SHILLING DEPRECIATION SLOWS UGANDA'S ECONOMIC GROWTH

The Ugandan shilling’s dramatic slide in the last year is putting the economy’s growth prospects under pressure and may force a rethink among planners of how the economy is structured. Read more

UGANDA BRACING ITSELF FOR MORE INFLATION

Inflation seems to be rearing its ugly head again, coming at 7.2 percent in September the highest its been in more than two years. Business Vision’s Paul Busharizi sat down with Bank of Uganda director for research Adam Mugume to talk about the disturbing trend. Below are some excerpts from the interview.

Q.How would you assess this year’s attempts to bring inflation under control?

A. When we started tightening monetary policy in April everybody thought including IMF they thought we were crazy. Inflation was two percent very many people including Ministry of Finance were really not happy with BOU, because they were saying how do you start monetary policy when inflation is two percent? But we insisted we said our forecasts indicate inflation was going to rise.

By then exchange rate was not as volatile as we saw in the last three months. What was driving up forecasts by then was the outlook on the shilling. Because five to six months ago we knew the shilling would fall because we were looking at trade balance, we were looking at the possibility of US tightening monetary policy, but the biggest challenge was the Balance of Payments outlook which was really negative. We said exchange rate would depreciate, after depreciation we would have inflation and any slight food price increase would lead to a big increase in inflation that’s when we started tightening. Our forecasts have been impressive and our pre-emptive action has worked.

By the time we started in the monetary policy meeting we said if we didn’t tighten inflation by December would be 15 percent.

Q. What particular aspects of Balance of Payments were hurt?

A. All inflows were impacted. FDI, workers remittances, exports, tourism were declining. Imports were continued increasing apart from oil that have been declining but the others were still rising. Private sector imports except oil were rising. Imports were rising at 5 percent on a quarter to quarter basis. We knew the exchange rate was going to decline.

We know normally this months of September to November seasonally we normally we have high food prices because this is the planting season. We start harvesting in December and if rains are good we have a bumper harvest in January and February. Our worry is we are projecting a problem if the weather patterns are bad, El Nino affect food crops and the good harvest in January doesn’t come and then we have a spike in food prices that is where we will have a bit of uncertainty. If that happens then what we project inflation coming down will not happen and will call for more tightening.

Q.  SO why not wait for inflation to rear its head and then act? You might make a mistake in premeption?

A. You can’t allow inflation to spike. Once inflation sets in it will take you 12 months to bring it down. If you delay in handling it, it will take you 12 months to bring it down. That is why you have to start much earlier because monetary policy must be pre-emptive if you wait until the thing has come you are wasting your time.

Q. The talk is that its campaign money drivng up inflation?

A. We haven’t seen it. People who say there is a lot of money in this elections we haven’t seen it because even commercial banks are crying they are saying they have no money. If it is money with one or two individuals it can’t cause inflation. But commercial banks are telling you they don’t have money. Because we have been tightening, the source of currency is BOU and also finance has been tightening. Flows from government have been very tight that’s why you see banks are borrowing form the central bank, rediscounting treasury bills so you see a lot of tightness in credit.

  

Q. So in fighting inflation you are reducing growth?

A. You have a trade off. That is why we did it gradually so that the impact in private sector is not so sharp. In 2012 when we increased the policy rates so sharply in a short period its impact on activity was so dramatic that you move from a growth of 9.7 to 3.2 percent within a year’s time. We did not want a repeat.  We wanted a gradual process so activity slows down but does not collapse. If we have a growth of 5.5 percent and we have inflation of between 7 and 8 its better than having inflation of 15 percent because it becomes very hard to manage.

Once inflation takes hold even the growth you are trying to stimulate will not take hold.

"Growth has been affected by about 0.5 percentage points. At the beginning of the year we had projected to have growth of 5.8 to 6 percent but now we think about 5.2 percent is more realistic...

Q. As a result the yields on government paper are shooting up, crowding out lending to the private sector?

A. treasury bonds and bills yields have risen sharply but a combination of many factors not all related to inflation are at play.

