BANKS AS THE SOLUTION TO OUR PROBLEMS

Last month the Uganda Bankers Association (UBA) had their annual general meeting, in which they reported on the sector’s status.

Generally the industry is still making money hand over fist.

 The industry made a net profit of sh1.41trillion off revenues of sh6.82trillion, a credible net margin of about 20 percent, in this hard economy. As a sign of the times bad loans were up above five percent, as a lot of the bad debt carried over from the pandemic continue to be resolved. Despite that, lending to the private sector grew 7.5 percent, a normalization from 2022’s 19 percent growth, that could be attributed to a recovery after the covid lockdown.

But the real story of the last week was the demonstrations on the street by youth urging an end to corruption.

For the last decade or so this column has singled out corruption as the biggest challenge for seeing the economic growth of the 40 years spread more equitably among Ugandans. Corruption concentrates wealth in a few hands, hinders service delivery and distorts markets, all leading to the unfair distribution of the economic gains we have made as a country since 1986. Hence the youth harping on the issue. Corruption is denying them opportunity.

While the banking industry is battling corruption in its own ranks (last week the second financial fraud forum was convened in Kampala) the banks can and are helping with leveling the playing field for beneficiaries of economic growth.

Or at least, that is what the numbers suggest.

The last year’s results in and of themselves, do not say much about the industry’s role in economic growth, leave alone distribution of this growth.

However, if you look back five years even a decade, there are clues that point to this benevolent tendency.

We know while the economy has grown in leaps and bounds over the last 40 years, most of this growth has come from services, construction and manufacturing, which growth has mainly been seen in the urban areas, that is how more than half of Uganda’s GDP is generated in Kampala.

The problem with this is that more than 70 percent of the population are rural based and derive their livelihood from agriculture. Agriculture over the last 40 years has rarely if ever grown beyond single digits annually, if ever.

While there are structural issues that ensure this persists and which affect the ability to finance the sector, for instance that we are mostly a small holder farm economy, the banks have been increasing support to the sector.

A decade ago agriculture accounted for eight percent of the industry’s loan book, but last year this share had increased to 13.8 percent. In nominal terms, the loans dealt out to agriculture more than quadrupled to about sh3 trillion from about sh650b in 2013.

We can debate about which part of the value chain – production, logistics or agroprocessing these funds are going to, but it would be full hardy to support one part of the value chain if production, where most Ugandans are employed, is not growing.

By inference while the sector’s share of GDP has dwindled to about 20 percent from more than 70 percent in 1986, in nominal terms its producing more and more. The successes in coffee and milk production are but one example.

So the trick for this country is how can we facilitate this increasing of shift of resources to agriculture from the banks?

The risks in supporting production are many. As mentioned above most of our farmers are small holders and still use traditional farming techniques whose yields are anaemic. Secondly, farmers need to be helped to negotiate with the market from a stronger position. And finally, access to market must be improved in terms of improved infrastructure.

The banks that have increased their interest in agriculture are finding they have to spend considerable sums to train farmers in improved farming methods and business practice. In the absence of a nationwide extension services system government would do well to offset these costs for the banks, as one way to lower the cost of loans but with the same stroke increase the adoption of improved farming practices across the country.

The government water for production scheme should be rolled out with more urgency. A World Bank report in the last decade showed that the biggest investments in agriculture should be in extension services and irrigation.

While the government struggles to beef up its extension services, relief to the banks already doing this would make sense.

The point is that while financing to the sector can make meaningful change, some things have to be set in place to speed this up.

SAYING BYE TO WORLD BANK BILLIONS, FOR NOW

The World Bank last week announced it would not be contracting any new assistance to Uganda, their response to our enacting of the Anti-Homosexuality law earlier this year.

This was not an announcement to thumb your nose at.

"The World Bank has been front and center of jumpstarting Uganda’s economy over the last four decades. Currently they have more than $5b (sh18.5trillion) in projects in areas as diverse urban redevelopment, agriculture, environment protection, energy, education, health and digital development among others....

These current projects reaching back to 2013 are riding on the back of and in support of fundamental economic reforms that saw this country liberalise the economy. The liberalisation of the economy not only unlocked local initiative, but has led to huge foreign direct investment into the economy.

The reform process has been more successful in Uganda than in other places because Kampala has embraced the logic of the reforms.

It was basic economics, to resuscitate the economy we needed to increase production, to increase production we need to improve infrastructure and remove inefficiencies like government parastatals. People who are hankering for a return to parastatals either have forgotten this context or have ulterior motives.

This mutually beneficial partnership has clearly come to a cross roads. The World Bank says the anti-homosexuality law undermines efforts to have inclusive development for everybody regardless of race, gender or sexuality.

