NRM DAY: THE LIBERALISED ECONOMY IS THE GIFT THAT KEEPS GIVING

Yesterday we commemorated the National Resistance Movement (NRM) day.

This time 39 years ago, the NRM had taken over control of a country riven with political instability and an economy that was barely on its feet.

As President Yoweri Museveni’s government tried to establish control over all of Uganda, the resuscitation of the economy could not wait.

"The economy had regressed to below 1970 levels, industrial production had collapsed, infrastructure was dilapidated and barely any new capacity had been added in two decades, coffee dominated the economy, providing most of the tax revenues and almost all export receipts...

This would have been all very fine if the population growth had followed the economy’s negative trend, but there were twice as many Ugandans in 1986 as at Independence, putting increasing strain on a stuttering economy.

From a purely intellectual level the solution was simple, increase production to create jobs, mobilise tax revenues to support, much needed infrastructure rehabilitation and key social services.

Easier said than done.

At the time, government had dozens of companies doing everything from supermarkets to fishnet making, that were producing below capacity, remitting little to no revenues to the treasury, while their payrolls and running costs were putting immense pressure on the budget. They were mismanaged, had fallen into disrepair and to resuscitate them would cost a lot of money. Monies the government did not have.

Initially, government since there was little tax revenue coming in, thought it could print money and finance the rehabilitation of these industries, get production up and running and everything would be ok. But the laws of economics will not be mocked and they soon found themselves battling runaway inflation, which frustrated any efforts to get the economy up and running again.

At the height of the inflation pressures , prices were doubling every three months.

Inflation the increase in prices, is a disincentive to production. Because it is difficult to plan for the future, discourages consumption, putting a ceiling on demand, hence frustrating expansion of production. A vicious cycle.

So to get the economy up and running they had to source funding abroad. The external funders were not our mothers. There was little charity to be had. They offered to lend us the money, on condition that we liberalise the economy, especially by breaking up the state owned monopolies, selling them off and opening up their respective sectors to competition.

The idea was that if we instituted these reforms, they would have a better chance of getting repaid.

While foreign capital with greater pools of money to back it up, ended up taking the juicier companies, removing the yoke of state owned monopolies, gave opportunities for Ugandans to go into general trade and industry.

Now the retail trade, transport, real estate development and most other economic activity is dominated by private players and the Ugandan consumer is the better for it, enjoying wide availability and choice of almost any commodities.

This liberalization of the economy, which unlocked individual initiative, has made the general economy more robust and able to weather the occasional storm, may be the biggest economic legacy of the NRM in general and Museveni era in particular.

I shudder to think what would have happened if government still had a monopoly over supermarkets, transport, telecommunications and banking, how things would be today.

The critics argue that today the economy does not work for the everyday man,  that a few people – mostly the urban elite, are benefitting disproportionately from the economic gains of the last four decades. And they will be right.

But their recommendation to disband the market economy and revert to a more centrally controlled economy would be wrong and setting the economy up for failure.

First of all, the market does not promise equitable distribution of benefits. In fact, left to its own devices it will ensure that the rich become richer and the poor become poorer. The promise of the market is that in the right environment, it grows the wealth of the economy. There is no other known mechanism that can do that more efficiently.

The distribution of this expansion of wealth lies solely with the government.

If the private sector is failing to grow wealth, blame the government for not creating the conducive environment for them to thrive. In an environment where the economy is growing consistently, but the income and wealth disparities are widening, blame it on the government.

Government through the taxation of economic activity funds, the maintenance of peace and security, building of infrastructure, social services and other public goods. In so doing they not only enhance the enabling environment for the private sector to thrive, but also improve the citizens capacities to take advantage of the improved economic situation.

So from the above, if an economy is working and but not for the everyday man its an indictment on government and not the market.

The people calling for a return to the controlled economy, think, wrongly, that the economy collapsed in the 1970s and 1980s for lack of money, and now since the government revenues have risen 100 fold they can take back the “commanding heights of the economy”.

