SRI LANKA, A CAUTIONARY TALE FOR UGANDA

A week or two ago I was shocked to find that diesel was selling at a higher price than petrol at the pump. This reversal I have never witnessed in all my years of driving.

That diesel is more expensive than petrol is cause for worry, as all our major transporters run on diesel. The knock on effect on prices is probably just beginning.

I have seen debate around the subject. A suggestion that is coming through is that government reduce or eliminate taxes on fuel all together, as a way to bring prices down. There are many reasons why this logic shouldn’t pass go but the best thing is to look to Sri Lanka to see what happens when governments bow to populism and forget basic economics.

"Following the elections in 2019 the Sri Lankan government set itself up for the current crisis by stopping the use of fertilizer, probably playing to the environmental gallery, instituted major tax cuts, which included the abolishment of Pay As You Earn (PAYE) and when the error of their ways became apparent went on a money printing spree and as a day follows night, inflation is now around 40 percent, digging them further into the hole they had already dug for themselves....

You can imagine the jubiliation in the streets of Colombo, as there would be in Kampala, at the announcement that government had abolished PAYE! The short lived cheap popularity has led to the collapse of the government, whose collapse was accompanied by the most riveting footage of angry protestors last week, rolling ministers’ cars into the river.

The repercussions of the ferterliser ban led to low food production, which has not helped the inflation situation. It also means the exports of their main crop, tea, have fallen off the cliff, leading to a collapse in foreign exchange reserves. This situation was so bad that last week the government announced on Wednesday they had only one day of fuel left, this despite the fact there was an oil tanker off the coast ready to offload its load but Colombo had no money.

What Ugandan populists ignore in calling for tax cuts, is that tax cuts will have to be matched by expenditure cuts. Already painful expenditure cuts are being effected as the economy tries to get back on its feet, to cut taxes further would cause more harm than good. And in fact like in Sri Lanka can lead to the collapse of the government, as frustrated Ugandans look to focus their anger. It would be foolhardy to believe what is happening in Sri Lanka cannot happen here. Which raises the question about the motives of these arm chair economists!

Thankfully the Ugandan government seems steadfast in its resolve to not to succumb to populism.

This is particularly important because the rising prices we are experiencing now are not as a result of runaway government spending but due to external factors, most especially the rising world oil prices and supply chain problems triggered by the two year Covid lockdown.

That means that the factors driving price increases are not in government’s control as it would be if the price rises were because of increased government spending...

If that were the case the quick fix would be for government to cut back on spending and for Bank of Uganda to put the brakes on banking lending. In this case those two remedies would send the economy into recession and more problems than we want.

It would be nice if government could give us some relief, maybe dish out a few shillings all around, that would only be digging our graves further but thankfully strapped for cash Kampala cannot afford that luxury.

There is pain all around, a liter of petrol barely gets us around, our waistlines are in danger as food prices soar and even – horror of horrors, we are getting less beer for our shilling.

The one thing government should, no, must do, is to continue to be disciplined its expenditure so as not to fan the flames of an already bad situation. It is called tough love.

If this can be maintained we will look back one day – a year or two from now and thank god we made the necessary, but hard decisions to stay the course of fiscal discipline.

That being said it’s a good time to take a long hard look at what we are spending cut out the excess, maintain the productive expenses – those that produce income. Because even this will pass.

 

CREATING JOBS, MUST BE JOB ONE

It was reported last week that two Ugandan ladies died in Abu Dhabi and in India. In the former’s case a real time video of her jumping to her death from the fifth floor of an apartment block did the rounds on social media. In the second case, while it was at first reported as a suicide, on closer scrutiny a more sinister reason was suggested.

Most people would rather work at home than abroad. The comfort of family and familiar environment compensate for higher pay abroad. So often when people go to work abroad its normally because circumstances have forced their hand. War, disaster, economic hardship, political and other persecutions could be the cause.

"Most of the Ugandan youth fleeing abroad do so in search of greener pastures and less for other reasons. They are voting with their feet, this economy is not able to sustain them in the way that they would want....

So we have seen hundreds of youth file out of the country every month to work in the middle east which has taken over from Europe and the US as the preferred destination for our immigrant workers.

