SHOULD WE BE CONCERNED ABOUT UGANDA’S GROWING DEBT?

Consider this wealth creation 101.

How rich you are depends on how much you own, not how much you earn. How much you keep of how much you earn is what makes you rich.

This is an important distinction because you can earn millions but you are up to your eye balls in debt, meaning most of your income goes towards repaying debt.

Hence the intuitive fear of debt.

In an ideal world all you earn you would keep.

In my second year at university I got my self a double deck cassette player (who remembers what that is?) with detachable speakers. It cost me the princely sum of sh199,000. It took all of that month’s pay but one thousand shillings to acquire the player.

I could do this because the university housed and fed me for free (who remembers that?). An ideal world.

Unfortunately for the rest of us – even university students today, there is no free lunch.

"With all the living expenses, only the most frugal of us is able to save significant amounts. We keep less of what we earn....

In these circumstances and if wealth creation is the goal, we should go over our expenses with a magnifying glass, retain only those we can not do without and save the rest. Actually we should set ourselves a savings target, when the salary comes in remove the savings and make do with whatever is left. The latter method is more effective.

But there is only so much of your expenses you can cut.

Another thing to do is to earn more, either you get a better paying job or sell more of the good or service you are hawking.

That is the sustainable way of wealth creation, earn a lot of money, save some and fit your budget to fit what is left.

But often times we really want to speed things along, which is actually where trouble starts, so we borrow.

You set the goal that by 30 you should be living in your own house. But your sh200,000 a month or sh2.4 million a year savings are not going to help you achieve your goal. But if you borrowed, which is essentially getting your savings up front, you could hasten the process. It could also very well mean putting more strain on your lifestyle if you stick to your commitment to save sh200,000 a month as well as repay your debt.

If your discipline is iron clad, at the end of the repaying the loan you will not only have a house  but also the accumulated savings.

So instead of exchanging your savings, cash, for a house, essentially exchanging one asset for another, you borrowed acquired another asset and still have your cash. You are richer than you would be if you exchanged an asset for an asset.

That ends the wealth creation 101 lecture.

To extrapolate this to the issues of national budgets, you can see why a country needs to borrow.

According to the budget the finance minister has proposed to the house, we shall have a budget of sh41.2trillion which will be financed by sh20.8trillion of our own revenue collections and the rest – sh20.4trillion from grants and debt.

While people are alarmed that our debt to GDP is inching ever closer to 50 percent – 46 percent, it is now about $18b against GDP of about $35b, the real question of sustainability should be how much of our revenues are going to service our debt.

On a personal level think of it as how much of your salary are you paying the bank to service your loan.

In Uganda’s case in next year’s budget we will plan to spend on interest and amortisation sh6.76trillion or about three in every ten shillings we collect in tax revenues will be used to meet our debt obligations.

This in and of itself is not a number that will make you sound the alarm bells, however every shilling used to pay off our debt would have gone to improving the infrastructure, education or health services, which is why we should be concerned.

In addition if the monies were used for their intended purpose they may not have been too much hoolah balooh. Everyday however the theft of billions of shillings provide fodder for headline writers and have the rest of us shaking our heads in wonderment...

If the money is spent on creating a better business environment – infrastructure, beefing up law and order and other ways of lowering the cost of doing business in Uganda, the sh6trillion we are using on debt servicing today will look like chicken feed in 10 years time.

Ten years ago we were spending about sh3trillion on debt servicing and even then there were t hose who were warning the roof was about to come down on our heads. We were collecting ab out sh13trillion in revenues then.

  We are right to be concerned about our growing debt levels, but as number in and of themselves they mean little.

"We should focus on whether we can repay our obligations, without unduly hurting our development ambitions and two, whether we are borrowing for the right reasons, development projects and not consumptive flights of fancy...

In the first instance I think we still have some wiggle room and in the second instance, on the whole we have our heart in the right place but corruption will be our doom.

EMYOOGA GOVERNMENT SHOULD NOT LET A GOOD THING DIE

Last week what was known anecdotally was confirmed when the coordinator of Operation wealth Creation (OWC) General Salim Saleh wrote to the microfinance minister calling for an audit of the Emyooga programme.

The Emyooga program was launched last year as a way to get seed money to artisans and Small & Medium Enterprise (SME). The way the program was designed was that funds would be availed to organized groups and SACCOs for onward lending to their members. The idea as I understood it, was to create a revolving fund, that the monies government had given would be used over and over again by members well into the future, if well managed.