That’s the reason they tell us all.

Me thinks, failing to operate in a competitive environment, they want government to get back into business so that criteria, other than merit and performance – like family and tribe, can once again apply to accessing opportunity.

 

 

OF AFRICA’S BUSINESS LANDSCAPE AND WHAT UGANDA NEEDS TO DO

At the beginning of the year The Economist had an interesting feature titled “Africa’s has too many businesses, too little business”, lamenting the lack of enough big businesses to speed up transformation of the continent’s economies.

They argued big businesses are “productivity powerhouses. They bring people, ideas, technology and equipment together in ways that make workers more efficient, which makes people richer.”

The Economist reported that there are only about 345 companies on the continent which pull in revenues of a billion dollars annually. None of which are in Uganda.

The counter argument is that small businesses are the ones that create the most jobs in all economies, so we should watch about throwing out the baby with the bath water.

This column has argued until blue in the face, that a nation’s economy is only as viable as its private sector. So if we are to not only grow the economy but also ensures it works for all, then its health is a subject that needs serious consideration.

Another report showed that while Kenya attracted the most venture capital of any country on the continent at $638m (sh2.4trillion), Uganda was left far behind only attracting $19m(sh70b).

Venture Capital (VC) bridges that gap between the friends, fools and family who are often the earliest backers of business ventures and the commercial banks and higher finance that deal only with viable going concerns.

The venture capitalists often provide funding in way of equity or they buy shares in your company, but also provide technical expertise where there are deficiencies.

There many reasons venture capitalists choose one country over another, not least of all the size of the market, hence the potential to scale a business and the general business environment.

Uganda’s landlocked nature maybe an impediment, but the growth of the East African Community (EAC), which technically stretches from the Indian to the Atlantic Ocean and allows the free movement of goods, services and people is making that less and less of an issue. The EAC currently constitutes the largest export destination for Ugandan products compared to the rest of the world.

In 2023 more than a third of Uganda’s trade was with the EAC, compared to two decades ago before the EAC kicked off and the similar figure was barely over single digits.

However, non-tariff barriers continue to hamper our traders, making us less attractive to investment flows.

Uganda continues to struggle in the World Bank’s ease of doing business survey, regularly featuring in the lower half of the 190 country survey.

While this is all well and good the report on attraction on venture capital tells us another story too, about the capacity or inability of our business community to tick off various criteria. Among which  ability to demonstrate the market opportunity, the capacity of their teams to exploit that opportunity, that they have unique value propositions, which can be determined initially through their well kept records and finally that there is a feasible exit mechanism, in the event that they want to sell.

"The government can say all it wants about continued GDP growth, lucrative returns on investment and liberal market economy but businessmen listen to businessmen and to the extent that outside investors cannot identify partners they can work with locally, is the reason why the attraction for our country as a VC destination is much lower than Kenya...

Interestingly, for the last five or so years, Uganda has been leading the charts in attraction of Foreign Direct Investment (FDI) in our region. How come the contradiction? Billions of dollars are going into the oil industry – it estimated that by first oil at least $20b will have been invested n the oil & gas sector.

Most of the money will go to the foreign companies doing the heavy lifting. But thanks to some local content provisions, we are hoping to back at least a fifth of that money.

The VC numbers speak better to the earlier Economist report.  Our low numbers compared to the Kenyans suggest that on one hand that VCs cannot see opportunity here to make good money when they scan the landscape or that and somehow related, when they look around they think they can just start new companies from scratch as there is no competition around.

The economic chaos of the 70s and 80s means our business community’s development was stunted or snuffed out altogether, so it would be no wonder that we fail to attract partners.

So beyond the government providing a stable macro-economic environment, it has a responsibility to improve the ease of doing business in Uganda – improve infrastructure, access to credit and the rule of law, enable capacity building in the business community so our indigenous businessmen are not left behind.