So how come we cannot make enough jobs for our youth?

The private sector is the major driver of job creation. Its inability to create jobs means either that there is not enough economy activity to warrant its expansion and therefore greater job creation or they are automating processes therefore needing fewer workers as they expand.

There has been criticism of our economic growth over the last three decades, that while on paper it has been laudable – averaging about six percent a year, it has not come with the commensurate job creation.  This is particularly disturbing especially since our population doubles every 25 years and if we think we have problems it can only get worse before it gets better.

Every first Friday of the month, the US’ bureau of labour statistics reports the Non-Farm Payroll (NFP), as the name suggests the number of jobs created outside the agriculture. This is a major indicator of the health of the economy and its future prospects and is awaited with bated breath as it can affect the dollar price or whether the Federal Reserve increases or lowers its interest rate.

It is a recognition that whatever happens in the economy is about people. Numbers are good but they are useless if they do not translate into the improvement of people’s lives.

They say too, that what you focus on expands. BY choosing to focus on job creation as they do, it ensures that the policy makers ensure that any improvements in the macroeconomy are transmitted to the man on the street. You may question the success the US bureaucrats have had on this but at least they try.

In Uganda, like in the US, we have monthly reports on inflation, the state of the economy and every quarter we have other reports on the state of the economy, but we do not have a report dedicated to job creation, even annually. So if we are going to create jobs in this country this would be a good place to start...

We complain about our education system and how it is focused on rote learning and not skill development, but we forget that all job holders today have gone through that same system. While skills development needs more work, my thinking is we go to school to learn how to learn, especially in this age when knowledge becomes obsolete no sooner have you put your text book down.

Skills development is being pushed with the hope that future school goers can make their own jobs, but is possible that one can learn a skill and fail to create a job on a sustainable basis.

 A major oversight of many of this skill development programs is that they do not teach accounting or financial literacy, which would help these graduates monetise their skill.

An engineering graduate many years ago – things may have changed, once confessed that he knew everything there was to know about engineering but nothing about how to run an engineering firm. His firm lurched from job to job mainly on the strength of his salary, without that subsidy the clocking would be ticking towards the firm’s doom.

Government can go a step further and integrate financial literacy in the school curriculum as early as in primary school. 

"We are poor as a country not because we do not have resources but because we have failed to aggregate our resources, be they land, capital or labour, into meaningful wholes. Hardwiring financial literacy in our children early through a formal process may very well be a game changer...

That being said it maybe in the youth’s best interest to take advantage of the skilling projects being offered in the country before they head for the exit, so that at least when they go abroad they can be more valuable workers. As it is now many of the technical colleges around the country are struggling to enroll students.

WHY ELON MUSK WILL NOT COME TO UGANDA

Last week Elon Musk confirmed his intention to buy social media app, Twitter. He is willing to commit about $43b (sh158trillion) to do the deal.

To put this in perspective, the GDP of Uganda is about $30b.

"Musk who is the richest man on the planet, was born in South Africa but has lived in the US since he went to university there. I saw him referred to last week, as the richest “African American”, which made me do a double take, but the logic is sound...

Musk in November last year was declared the richest man in the world with a net worth of $300b, the bulk of his fortune due largely to his 17 percent stake in electric car maker, Tesla.

This story got me to thinking, “What would it take to get Elon Musk to invest in Uganda?” Not because I have any particular liking for the man, but one because he has his roots in Africa and because if we could coopt his mobilization skills we might be better off for his presence here.

I soon had to disabuse myself of the illusion. This is why, in order of increasing importance (maybe).

1.       Who will he partner with

While governments like to believe they are the main drivers of investment in a country the truth is businessmen look to their fellow businessmen on advice on whether to invest or not in a certain locality.

While governments like to push the high returns of investment one can make in a country, the businessman is more interested in the risk to the loss of his capital. Is the politics stable? Is the legal environment predictable? Can I get financing in country? Or if I source it outside the country how easy is it to repatriate, not only to pay shareholders but my financiers as well?

Given the size of Musk it may take a billion-dollar opportunity to just whet his appetite, the problem is there is only one enterprise of that size in this economy, so he does not have much of a reference point.

