, except in countries where they work, in Scandinavia  especially.

The critics argue that it only serves to increase government spending and increase dependency of the recipients. The supporters have shown through the data that actually the handouts are less likely than thought to create dependency, they in fact are used to uplift their living standards by paying for school and health fees and even acquiring assets. 

With the recent lockdown the case for social security became even more pertinent.

With companies working at less than full capacity for lack of demand, cash grants would help keep them in business. In fact it would be a better intervention for the economy than the posho and beans handed out to the most vulnerable, because with money in their hands they could decide what their most pressing needs were, not necessarily food.

Like during the global financial crisis of a decade ago, the debate was whether to bail out the big companies or step up relief to people who were hardest hit by the crisis. The US chose to bail out the big companies, while Europe, without letting its companies fold provided a robust social security response.

"While the US rebounded faster from the crisis at a macro level, Europe’s populations were cushioned for the worst of the crisis, thanks to existing social security mechanisms which were beefed up, with differing levels of success to aid its populations....

Bailouts by the big companies were used to help restructure them – often leading to job cuts, while in Europe the money in people’s hands helped their companies stay afloat and ensure that some dignity was saved for the everyday man.

Governments don’t like these discussions because, in an earlier age it was difficult to execute and would make them more accountable to more people beyond the tax payer.

If in Uganda’s case cash grants as i describe would mean another million people would be watching government, to who government doesn’t exist in a direct way. Missed payments or other inefficiencies would trigger protests they do not need. Not to mention they would have to commit for the long term because once you start it is unlikely you can stop the process without a lot of protest.

A lot of the cash grants in western economies begun after the second world war, when western Europe had to resuscitate the economy. It is all very nice building companies but if no one is buying  the companies’ shares are not worth the paper they are printed on.

Back to the lucky ladies of Scotland. With one stroke the governmmnet has given a boost to the industry around sanitary protection, while ensuring girls can do better at school and eventually become more productive members of society in the future. One outcome – the boost to industry, is more immediate but the second is more durable and pay uncountable dividends to the country generations into the future....

 President Yoweri Museveni has pledged to bail out companies stressed by the COVID-19 pandemic. This could turn into a gravy train for a few connected individuals and the outcome will be very questionable. But if we split the bail out between the companies and providing social security recovery can be more evenly spread and sustainable.

It is not only good economics but good politics as well.