I think there are some economic agents, those who participate in the auction they believed the government was so desperate for cash given the budget, which was misunderstood to be sh24trillion then government would be forced to come to the markets. The participants in the market are not convinced that government is serious, they think government is still going to debate the budget so they would rather wait and see. They are more interested in 91-days, they think sometime down the road government may want more money and come to the market so interest in longer term bills is low

Government has to make it clear that they are not desperate to take this money. They have passed the budget, other than borrowing in the range of 25 percent you would rather suspend some of the activities, it doesn’t make sense to borrow as government. If government borrows at 25 % then the private sector will be borrowing at 35 percent which is not good.

Q. SO what are the economic growth prospects?

A. Public investment will stimulate the economy, but also private sector credit has not slowed down as of August, it had grown by 23 percent on an annual basis. But some would say there is some exchange rate impact since some loans are in hard currency but even if you look at the shilling loans they grew 15 percent which is healthy. Overall we have not seen a slowdown in activity that’s why we believe that private sector investment, those already on the ground will not necessarily cut down on investment, we will not necessarily get new FDI but the ones already  in the market will not necessarily slow down because of the monetary policy tightening, we believe private sector credit will remain strong, investment will remain strong, will decline a bit but not stop and then if weather conditions remain conducive then agriculture also should really continue to grow.

UNRA’S FATE IS AN INDICTMENT ON OUR SOCIETY

This week the Uganda National Road Authority (UNRA) board took a chainsaw to its staff, sacking all of them to facilitate a complete overhaul of the organisation, which has become the poster boy for corruption and greed.

The almost 900 workers will be let go over the following weeks but have been given the option to reapply for their jobs when applications are called.

UNRA has said that it needs to almost double its staff complement within the year, so for some of the workers without sticky fingers there is hope.

If there is any doubt about the extent of rot in UNRA, then, that the board was compelled to sack everyone says it all.

Over the last few months we have watched with jaw dropping shock as official after official before the Bamugemereire commission grudgingly revealed, was tied up or was tripped over by the web of lies they needed to spin to cover up the scams that went on at the Authority.

"What was clear is that these officials went about their business – not the official kind, with  impunity, confident that their shenanigans would never come to light, never mind that they were wheezing around in brand new cars, living it up on holidays abroad and sipping cocktails on the verandas of their palatial mansions, right below our very noses...

Weeding out corruption, so entrenched as it is in Uganda will often be a losing battle.

To begin with, pinching from the workplace is the new normal – just because we do not whack people over the head with metal bars or make them surrender their money at gun point does not make it less of a crime.

Secondly, there is no social censure of the corrupt – we even give them pride of place in our churches.

And finally because of the above, we have set the bar on what constitutes corruption very low.

It’s ok to claim per diem for three days when we have only been out of office one day; its ok to use company transport for our private errands; its ok to pilfer a few coins from the office because other people steal more.

Thankfully the days of extra judicial killings are past. But people used to nonchalantly walk around dead bodies on the street as they rushed to work or the location of dumping grounds was a topic discussed over a beer before we moved on to more serious  topics like who is getting married to who and which station is selling fuel the next day.

It was once said that love of the good life is the source of corruption. Wanting a good life, seeking progress need not lead to corruption.

Let us not kid ourselves. Like we have seen with other organisations that were once the epitome of corruption, that when the bad seed was cleaned out the incoming breed was also corrupt, maybe not as corrupt as the first but it was really a matter of degree.

"I continue to disagree with people who maintain that us Africans, Ugandans more specifically, we are inherently corrupt. That we have a demon seed in us, that we cannot help ourselves when money is lying around. One has to admit though, that the anecdotal evidence (no one really gets convicted for these things, do they?) is overwhelming as to suggest we might just be irredeemably flawed....

I have hope, if not in the inherent goodness of the human condition, at least in the inexorable march of progress, call it evolution if you want.

For our businesses to compete with global companies, for government to maintain its relevance by providing better and better services for more and more people, something has to give.

I would like to believe that what will put paid to corruption in our society is when the cons outweigh the pros of allowing a corrupt society to continue.

However, I would warn you not to hold your breath for this day of reckoning

THE SCANDAL OF NSSF’S PILE OF BILLIONS

Recently National Social Security Fund (NSSF) boss Richard Byarugaba rued the lack of investable projects locally.

The Fund which manages sh5.8 trillion ($1.8b) in assets has about sh160b to invest per month, which for lack of viable projects it ploughs into government paper and fixes in commercial banks.

Of course the argument is that the money deposited in the banks will be on lent to the private sector but one has to feel that more can be done with that money.