No surprise to many of us, corruption set in and now enough people are crying foul as to put the whole program into jeopardy.

A few years ago government tried another such program and attempted to channel the money through the banks. This initiative run into trouble too because the banks insisted on certain criteria, which locked out many of the potential beneficiaries. Anyone who knows anything about the banking knew this was bound to happen. Commercial banks, which all our banks are, are not set up for startup capital financing making them the worst conveyors of this money.

So then government passed it through the gender ministry and while they claimed to be good at disbursing money the default rate on the loans was more than 30 percent.

Emyooga is the most recent iteration of this effort to help our small businessmen.

Clearly the intention is good but the execution is horrible...

In a text book economy, the means of financing business go from friends, fools and families to angel investors to business support organisations to venture capitalists to commercial banks and then the capital markets come somewhere near or at the end

In Uganda we have friends, fools and family and then a gap all the way to commercial banks. That’s a problem because from angel investors to venture capitalists, these forms of finance are often willing to share the risk with the business and provide vital hand holding along the way, helping the entrepreneur to grow along the journey.

This mentoring is critical for any business. Unlike all that the inspiration books tell you, you need more than persistence and determination to survive and thrive in business, you need the help of people who have already done the journey or with expert skills in finance, marketing, sales, human resource management among others to help you along.

The Chinese say if you want to climb a mountain, study all the routes to the top and then ask someone who has already been there.

Because our commercial class was gutted in the 1970s, by Amin’s ill-advised expulsion of the Asians, the local businessman cannot sustain his business beyond its fifth birthday. The discipline of doing business is best taught by example than from the text books...

So the Emyooga funds are a good opportunity to provide patient or at least inexpensive capital for our budding business people. But also it can be extended to train and mentor them as well.

The truth is the biggest problem of our businessmen is not a lack of capital, but a lack of organisation in their businesses, hence their inability to meet the earlier banking requirements to access funds. When you are organized the funds will come. So who will help our businesses get organized?

That is where governments come in. I believe strongly that government should not be in business, it should stick to ensuring the environment is conducive for business. However, governments have been useful in opening new markets and once developed leaving it to the private sector to get on with.

We have our own examples here but the one which pops to mind is the fish industry. In the 1980s government financed the setup of a fish factory in Masese in Jinja. While – as expected it collapsed spectacularly, it had the effect of showing the private sector the potential of the sector and now fish exports are one of our biggest forex earners.

While government will always stumble and stutter in its effort to get financing to small businesses, the outcome of their clumsiness – hopefully, would be that the private sector will see an opportunity there and rush in to fill.

But before the private sector does that government would have to get over itself, recognise it cannot do it – despite its best intentions and call in the people who can, offer the appropriate incentives, step aside and watch as the sector is transformed...

The hiccups the project is experiencing were expected, that will take the government a long time to recognize the error of its ways too is expected, but the day of reckoning is fast approaching and government’s hand will be forced to do the right thing.

 

DON’T LAUGH AT KENYA WE COULD BE NEXT

 Last week it was reported that the International Monetary Fund (IMF) had approved a $2.3b facility for neighbouring Kenya.

The loan was necessary because the Covid-19 related down turn in the economy has seen tax revenues fall and caused. As a result Kenya’s high debt servicing obligations are threatening to choke off the budget.

As it is now about two thirds of revenues go to debt servicing.

We are all in this Covid mess together, the difference though is that Kenya has a lot of non-concessional loans – loans taken at market rates, and in a financial crisis as they face now these become an onerous burden.

In the last few years Kenya has seen their budget explode due to increased infrastructure investment and a jump in public adminstration bill.

It was reported last week that Kenya's debt stands at Ksh7.2trillion (about sh240trillion) of which about 80 percent of it or Ksh5.8trillion was contracted over the last nine years.

"Critics of Uhuru Kenyatta's government complain that not only has the government contracted odious debt but a lot of it has found itself into the pockets of regime cronies...

But the big story real is that Kenya have now fallen back into the dreaded Structural Adjustment Programme (SAP), the favourite punching bag of arm chair revolutionaries up and down the continent.

In the 1980s and 1990s the SAPs came with conditionalities like growing tax revenues, cutting back on government spending and allowing the currency to float freely among other things.

The idea behind these conditionalities was to bring greater efficiency to the economy so that the distressed nations do not only get their economies back on their feet but are able to repay their debts.

The conditionalities were often unpopular because they entailed cutting or remobving altogether subsidies, laying off public servants and selling off government companies among other austerity measures.