Uganda on the other hand enacted the law through parliament, the representatives of the people, a democratic process.

"It would not be a stretch to interpret the World Bank’s action as saying, “if you want our billions, you have to drop the law.” It takes your breath away, when you narrow it down to its bare essentials.

It should serve as a wakeup call to us.

Our wellbeing and that of generations of Ugandans to come is really up to us. Everybody else can only be an enabler or hinderance to our developmental ambitions.

In this journey others will have their own values and priorities with which they will choose to help or not. They have choices, we don’t. Development has to happen with or without the helpers.

That being said our dependence on donor support is long past its sale by date. We have the means to mobilise our own resources.

We have a budget of sh50trillion, which has to be adjusted not to reflect this new reality, as more than half of it is going to be underwritten by the donors. WE all know that we are not collecting as much revenue as we should, the excuse has always been we area largely informal economy.

As an indicator of how much money we are leaving on the table, last year more than sh170trillion flowed through mobile money platforms. This is more than thrice the size of the budget and the size of the entire economy at $47b. As an indicator of economic activity few indicators beat this.

"The problem is not that the economy is largely informal but that we are not exercising creativity and innovation to collect what is due from all citizens...

I have always argued that we need to tax all land in Uganda. Not only will it increase our revenue collections but even better it will increase the productivity of those lands. If I have my acres of idle land and you slap a sh100,000 tax on every acre I will either have to put it to work, that it pays for itself or sale or lease it to someone who can put it to good use.

But also we need to stop thinking of tax according to the text book. I was a supporter of the tax on mobile money transactions and even on data because these are all economic activities or proxies for economic activities that need to be taxed. I know the arguments about financial inclusion and access to the internet, but anything to make these more productive, which tax does, is welcome.

When the colonialists came to Uganda and wanted us to grow coffee they instituted a poll tax, a tax on every grown man, that forced us to sell something – our labour or goods to pay the tax. Coffee was useful and hence our huge small holder coffee farmer population, which feeds into us now being the biggest exporter of coffee on the continent.

"The seduction of aid is that it is easier to access than taxes. To introduce or raise taxes governments have to negotiate with their people, show some quid pro quo. You pay taxes and we will deliver public goods. Governments don’t like such pressure. It is easier to hop on a plane to Washington DC and over cocktails and canapes, sign aid contracts – per diems all around. The lender will not care as much as the local whether the money is employed for its intended use, more than if he gets paid.

This will undoubtedly have a ripple effect through the donor community.

Locally we may very well have to change the way we think about democracy. For example how do we cut public expenditure for example, in the size of our current parliament? Do we think MPS would ever vote to cede their seats in the house? If push comes to shove how do you do it using the current processes in place?

The move by the World Bank is unprecedented since they pulled out of Uganda during the Idi Amin era, this might just be the push we needed to become more self-reliant.

 

SAPS; UGANDA’S FAVOURITE BOGEY MAN

Picture this, you are in a world of hurt. Your income can not cover a month as the demands on that money –school fees, rent, fuel, food are just overwhelming. As if that is not enough, you lose your job. So, you go to your neighbour who is better off, for a loan.

Your neighbour would love to help, but more importantly he wants to get the money he lends you back, at some pre-determined point in the future. He is not a charity.

So, he sets some conditions for you if he is to lend you the money. Getting a job may not be easy, so most immediately he makes it a condition that you cut back on your lifestyle – move into a cheaper house, shift your kids to less expensive schools, cut out morning and evening tea and on some days you can eat two instead of one meal.

In the meantime, he wants you to look for a job. He may even be willing to pay your school fees to upgrade your qualifications. He wants to improve his chances of being paid back.

You have a choice to put pride aside, bite the bullet and accept the prescription in order to get the loan or tell your neighbour to go to hell and go and beg or con someone else who will lend you the with less onerous conditions.

Extrapolate this to the national level and these are the choices that faced the NRM and the Obote II before them.

"When the NRM came to power in 1986 not only were the national coffers bare, but also the economy had shrunk below its level fifteen years prior. In fact, it took almost 15 years from 1986 to grow the economy back to where it was in 1971...

After trying to get the economy back on its feet on our own resources failed, they turned to the World Bank and the International Monetary Fund (IMF) for help.

To access financing from these two Bretton Wood institutions they had to sign up to some conditions, which basically were to cut back on government spending and raise tax collections – Structural Adjustment Programs (SAPs).

This is not high finance, its commonsense.

Among the things government had to do was to shrink the size of government, sell loss making parastatals and liberalise the economy, let the private sector drive growth. In terms of raising taxes the Uganda Revenue Authority(URA) was created and invested more in infrastructure.