Why is it difficult for NSSF to invest more prolifically locally?

The law aside let us look at the math.

Byarugaba and his team have pledged to pay contributing members an interest above the ten year moving average of the inflation rate.

Using simple arithmetic the average annual inflation for the last 10 calendar years is 9.34 percent. If NSSF is to come good on its pledge it would pay a bit over that figure to its members. Of course what that means the return on all their investments ten has to be above 15 percent for the year.

As a rough indicator all their assets if deployed would bring in about a trillion shillings this year.

US Billionaire Warren Buffett,whose company Berkshire Hathaway is valued at about  $240b keeps warning his shareholders that it is becoming more and more difficult each year to show a real return because the size of projects he needs to show a meaningful return are growing fewer and fewer.

Last year he splurged $28b to buy food company H. J. Heinz, in 2009 he spent $26b in acquiring logistics company Burlington Northern Santa Fe and the year before he bought chewing gum maker Wrigleys for $23b.

"His deals are few and far between and he keeps joking that he needs an elephant gun when he goes out shooting. No million dollar deals for Buffett, thank you.
NSSF finds itself in exactly the same situation for a corresponding economy...

And when they decide to invest abroad as the y did earlier this year in putting down sh120b for a stake in Kenyan based Equity Bank we start tearing out our hair and start questioning Byarugaba’s patriotism.

NSSF investing abroad is not the scandal, the real scandal is that we do not present big enough projects to NSSF for it to bankroll.

True that NSSF’s $2b war chest is a drop in the ocean of the infrastructure developments we so badly need --- the 700 MW Karuma dam alone will consume upwards of a billion dollars, but letting them in on a hundred million dollar stake or there would reduce on the exchange risks that come with borrowing abroad and also give the workers of Uganda a stake in these projects and the accruing benefits.

But government initiatives aside there is an embarrassing dearth of private sector projects that would tickle NSSF’s fancy. MTN is probably is the only billion dollar company in Uganda, with even Stanbic valued at less than $500m.

Meanwhile NSSF is not in the business of the shelling out money from its till. To get access to NSSF’s stockpile you either have to issue a bond, list on the Uganda Securities Exchange or sale a share of your company to them, like the $2m deal that was cut with Serena Hotel about a decade ago.

That being said I think NSSF needs to recognise its context and even the mountain cannot come to it it should go to the mountain.

Within the law NSSF should start up a private equity fund, basically a company which buys interest in going concerns to help them grow and then when certain parameters have been met sell out. So they could seed the Fund with say $10m or sh36b and hope to invest in 50 companies over the next five years.

It may even consider having several Funds, tiered to match the amount of money required. So you could have a lower tier for companies requiring $1,000,000 and above, another for $100,000-plus and finally for $50,000 - $100,000.

"I fear though that even if NSSF bent over backwards for us it might still suffer an inadequate deal pipeline....

Using Warren Buffett’s rules, how many companies can show a sufficiently long track record of improving shareholder value over years even decades? How many companies can show a distinct competitive advantage that cannot be replicated and therefore guarantee near monopolies years into the future? And finally how many of these have management systems that can be relied on to continue doing what they do well into the future?

So you want NSSF’s money fair and square? Get ready to roll up your sleeves and get to work!

TDA AND UGANDA’S QUEST FOR A VIABLE OPPOSITION

Unlike in the classroom, life first tests you before it teaches you the lesson. And it is true too, that you will continue to seat the test until you learn the lesson.

This week the political opposition came up empty handed in their attempt to agree on a single candidate for next year’s presidential election.

The Democratic Alliance (TDA) last week, with four presidential flag bearer nominees --- FDC’s Kizza Besigye, DP Norbert Mao, Former vice president Dr Gilbert Bukenya and former prime minister Amama Mbabazi, it was hoped by mid this week they would have a single candidate they could rally around.

The NRM’s President Yoweri Museveni had already been duly nominated during the weekend.

Reports were that very quickly they had narrowed down the choices to Besigye and Mbabazi, which was not a surprise, but it also became clear that both men were unwilling to budge, to give way for the other and give up their ambition to lead a unified opposition.

They say we are wiser after the fact.

Beyond the individual personalities of the two men, one wonders whether TDA ever had a chance at achieving this goal.

They say the seeds of any endevour's destruction will be sown at the beginning of the process and that light we have to ask, who is TDA?