Imagine someone comes to you in distress, debts are chocking him to the point that he is struggling to feed, house and cloth his family. Beyond your sympathy you want to make your loan to him is repaid. So as condition of lending him the money you will insist he rents a cheaper place, gets his kids out of their posh schools  and put an end to weekend drinkouts with the boys. If he doesn’t commit to the conditions he wont get your money.

"The truth is that often the conditionalities were used to save countries from themselves or more precisely from their extravagant governments...

It reminds me of the saying that, you are broke because you are spending on things that don’t make you money.

Kenyans took to social media streets last week to urge the IMF not to disburse the loan, which was essentially being contracted to pay for other loans.

It is a measure of how far we have come that we no longer criticise the IMF for doing their job, but are now turning the guns on our governments. Which is as it should be.

When things are good or even when they are not unaccountable governments begin to spend as if it is going out of fashion, building white elephants, indulging in questionable, unsustainable but populaist projects. In  so doing they stretch revenues and live their  respective countries exposed when a disaster like the covid-19 pandemic happens.

If you look around the hardest hit countries  have themselves to blame for their suffering.

To illustrate last year deep into the pandemic Singapore announced it would set aside $60b from its own reserves to the economy back on its feet. Some people will argue they are rich and can afford it but this did not come by accident. The small island nation – not as big as the Kampala metropolitan area, with a population of less than five million people has been very prudent with its budget and as a results have the reserves to tide them over the pandemic. They may still need to borrow but they will be a safer bet for the lenders than Kenya or some of us.

That is why as Ugandans we need to question when, new districts are formed, government indulges in flights of fancy like manufacturing cars, when we don’t have an agro-processing industry to talk of or giving tax holidays to con artists and charlatans when the productive sectors of the economy are going begging.

Currently we are spending three in ten shillings we collect on debt servicing. This will change as half of our budget is now financed by debt and debt servicing obligations will go up.

"Debt is not bad in itself but what we use it for. If we don’t spending it on things which will help the economy grow, like infrastructure it will soon become a lodestone around our necks dragging us down into poverty...

Already the IMF has made some recommendations around raising tax revenues, controlling government spending and addressing weaknesses in state owned enterprises, which will most likely include layoffs and privatisations.

For starters they are wondering (requiring?) whether the government can not double the VAT on fuel.

WHAT IS GOING ON AT THE FINANCE MINISTRY?

Last week the finance ministry announced a raft of new tax measures it intended to implement starting in the coming financial year.

The public has been up in arms lambasting the ministry for thinking of increasing taxes or adding new taxes in this time of financial stress.

I am always amused at the knee jerk reaction of your man on the street at the sound of new taxes in the offing. Its spontaneous and loud but peters out just as fast as it erupted. I guess the bureaucrats too have heard it all before and find it hard to take us seriously.

That being said I was shocked that the ministry was suggesting a return to the annual road licenses for cars.

In 2007 then Finance minister Dr Ezra Sururma announced the abolition of the road licenses in his 2007/08 budget speech. He explained that while it was projected to bring in sh80b, "It is undermined by the high rate of default, rampant forgery of license stickers and requires a lot of administrative resources to ensure compliance. This state of affairs is untenable,” he told parliament.

He said he would recover the “lost” revenues from other sources. The government decided to put the levy on fuel and ring fence the proceeds for road maintenance.

For a car owner at the time this was a godsend. It, renewing road licenses was time wasting process that involved waiting in long lines at the URA office to pay for the license and days later, to collect the road license. Default was rife and I would be surprised if the finance ministry would have collected even half of that projected sh80b. Most of the tax was going into traffic policemen’s pockets....

It was a win-win situation because now every car owner paid the tax. In addition, all boda bodas pay now and it was pointed out to me recently, that even lawn mowers pay the tax.

If there was ever tax that widened the tax base painlessly – for the payer and the collector, this was it.

The strangest thing was that URA and the government never divulged how much they were collecting in the new scheme, which we took as a signal that they were collecting way more than sh80b and did not want to say.

It is therefore baffling – it is inconceivable the planners were not driving in 2007, that the ministry would contemplate this U-turn.

And by the way the return to road licenses should mean that they remove the levy on fuel, isn’t it?

The pressure for more taxes is plain for all to see. The Covid pandemic has forced government to borrow more than planned. While a lot of this was concessionary borrowing, the budget was already under pressure, with debt servicing accounting for three in ten shillings of the budget.