The measures to cut costs meant for starters, quite a few people lost their jobs a government was downsized and parastatals were sold off. Government struggled or cut budgets to things like university education and sports.

It is understandable why people were not happy with it.

"NRM tried to do it alone, thinking they could print money to climb out of the economic hole they found themselves, but this only made matters worse, with inflation hitting 250 percent a year...

To put that inflation rate in perspective it means prices were doubling every four months. That meant if you paid one million in school fees for your kids in January when you went back for second term it would be two million shillings and in third term would be four million shillings. we were here screaming when the price of petrol went up from sh4000 to sh5000 a 25 percent increment in a year, what would we be saying in 1987 when inflation was galloping out of control?

So when I hear people criticizing SAPs I think two things, either they were the beneficiaries of the economic chaos or they don’t know what they are talking about. I found that more times than not it is the latter rather than the former.

The main criticism of the SAPs was that it opened up our economies to the acquisition of our “assets” by foreign capital.

In Uganda’s case we are being very generous by classifying our parastatals as assets. An asset makes you money but these companies were a drain on the treasury, diverting money for more essential services to prop up under capitalised and badly run companies. People say if only government had recpaitalised the companies they would have been fine. When I hear this I don’t know whether to laugh or cry.

Government was so broke that it shut down Uganda airlines because it could not afford the sh10b (about $10m) a month it cost to keep it afloat. Today government would fill little pain with such payments.

If our “assets” were taken it was because of our own weakness. Kenya across the border from us did not have to let go of their state enterprises, because they were actually net positive contributors to the budget.

Now I hear President William Ruto is looking to flog them on the open market to raise money to clear some of the country’s huge debt. Common sense.

 

MORE EVIDENCE THAT CENTRAL BANKS NEED TO BE INSULATED FROM POLITICS

Recently Zambian President Edgar Chungwa Lungu sacked the govenor of the Zambian central bank  Denny Kalyalya ostensibly because he refused to turning on the money printing presses.

With economic growth in reverse, inflation  threaten to gallop out of control and an election coming last year Lungu’s need for cash.

He has brought in a more pliable central bank boss Christopher Mvunga and is now probably more confident of retaining his seat in the next polls.

His actions are more surprising given the experience of neighbour Zimbabwe, a once proud economy that is now scrambling, with little success, to get off its knees.

Former President Robert Mugabe in a bid to hung on to power gutted the country’s productive sectors and resorted to printing money at a whim. The net effect has been, among other things, that Zimbabwe, the once food basket of the region, now needs food aid to feed its people and has gained notoriety,  a few years ago for experiencing hyper inflation the like of which had never been seen anywhere before.

Now Lungu is threatening to do the same.

Central banks’ major role is to aid price stability. When prices fluctuate wildly it is difficult for producers to plan or save which tends to discourage investment and hence development.

Politicians are all about getting into power and staying there once they have attained it. Unfortunately, left to their own devices they will do this by whatever means necessary.

Your politician, unrestrained by strong institutions or traditions would rather sink the economy if that will serve to keep them in power longer.

In the politicians’ mind their own survival now is more important than the long term sustainability of their countries.

We have seen it before.

"Politicians when it suits them put their heads in the sand and pretend as if the laws of economics, demand and supply can be suspended or expunged altogether in the service of their political ambitions....

Former President Hugo Chavez, whose country Venezuela has the largest known oil reserves of any country, thought he could be play the market.

When oil hit record levels -- $100+ a barrel a decade or so ago, he thought this was a permanent situation expanding government, poisoning the environment for business and set himself as a year around Father Christmas.

However, oil prices collapsed to below $30 a barrel constraining his ability to be everybody’s favourite uncle. The economy then went into a tailspin to a point that people are bathing in the streets, seeing as piped water is gone and diseases like Malaria, eradicated decades ago are back with a vengeance.

Norway went the complete opposite, socking away billions of dollars in oil revenues in their sovereign fund. They beat back the populists who called for a higher amount to be drawn from the fund – they restricted themselves to withdrawing not more than 4% of the national budget. As a result they have more than enough surplus to see them ride much easier than others during this Corona crisis.

Critics of disciplined economics say that the laws of economics are not the natural order and are conspiracy perpetuated by the Bretton Woods institutions, intended to shackle the lesser developed economies.

They often cloak these arguments in a nationalism, diverting blame from themselves onto foreigners.

"They say nationalism is the last resort of the scoundrel. But even nationalism is no match for the realities of supply and demand...

And that is why public enterprises fail all over the world and even when they function they do not do that optimally. Those handful that thrive are the exception that justify the rule.

