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.