That being said we will be forgiven of looking with a jaundiced eyes at such tax initiatives, which if they are what they seem on the surface, we wonder whether the planners are trying to pull a fast one on us. Hoping that we don’t remember how we got to where we are, hoping to take advantage of our good nature...

As an aside the Auditor General reported to parliament last month that even some of the money we borrow we don’t utilize. There was the issue of sh1.4trillion that went begging when the facility expired before the money was disbursed.

Thankfully parliament has thrown up a real stink about this particular tax measure and rightly so.

Listening to a finance ministry official on radio this week laboring to explain how the tax will be levied – according to seats in a vehicle, I couldn’t help thinking it would be helpful to know how much the original fuel levy was bringing in, if only to help us determine whether it has done its time or not.

It boggles the mind to wonder which government would forgo as perfect a tax as this one, where compliance is 100 percent and cost of collecting minimal for a mode of collection where he is not 100 percent certain to collect all the intended tax?

It has to be an unusual situation too, where the tax payer is arguing for a tax he cannot evade and against one which had been shown to be manipulated as Suruma said when he was abolishing it 14 years ago.

 

BMK AND THE LATEST NSSF SPURT

Two weeks ago Bulaimu Muwanga Kibirige, more widely know as  BMK launched his book “My story of building a fortune in Africa” and last week the New Vision had a four part serialisation on the same.

Its an entertaining read. Over five decades BMK has built an empire that stretched from Hong Kong to Lumbubashi in DRC and from Moroto to Lusaka, Zambia. It has been a labour of love, launched in the Idi Amin era – where he was labelled a smuggler, persevered through the Obote 2 era, where he literally dodged a bullet and has really taken off over the last three decades.

The business lessons are peppered all over its pages. It is all very well to have a long term vision of where you want to be in the future, and BMK had his share of that, but the bigger lesson, for me was

start where you are, with what you have, take the next step even if you can not see the whole staircase and believe that the path will become clearer as you go....

What right did BMK have to drop out of school after P7 and dream of one day being a hotelier? What right did have as he prowled the streets of Hong Kong, Guangzhou and Bangkok to think he could father the second hand spare parts and boda boda revolutions in Uganda? What right did he have to think he could turn marginal land on Wampewo avenue into the flagship of the African Hotel Chain? There is one in Moroto, another in Lusaka, Zambia and another two planned for Arua and Apac. 

Given his journey through some of the worst economic times of this country the rest of us should shut up about the lack of opportunity in Uganda today. It is not in the nature on the man but such complaints maybe met with a snort as he set upon his newest venture.

"Just as important as a lesson, BMK is a compounding machine. Untempted by the seductions of youth he was able to plough back most of his profits into his business. Done across five or ten years the results may not be so impressive but done with discipline over five decades can make for eye popping results.  This assumes of course, that like BMK, you enjoy more success than suffer failure during the period.

Which brings us nicely around to the latest drama with NSSF at the center. Earlier this year parliament passed a law that allows  members to access 20 percent of their savings once they make 45 or save for ten years. The uproar was triggered by a report that finance minister Matia Kasaija had written to President Yoweri Museveni advising that he not assent to the bill. That it should be returned to parliament for further debate.

The minster argued that a massive outflow as is suggested by the law, would hobble NSSF’s activity and affect the Fund’s ability to pay members the attractive interesting they have become accustomed to.

Unlike BMK most of us have to compelled to sock away part of our income and allow the compounding effect to work for us.

Looking at my own NSSF account I notice that my contributions over the years account for about 45 percent of my savings with the rest being interest. That is down to the compounding effect. Because interest has been paid on interest I will receive much more than if I had just saved my money under the mattress dilligently during my career.

"BMK insists he is a lucky man. I guess looking back over what he has achieved he has surprised even himself. That is what the compounding effect does...

Given time and a good rate of return  the end result can look like a miracle.

To illustrate given the choice between receiving a billion shillings at the end of the year or starting with a shilling and compounding at the rate of one percent a day and being paid off what ever the total will be after six years, most people will take the billion shillings now. But then they would be forgoing another sh1.9b if only they had waited to year six.

The point for BMK as for the salivating savers of NSSF, we don’t need to be clever to take advantage of the compounding effect to do well. What we need is a good money making machine and uninterrupted time. 

Delayed gratification is not for everyone – we can not all be like BMK, that is why government against our will made us save. The warm feeling of getting a few millions now may deny us a greater glow of many more millions a few years down the road.

What? You are scared NSSF may not be around by the time you are 55? That is the same thing they feared 20 years ago.