And often times while such investors can go it alone they will be comforted if some local businessman can have a sizeable stake in the enterprise, to spread his risk.  Businsessmen understand the power of numbers. There needs to be enough company in a country for the inevitable run ins with the government. If you are alone however big you are, you can be isolated and frustrated.

 

2.       Why Should he care

Related to the first point it is local entrepreneurs that are willing to forgo massive returns elsewhere to invest at home. They have an emotional attachment. So a local investor will brave inadequate transport networks, intermittent power and corruption to invest at home. Musk has no emotional attachment to Uganda so that is that.  He has just broken up with his latest girlfriend, so who knows?

 

3.       We seem to have serious governance issues

In recent weeks the headlines have been captured by the questionable deal done by one Vinci Coffee Company Ltd (VCCL) and the effect it’s going to have on the coffee industry. The government has signed off on the deal but the noise being made around the deal might mean its dead on arrival.

Opposition to investment plans by local communities is not unique to Uganda, but if even the government is split on a deal (collective responsibility be damned) potential billionaire investors will wonder what will happen when they get the concessions they need to make the investment viable get shot down by the chattering masses.

People like Musk don’t accumulate the billions they have by being casual about the odd dollar or so, they get to where they are by watching every penny.

4.       Where is Uganda?

I left this for last although in Musk’s calculations it will be at the top of the list. For a man with a net worth ten times the size of the Uganda economy. As pointed out above, for an investment to make sense for him it will most definitely have to be a billion dollars and even then it would be a stretch.

A billion-dollar investment even with an unrealistically generous 50 percent return on investment would amount to less than 0.2 percent return on his total portfoilio. Uganda would have to bend over backward – maybe give him all of Lake Victoria for him to even go beyond the cover page of such a proposal.

But maybe all may not be lost. Its possible that Musk is invested in some venture capital or hedge funds so that is how we might get a bit of his money to our shores.

But who cares anyway whether Elon Musk invest in Uganda or not? The point is the same criteria he will be looking to tick off are the criteria investor local or foreign would be looking at. How do we stack up? Not very well given the cowboys we are attracting to our shores.

 

ACRES OF DIAMONDS IN THE EAC

The story is told of the man who frustrated with eking a living on his farm, sold it and took off into the world to find his fortune.

After trying this and that with little success and his finances dwindling to a drip, he decided to go back, with the hope that his own may treat him better. When he got back he was shocked to find where his farm once was a thriving diamond mining enterprise.

The moral of the story is that we often miss the opportunity staring us in the face for speculative fortune further afield.

Last week the Private Sector Foundation of Uganda hosted a dialogue on “The status of East Africa community process on investments and job creation”

The event, co-sponsored by the Mastercard Foundation, came with equal part jaw dropping surprise and headshaking despair.

"New entrant Democratic Republic of Congo (DRC) comes with a bounty of gifts, which include the fact that a third of all the world’s copper and cobalt reserves are underground there. We more or less knew that. But when we heard that assuming Uganda exploits its oil optimally we could have an economy by 2050 equal to the current size of the South African economy -- $500b, you had to seat up and pay attention....

The reincarnated East African Community (EAC) has been in existence for the last two decades, while the free movement of goods and services came with the common market protocol in 2010. In this time we have seen trade within the region grow to about 20 percent from a six percent at the turn of the century.

As an example it is reported that at least 80 million youth are unemployed in the region. Unemployed as used in this context means a person who has done paid work in the last week. So the reality is definitely much worse. The Economic Policy Research Center (EPRC) estimates we need to create 120 million jobs to plug the hole.

With a new regional population of about 300m and a combined GDP of just under $300b and the freeing up of the movement of goods and people, job creation should come easier to the region.

The free movement of goods and people will boost industry and services with a corresponding increase in jobs.

However, we learnt that Non-tariff barriers are holding back our full potential. While goods move around largely tax free in the region, powerful interest groups have conspired with their respective states to throw up other barriers to trade, to protect their own interests be they their own inefficient industries or importation deals from outside the community.