TDA has projected itself as a pressure group that will force government into good behaviour, with the secondary aim of unifying the opposition under a single candidate ahead of next year’s polls. As time has gone it can be argued that the emphasis has shifted to the latter from the former.

The idea seems to have been that they would whip up popular discontent against the government which would force them to a negotiating table, where they would steam roll the NRM into a raft of concessions not limited to electoral reforms.

The idea was good but the execution may have fallen short.

"TDA did not muster any traction among the masses – despite their shrillest protests, and therefore made little to no impression on the government, the evidence being that in bringing constitutional amendments to the house a few weeks ago, the cabinet all but ignored TDA’s “Citizen’s compact”...

The truth of the matter is that TDA is a political elite grouping who have analysed our situation and have a proposed solution to the country’s challenges. They do not have a popular mandate, like parliament or other elective offices.

This is not a crime and is not necessarily a weakness.

The political movements of the world have been directed by men and women who take it upon themselves to crystalise the society’s problems for the masses and then rally those same masses to overthrow the status quo.

The trick of course is to sell the alternative view to the masses. This takes time, patience and persistence.

People dwell on the romanticism of the Arab spring or the Ukraine’s orange revolution or even our very own NRA bush war, they forget the hard work, disappointment and the numerous times victory was snatched from the jaws of defeat.

 Truth be told TDA, this time last year was not in existence, is looking more and more like a desperate smash-and-grab attempt at State House without paying the price that high endeavour demands...

I would like to be wrong, if only because this country needs a credible opposition, not only made of high profile, charismatic individuals but in addition the opposition we look forward to is one which has men and women of substance as their flag bearers, but who are also backed by organised operations which can project their will nationwide.

ORGANISE YOUR SMALL BUSINESS YESTERDAY

A fortnight ago an organisation called the Inclusive Business Accelerator (IBA), which in a nutshell helps small businesses formalise their operations and make them more understandable and attractive to investors and potential partners.

IBA inaddition to make small businesses investor friendly link the up with potential investors.

The organisation, backed some traditional charitable organisations, highlighted a growing trend by aid agencies who in trying to have their monies have a broader impact on society are looking directly at the bottom of the pyramid.

Its a natural progression from offering a hungry man a fish to showing him how to fish, which is more sustainable and can be profitable for all involved.

"Uganda's status as the most entrepreneurial country in the world was recently reaffirmed by UK study. Unfortunately while we are good at starting up companies we are poor at growing them and ensure they endure over years.
The reason that this happens range from the strategic -- we have no long term plan for our businesses beyond providing subsistence for ourselves, to the tactical -- that our businesses are not organised enough to take advantage of opportunities available. The second is derived from the first...

Arguably since we have businesses sprouting up at every corner we have solved a critical part of the equation of how to build sustainable businesses. Our businesses then need handholders to help them transition from their small, informal beginnings to more viable entities.

And this does not apply only to the rolex guy around the corner or the small market stall owner. 

During a recent press event with Uganda Revenue Authority boss Doris Akol she said that the informal sector include law, accounting and consultancy services. This was a revelation because one would think these knowledgeable specialists would better appreciate the benefits of getting organised.

Of course one of the reasons of this reluctance is the high price of transitioning to formality -- the hustle of registration, new dues and regulations that come into play.

The difference between a company with organised accounts and one that doesn't is like night and day. The same can be said for one that is tax compliant compared to one that is not.

One of the challenges of making the transition is the unrealistic expectations people place on their business. Talk to any new business owner and they expect to have broken even within months and buying a VX within the year. Registering, paying taxes and meeting other regulations do not play into these expectations.

This an important discussion if only because it will give our small business not only a chance of survival but to grow into big companies. All big companies started as small companies.

It is also important because even in more developed economies it is small businesses that create the most jobs.
While organisations like IBA and similar outfits, may have it as one of their aims to make small businesses investor ready the long term benefit to businesses to getting organised is immeasurable. The ability to qualify for credit, the quality of tenders one can bid for  and the calibre of partners that will give one a second look are but a few of the benefits and make all the "pain" of formalising.

"But even for those who want to become immensely rich, they soon find out that informal practices only take you so far before they begin to sabotage the business. If you are racking in millions even billions on an informal structure know you can be making multiples more with a formal structure. And the longer you remain informal the costlier it will be when you are finally compelled to...