Ugandan on their part need to grow beyond subsistence to opportunity businessmen. We need to have a higher vision for our business than just sustaining an ever increasing capacity to consume, to building bigger companies that will create more jobs, bring in more tax revenue and spread beyond our borders.

No economy was ever sustained on rent seekers and commission agents.

 

THE UGANDA ECONOMY 2025, GET A GRIP ON DOMESTIC ARREARS

Various observers predict good things for the Uganda economy this year. The Bank of Uganda maintained their projection of a 6.5 percent growth for the financial year, but ballooning domestic arrears, monies owed by government to the private sector, could dampen these and future prospects for the economy.

With the budget cut by at least 25 percent and the date for first oil pushed back at least another year, one can expect that government will not have its huge stock of domestic arrears, touching sh7trillion at last count, at the top of the agenda.

We all need to appreciate that domestic arrears are not just a number, but have real implications on people’s lives and livelihoods.

"While the economy is reported to be going from strength to strength, suppliers to governments are having to jump through hoops to stay alive, as payments are often delayed for months and even years. It is so bad now that many banks will not accept invoices to government for working capital facilities...

 In the daily workings of business, one may not have all the money at hand to meet various obligations. The banking industry can however provide working capital against invoices for work done. Basically if someone has done work and is due payment of say sh100m in future the banks can lend you money against that promise of future payments.

So if banks are not taking government invoices you can imagine how squeezed our businessmen are for liquidity.

This has the knock on effect of limiting businesses ability to invest, expand or even just stay alive. Given that government is the biggest client to the private sector most, if not all businesses are affected by this ever increasing inability of government to honour its obligations.

The deafening silence around this issue in government communication makes one wonder.

"An economy is only as vibrant as its private sector, as the former communist countries showed us, government’s mounting debt to the private sector in contravention of all measures to guard against this can, only spell doom for the private sector and by extension the economy...

But one can not help but wonder about certain contradictions in the economy. Given how government is squeezing life out of the private sector, it came as a surprise when Uganda Revenue Authority (URA) reported it had beaten the half year revenue collection targets by sh300b.

This should be welcome news for any economy. It suggests that revenue administration is improving, that URA is not only plugging the holes but also widening the tax base. The worry may be as the domestic arrears continue to bite even URA will struggle to collect.

The worrying thing for URA and the economy as a whole is that many of these businessmen will not just roll over and die. They will seek to survive by any means necessary. It is not a stretch to imagine that many of them will revert to informality if only to stay one step ahead of the tax man.

But beyond that these unmet obligations will erode confidence in government with far reaching implications for things like the cost at which we can contract loans in the open market. Lenders will not be averse to adding a point or two on interest rates to provide for government’s risk of default.  

Again this rising number is not one we can hide under the carpet.

The remedies seem obvious. For starters government really needs to rein in its accounting officers. The Public Finance Management Act not only provides a legal framework for managing government resources, but in addition in the Charter of Fiscal responsibility mandates timely payments to avoid arrears accumulation.

The government’s laissez faire attitude to accumulating domestic arrears flies in the face of this and clearly no one is being held accountable...

With that we can at best stop the accumulation of domestic arrears or at worst slow down their accumulation.

Which still leaves is with almost $2b of domestic arrears to grapple with.

 A policy needs to be drawn up if it hasn’t been, to prioritise the clearing of these arrears and regular audits to confirm and validate outstanding obligations. And there need to be credible sanctions against officials who ignore these initiatives. Up to now it seems they are not even getting a slap on the wrist for their impunity.

It is inconceivable that government can clear these in one budget cycle. However, government can go to the bond market and borrow money to be paid over years. While this will increase our domestic debt, which now stands at about sh55trillion, it would revitalize the private sector and the economy. We can not continue hoping for first oil in the hope it will give some much needed impetus to the economy.

Last week government raised sh990b from the bond market. Imagine we could ring fence a bond auction a month for clearing domestic arrears, we would have done commendable progress by the beginning of next year.