So suddenly your maize or eggs don’t meet their health standards, never mind the market for our eggs have been growing in the last few years. Or your milk, it is suspected to cheap to be locally produced, you must have sailed it in all the way from Australia and smuggled it in via the DRC or how is it that now a truck can only make two round trips a month to the coast now when in 1977 it could do two round trips in a week on roads that were in worse shape than they are now.

It would be easy to dismiss these as teething pains of the young community, but we need to nip them in the bud before they become entrenched in our way of doing things.

Besides that, some people have made the argument that quality of the population is lacking, be it in terms of purchasing power or capacity to actualize our potential. But its probably a chicken and egg situation, do you open up to trade and raise incomes and therefore the quality of your people or do you wait to improve the people’s quality and then the trade and increased economic activity follows? I think it is the former rather than the latter.

That being said the respective government really need to be more proactive in improving the quality of the people by rejigging the education system, improving health care and other services.

Making entrepreurship part of the curriculum on day one and business support services to existing businesses, may make the difference between Ugandans benefitting maximally from the new opportunities or we may be in danger of providing only office messengers to the region.

On an intellectual level we know our acres of diamonds are under our feet, but the will to do what is necessary to unearth those diamonds seems is slow in materializing.

 

MAKING UGANDA WORK

To collect your passport you are directed to the former Face Technologies offices in Kyambogo. A compound seating on more than an acre.

“Oh My God!” I gasped at the queue that started at the gate down to the bottom of the compound, along the perimeter wall and back up again to the entrance of the collection office across the compound on my right. There were easily a thousand people lined up and I had just arrived for my noon appointment.

My first thought was that, standing in that line was not an efficient use of my time, where efficiency is work done per unit time. My second thought was since I was here I better grit my teeth and get on with it.

Ordinarily I don’t mind waiting, I normally have a book on hand and the more I wait the better.

But I couldn’t read because I was thinking about the state of affairs that got us here.

A week prior, at the Jinja road offices of Directorate of Citizenship and Immigration Control (DCIC) I wondered aloud to the officer interviewing whether there wasn’t a more efficient way of doing this, than have hundreds of people seat around for hours.

"She explained with suppressed annoyance, that the process would be smoother if people honoured the time of their appointments, but pointed out too that 90 percent of the people waiting did not even have an appointment for the day and were occupying space of the genuine appointment holders...

The process is you fill an online form—and exponential improvement from before. That process is complete when you pay for the passport – new or renewed and are given an appointment time and date. Days after you get a message, giving you another appointment to collect your passport from Kyambogo.

In a room of a thousand people in Kampala, I would ordinarily know one or two, a function of age and profession. I stood in line for three hours and I can honestly say I never saw anyone I knew.

Easily 99 percent of my fellow collectors were young people, mostly women. When I asked, they told me most, if not all, were looking to add to our labour export numbers. I believe governments should not restrict the movements of its people, but that being said, I think it is an indictment on the government and on Uganda as a whole that we cannot keep these young people gainfully employed at home. Especially since they are going to do menial work abroad they would not be caught doing here.

Industry as a driver of growth is so 20^th century – the breweries for instance, employ fewer people per bottle of beer produced than they did in the 1990s, but factories would be a good start. I have always argued that the most natural place to start for us is with agroprocessing. We are currently ramping up production which is useful, because believe it or not, except for coffee, milk and a handful of other crops, we do not produce enough to sustain a viable agroindustry sector.

"You also want your youth to remain in the country because they are the drivers of innovation. Older people, like me – I really felt old waiting in line, are set in our ways, it’s the youth who think things can be done better, dream the impossible, unhampered by experience and obsolete knowledge and who, if given a chance, make it happen.

We need to stop seeing them as individual units of unskilled labour and more for their potential as a generation that will make the difference in the future about whether this experiment called Uganda, will prosper or not.

After three hours on my feet, I got my passport. I should have jubilated and celebrated but I quietly slunk out of the area, a nagging feeling that someone might call me back and take it away from me. There would be a fight.

The officials at the DCIC were courteous and helpful, a far cry from an official – in another country, almost 40 years ago, who after a sip of his Fanta (DCIC officials do not eat at their stations) told me to go and wait at the border for the renewal of my student’s permit – a story for another day.

But you have to think, for a ministry that is top heavy with military Generals, things can be better.