One does not have to be a prophet to see that Lungu is leading his country down a dangerous path. The resulting low growth, hyper inflation and increased poverty will call for very unpopular policies – cuts in public spending, privatisation and liberalisation of the economy, which will then be blamed on the World Bank and International Monetary Fund (IMF).

Running a disciplined economy means one can not have all he wants, a country will be forced to cut its coat according to its cloth. If discipline is maintained economic growth can follow and a general improvement in living standards of the population.

Populist economic measure may cause the good times to roll, but only for a short while, before all hell breaks loose.

"Mugabe run the white farmers and industrialists out of town and distributed the land to his supporters. Their was rejoicing for a while as well as kudos from armchair revolutionaries on the continent. This has since turned to wailing and gnashing of teeth by the everyday Zimbabwean and a deafening silence from his cheering section on the continent....

Such advice will likely fall of deaf ears, Lungu’s political ambition will not be denied.

IT STARTS AND ENDS WITH JOBS

Last week the World Bank released their Jobs Report on Uganda. It had some very enlightening findings, many sobering and clearly we cannot continue with business as usual given the potential crisis looming ahead.

"If the management of the economy is about improving the living standards of a population, then you can’t get away from a discussion about jobs – the quantity and quality of jobs....

The current state of jobs flatters to deceive. The report says that 77% of the population aged between 15 and 64 is employed, which is high compared to the average for low income countries, which stands at about 70%.

However, the quality of jobs is falling as people are working longer hours for less pay.

This is not hard to explain as 64% of Ugandans are employed in agriculture. Our agricultural practices are rudimentary, our farm yields are among the lowest on the continent and we then lose almost half of our produce after the harvest.

To add salt to injury, as an economy we are still stuck in the rut, producing raw materials for export. We not only get a fraction of the finished good but it also means we do not control the price that we sell at.

As if that is not enough we are a young population, the second youngest population in the world with a median age of 15.9 years. What this means, that for the next few years or decades there will be more people joining the workforce than leaving it, which means the speed of creating jobs has to be accelerated.

According to the Jobs Report the economy must create up to thrice as many jobs than it did between 1992 and 2006 in order to keep up.

As it is now more than 500,000 people enter the job market annually and this number is expected to double again within a decade or so.

It doesn’t take a genius to work out that millions of youth without a job or incomes, will be forced into crime and other anti-social behavior, and it is not a stretch of imagination to see that national stability will come under threat.

So what to do?

The World Bank has some recommendations.

For starters they counsel that macroeconomic fundamentals have to be just right.  Galloping inflation, lack of economic growth and an exchange rate out of control will not allow for any of the initiatives needed to tackle the problem to take root....

Develop agro-processing industries and facilitate their exports, promote Foreign Direct Investment (FDI), create an environment that will encourage more investment by big firms and support domestic firms to transition to medium and larger entities. 

Given these, it makes sense that any real transformation will have to start with the agriculture value chain, seeing as seven in every ten Ugandans derives a livelihood form the land. Not only should we increase farm yields, but can we also improve marketing, incentives the set up of agro processing firms and promote exports abroad.

At the bare minimum farm gate prices will rise but also employment will be created when the value chains are better developed.

However, I think the real game changer would be to facilitate small companies to grow into larger entities...

The world over the biggest employers in any economy are the small and medium enterprises. 

However, the biggest case of business failure comes from these same sectors. On closer scrutiny its not that there are no markets for their products or they have run out of raw materials or the Ugandan economy is a particularly harsh environment to do business, most business failure is because the people running the business don’t have the capacity to run a business.

The promoters of these failed business, don’t know how to raise capital, don’t know how or neglect to do market research, fail to forge the relationships that will grow and sustain the business, don’t or can’t be bothered to strategise for their business.

Doing business is a skill that is learnt over time, however we can help our businessmen with training and other capacity building initiatives to help them along. We are the most entrepreneurial country in the world, which means that in our case there is a necessity for most of us to start a business. Well-tailored training will ensure we can go beyond the initial excitement for business and build bigger businesses.

Indigenous business owners are more beneficial to local economies than businesses taking orders from far off headquarters. Out of a responsibility to their local communities they are more likely to find ways to make the business work than hack the payroll and they give more back to the community in social causes.

It follows therefore that bigger indigenous concerns will magnify these benefits.

The government programs to dish out money to the youth are more a hit or miss operation, based on the flawed analysis that our entrepreneurs biggest challenge is lack of finance.

A more systematic attempt to build our entrepreneurs’ business skills, some hand holding to ensure they grow beyond the teething pains and a proactive program to create market access for them home and abroad are urgently needed.

I put little faith in the already bigger firms hiring more and more people, as our current circumstances demand. After all the bigger firms are becoming more automated and therefore not hiring as fast as we want.

The SME sector’s growth will more likely create the needed jobs.