As Uganda has formalised over the last few years we have seen any number of businesses from supermarkets to manufacturers and even banks because their continued informal practices caught up with them.

The new movement of business incubators and  accelerators, which should eventually evolve into our own venture capital industry is one to watch and encourage.

Thankfully the early adopters are already coming through. Last week the start up online logistics company, Intership Uganda beat off eleven other local companies for a chance to pitch to foreign investors in Switzerland next year.

They won, i think, on the strength of their business model, providing logistics services via the web, but also because their model was better organised and they had realistic projections given their current operations.
So do you have a side hustle you are running-- you bake cookies or you have a chicken  project or even doing mushrooms in your garage, at the bare minimum have organised books of accounts. At the bare minimum you will be able to objectively determine what you are doing right and you do more of it or what you are doing wrong and not do it again.

LEARNINGS FROM EU IMMIGRATION WOES

In recent weeks thousands of immigrants have been streaming into the European Union. The recent upsurge has accentuated ongoing waves of Africans and east Europeans.

A civil war in Syria that has razed the middle eastern country to the ground is the trigger for the current explosion in immigrant numbers. That and the fact that many of it's richer neighbours are unwilling to take in even a single fleeing Arab.

Its impossible to detach the politics of it from the economics and speaks volumes to the issues of the blow back from colonialism and neocolonialism, governments' role in translating economic growth into development and the future reality of a centralised global government.

"No one wants to leave home. We are compelled to do so because we are insecure where we live for political or economic reasons.
Immigrants are a failure in the management of our society, more specifically the management of our economics....

The relentless flow of immigrants to Europe since the independence of many African states has as an underlying factor the global economic inequalities that have continued, even widened in the last half century.

The west by plundering Africa during colonialism and maintaining those exploitative systems after colonialism have grown rich on the continent's back.

The UN estimates that up to $1.4 trillion has flowed out of Africa illegally between 1980 and 2009. A lot of this money can be attributed by organised crime -- smuggling, drug and human trafficking but more than half of it, some estimate about 60 percent of it is due to multinationals through tax evasion and avoidance among other dodges. A system the west has cordoned but only now moving to minimise as it threatens their economies and politics.

The net effect of this is that the rich have grown richer and the poor have grown poorer. To the point that it is doubtful whether the word has the resources to sustain us all at the standard of living the west has grown accustomed to.

So its a simple equation there will always be motion from high pressure to low pressure areas, in this case from high economic stress areas to lower economic stress areas. The movement will be stopped when balance is attained. There are no shortcuts.

For this obviously two things have to happen.

One, the prodigious economic growth figures that many in the third world have been posting should be translated into meaningful improvements in general welfare. Secondly, that the developed nations severely cut back on their consumption to allow the third world catch up.

The first cannot happen without the second, which explains why poverty maybe here with us to stay.

That being said what needs to be done to ensure meaningful development for the third world?

To begin with there has to be a near universal appreciation among ourselves that we have all the resources -- human, natural resources and even capital to dig ourselves out of our predicament.

Across the border from us in the DRC the extent of their mineral wealth is estimated at $12trillion, at par with the US economy. And we haven't even started factoring the economic potential of its 70 million people.

The same can be said for Uganda where recent surveys have showed if we were to fully exploit our mineral wealth we would have to relocate everyone out of the country.

The trick to unlocking these embarrassing riches at our feet is to improve the quality of our human resource, through quality education and health care and to create a conducive environment for the private sector to thrive. 

And that doesn't mean living capitalism to run around unfettered, because the market is the most effective wealth creator we know its the worst distributor of wealth.

It is important that we tap into our well documented entrepreneurial abilities to harness the market for our benefit. All the aid in the world cannot do that for us.

"In fact aid has stalled rather than helped our progress. Getting aid is easier than building durable, transformative companies. In the last half century, billions of dollars have been pumped into Uganda but during the same period we have only a handful of companies with a national presence, nor do we have billion dollar companies....

A country is only as viable as its private sector. That is the more durable measure of development, with a string private sector your poverty issues will be sorted out, as will be your governance issues and therefore your service delivery issues.

The "crisis" the EU is facing has the same qualities as the rural-urban migration.

Its not an insurmountable challenge but a restructuring of the world economy -one way or another, will have to come first before things change.

There is a more apocalyptical vision but we will keep that for another day.