A few years ago while in a check-in line at an airport somewhere in Europe, a Caucasian man wheezed past us, pausing only to swipe his phone and breeze through the gates to the departure lounge. When I asked, I was told he had an app with all his details, that allowed him to swipe over a sensor and complete his process in a blink of an eye, leaving the rest of us backward travelers in the analogue line.

I am sure such technologies are available widely now. But if that is too much to ask, my analogue solution would be to have the passport office work 24/7. It would call for more manpower and jump in allowances for staff, more inefficient than newer technologies, but there must be a way to ensure a Ugandan’s right to a passport is not a nightmare to acquire.

LESSONS FROM THE KENYA FUEL CRISIS

Kenya has been suffering a fuel crisis in recent days and Ugandan night dancers have been rubbing their palms in anticipation for when it will hit our shores.

They have been sorely disappointed.

The Kenyan fuel crisis is not one of low supplies but one created by a delay or refusal of Nairobi to pay an agreed upon subsidy to the fuel companies for supplies provided in the past.

The way it worked is that government in an attempt to cushion its citizens from fuel price increases, that have arisen from increased demand in recent months following the lifting of Covid-19 restrictions around the world and the Russia-Ukraine war, agreed with the fuel companies to cap pump prices at a certain level and pay the companies any extra costs they incur.

Last month global fuel prices hit a 14 year high at $139 a barrel.

Government fell back on payments to the fuel companies and they turned off the taps. Fuel prices had jumped to about sh6000 a liter of petrol from the capped value of sh3,500 a liter. The fuel companies claim government owes them about sh600b but the Kenya government says its about sh400b.

There were reports that the fuel companies were sending some of the excess fuel on to Uganda, where they get paid in full at the pump, hence no supply shortages on our side of the border.

Kenyans may get some relief soon as President Uhuru Kenyatta signed off a Kshs35b supplementary budget to continue the subsidy on fuel.

The problem with subsidies of this kind they are often driven by bad politics rather than good economics.

Kenya is in election season, with the elections coming up in August, the ruling party cannot afford to have people grumbling ahead of what is expected to be a tightly contested poll. So they bow to populism and ignore the economics.

There is an old saying that the market can remain irrational longer than you can remain liquid. So the Kenya government is hoping the price increases on the global market are not rational and will revert to previous levels. They think they have enough money to subsidise the pump price until this happens. I think they do not have the money and will be forced to remove the subsidy, after a few more fuel crisis in coming months.

The more cynical take is they will hang on to the subsidy at the cost of providing public goods and services and remove it once the election is done and dusted in August. If they are still in government they will grit their teeth and weather the protests but if they are out the new government can sweat with the mess they have created.

Subsidies, especially of consumption are never a good idea.

They keep the people happy for a while but the market will not be fooled for long.

As is already happening a parallel – black market, in fuel has emerged in Kenya and prices are almost double the targeted pump price. That’s an indicator of what will happen when the government gives up on the subsidy.

Across the border in Uganda where there is no subsidy the fuel prices have increased steadily allowing us to adjust our behavior, without suffering unnecessary shock. We have huffed and puffed about government’s insensitivity to our lives, that they should do something like the Kenyans are doing for their people, that was a few weeks ago.

Suddenly we are quiet as the Kenyans are lining up for hours to get fuel at their stations.

There was a funny story about boda bodas escorting a fuel truck. They thought the fuel tank was going to deliver fuel to a station, so they would be first in line.  To their shock even the fuel tank was looking for fuel.

What is popular is not always right and what is right is not always popular.

That being said the warranted subsidy government should be paying in Uganda is the cost of ensuring our fuel reserves are maintained and managed well in the event of fuel shortages -- hopefully not cause by bad economics, sometime in the future.

A few days ago US President Joe Biden announced the release of a million barrels a day for the next six months form the country’s strategic reserves to ease the pain of high prices there. It is expected the release will slow the rise in fuel prices – US daily demand stands at up to 20 million barrels.

The US oil reserves stand at just over 700 million barrels, which have been accumulated since the 1970s oil crisis.

I couldn’t determine the cost of storing them but assuming it was even $0.1 a barrel per day that would still come to about $25 billion a year that the tax payer has to foot, money that may be “better” spent on improving their health and education services.