The privatization of the state enterprises and the liberalization of the economy starting in the 1990s, unlock individual initiative making the economy more robust and vibrant. As a result we have been able to shrug of many shocks – local, regional and international.

It is in our best interest to make sure our private sector is strong and able to continue bringing us through these tests.

Resolving our domestic arrears issues would be a good place to start.

 

LETTER FROM A FRIEND

Dear Paul,

 

Be grateful for making it through 2024 in relatively good order. But we are back on the tread mill and yet another year is ahead of us.

You had a good year in 2024, despite being retired and the trick now is not to rest on our laurels (we may do that in 10 years’ time) but maintain commitment to our financial discipline. We have got to keep at the fore of our mind that our financial health in coming years will depend on the balance between consumption and savings/investment. The process should see you consuming less and less, while investing more and more of your income. That will be your measure of success.

At the risk of sounding like a broken record, here is what you should be doing in the New Year to ensure we end it on a high, like we did last year.

1.       It is not how much you make but how much you keep

We all want to be paid. Being paid is always sweet. But what will improve our financial fortunes is how much we keep of our income through saving and investing than how good we look spending our money. Easier said than done. They say save your money today so it can save you in the future.

Saving 50 percent and investing 25 percent of all your income is a good start. We should maintain that discipline with a view to pushing up your investing ratio in 2025 to between 30 - 40 percent. We will only be able to do that if we stay the course in 2024.

 

2.        Shed your ego

There is no amount too small to save or invest. Us “corporates” we dream of investing big numbers and therefore miss the chance to build over time. No wonder we are so corrupt. We are waiting for the big deal. Hence the story of the big boss and his driver, who when they were both retired, the driver was well off because he was not afraid to put aside a bag of cement when he could. A bag of cement is not even drinking money for the big boss. But because of not taking care of the cents through his career the big boss finds himself with few shillings from his investments, with huge expenses built up during the good old days.

 

3.       When you see risk, seek  knowledge

Everything you do will come with risk. In the face of risk you can choose to back off and not give yourself a chance at good returns or research the deal before you turn it away. Knowledge is the greatest mitigant against risk. Money is being made everyday in this economy. The ones who are making the money are silent, allowing the ones not making money to be the loudest. But if you paused and looked  harder there is opportunity everywhere. The problem is that when you are not in the deal, you don’t know the deal, and think everyone is gnashing their teeth like you.

But about risk. You would think nothing of driving from home to town – you have been driving for 30 years, the risk is minimized by your knowledge and experience. How much riskier does the same trip look if you had the car keys to your ten year old child?

Go further than copying your neighbor in researching new opportunity.

 

4.       Don’t overestimate what you can achieve in a year

The cliché that the race to your financial freedom is a marathon not a sprint, bears repeating. This time next year you should be better off than you are now or not. But expect to be only marginally better. But seen against the rest of your life, that small gain will be the foundation for the gains of the next 20 years. Stick to the process, the results will take care of themselves. If you can grow your portfolio just 10 percent a year, at the end of 20 years it would have grown nearly sevenfold and the ensuing income with it. Think about that. You need to be in bed with compounding rather than at war with it.

5.       Guard against lifestyle creep

Maybe I should have started with this. With increased income the temptation to consume more will be your biggest battle. If you are consuming 25 percent of your income now, let it remain at that percentage but preferably lower as your income increases. A wise man once said he makes ten shillings eats one and reinvest nine, repeat until rich.

We have talked about this before all of the above is simple but not easy to do. No enterprise of real value is easy. The battle is really with yourself. We are seduced by complexity but its really simple and we should not be suspicious because the process is simple.

Low income, bad investment environment, your friends blasting while you are lying low like an envelope, are all outside your control. You can only control your attitude and effort. Focus on that.

Otherwise Happy New Year, wish you the best  and see you on the other side.

 

Sincerely

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