Our consumption of about 20,000 barrels daily means our reserves would be much less, but we should have them. Like an insurance policy, they will be frowned upon in good times but will come in handy in tricky situations.

STANBIC BANK RETURNING TO ITS UCB ROOTS

Podcast here

Last week Stanbic released its annual results announcing record profits, though shareholders were left grumbling because for the second year in a row their dividends have been put on ice.

Now a holding a company, with the bank being one of its subsidiaries, Stanbic reported revenues just shy of a trillion shillings at sh903b, which led to an annual profit of sh269b which represented an 11 percent jump in profit from the previous year’s sh831b.

We take the turnaround of the Stanbic, formerly Uganda Commercial Bank (UCB), for granted but it is hard to ignore its impact and its centrality to the industry and the economy.

The group has a loan book of sh4.8trillion of which sh3.72trillion is lending to tits customers and the rest being to other banks.

What continues to amaze me is how much they pay in tax. Last year they paid sh82b up from sh77b the previous year.

Why this is impressive is that their tax bill amounts to about $23m. in 2002 when Stanbic bought UCB it got it for the princely sum of $20m, so essentially every year from here on end, assuming Stanbic continues in its profitable ways, it will be paying us at least a new UCB every year. (Maybe we should ringfence this money and start another UCB, if we so badly need it?)...

And dare I say this is nothing compared to the ripple effect they are having through lending to the private sector.

But they may have become too big for their own good and their management is being forced to go into areas that are outside its corporate banking comfort zone.

First off there are some interesting trends, which make the sale of UCB those many years interesting in hindsight.

One of the issues that made it difficult to sell UCB was its extensive upcountry network – 190 branches at one point. Most of them were unviable used mostly to pay public servants up country and collect some taxes. Government’s condition that any buyer should commit to keeping them open was the poison pill in the deal.

It was such a deterrent that UCB was only attractive to conmen like Westmont Bhd, which it was recently discovered was just a shell company belonging to the now defunct Greenland Bank.

Stanbic took over a leaner UCB, which had 85 branches, many of which are becoming more unviable by the day.

An interesting statistic popped out at me, that since 2016 customers coming to the banking hall has dropped to 9.1 percent last year from 42.5 percent six years ago. Meanwhile customers transacting through digital channels now stand at 34.8 percent from five percent in 2016. This reality suggests Stanbic should be shedding even more branches as their customers will increasingly not need to come to line up in the banking hall.

But to return to the claim that Stanbic is easing its way back to its UCB roots. The bank is providing financial services to an increasing number of farmers by using Agricultural based SACCOS. Over 150 such SACCOS are working with the bank accessing credit for as low as 10 percent, the ripple effect from this they estimate affects more than three million people between the ages of 14 and 64. In addition they are helping farmers in Hoima prepare products that are of the quality that the oil & gas industry can consume.

More has to be done in the agricultural sector up and down the value chain beyond production and the bank seems to be touching off the right pressure points.

They are also helping traders with the traditional products – credit, invoice discounting and working capital but in addition they are helping them meet their tax obligations. The formalization of their clients will go a long way to improving their viability and sustainability.

There was one sore point as mentioned earlier. The central bank has prevailed on the bank not to pay out a dividend for the second year I a row – sh100b in 2020 and sh50b in 2021. The Bank of Uganda argues that the full effects of the covid-19 pandemic on the industry are not fully appreciated and by asking banks not to pay out dividends and other discretionary payments is them erring on the side of caution...

They however say that the suspension is being handled on a case by case basis, if a bank can make the case that they can afford a dividend payout while remaining solvent enough to ride over any covid hangovers they are welcome to make their case. Bank of Uganda would rather maintain a wait and see approach nevertheless.

The lesson for me is that beside our jealousy of the huge monies such companies make – and in the case of Stanbic bank, we failed to make them when it was ours, we should get out of the way of such entities and let them do their thing. After all its in their best interests to serve more and more people, because in that way they can make more and more money.

On the day they were releasing their results – March 30^th, Standard Bank the parent company made 160 years, the smart thing to do is to take advantage of that rich institutional memory, spare ourselves the pain of reinventing the wheel.