NORBERT MAO: AND THEN THERE WAS ONE

A deal between the ruling National Resistance Movement (NRM) and the Democratic Party (DP) received a mooted reaction from public. There was some initial surprise, even shock at the development, but that soon passed and we went back to our business.

Anyone who has followed the progression of the NRM over the last three decades was not surprised.

When the NRA took over Kampala in 1986, it showed itself to be a superior military force to the national army. But the NRM was politically weak.  President Yoweri Museveni while using the NRA to come to power recognized that to sustain his project he needed national political buy-in.

"Suspending the party activity of the traditional parties and coopting some of its leading lights, at once froze political parties in place, while strengthening the NRM politically. Ten years down the line and the first presidential election – where Museveni beat DP’s president Paul Ssemogerere in 1996, proved the success of this route....

The return to multi-party democracy in time for the 2006 presidential polls, came from external rather than internal pressure, a concession Museveni had to make to cause the lifting of presidential term limits. In case we had forgotten, the 1995 constitution had restricted the presidency to two five-year terms. It was thought by opening up parties would now gain traction and offer a more competitive political playing field.

But the party inactivity had taken its toll. The old leaders wanted to hang on, yet a younger cadre who thought their time had come, were banging incessantly at the door, demanding a place at the table. the infighting meant parties could not muster any credible challenge against a more organized and better resourced NRM. It did not help that opposition parties were seduced to adopt a big man model and forgot or ignored to build party structures and invest in the coherence of their organisations.

New parties fell away as soon as they sprouted, while the older parties were really just keeping up appearances, failing to make an impression in presidential elections or in terms of parliamentary seats.

The writing was really on the wall as far back as 2011, the last time DP and the Uganda People’s Congress (UPC) together fielded a presidential candidate. In that year Norbert Mao and Olara Otunnu were the flag bearers for DP and UPC. Between them they failed to win five percent of the presidential vote.

Mao run in 2021, but his campaign (0.56 percent) was overshadowed by the new energy of the National Unity Party (NUP), which crashed the party relegating even FDC to a distant third. NUP’s Robert Kyagulanyi won 35.08 of the votes to FDC Patrick Amuriat’s 3.26 percent.

We are wiser in hindsight of course.

"We have known all this intuitively, which explains the mooted response to the DP capitulation. The only cognitive discordance was caused by Mao in his speech at the event, repeatedly lauding Museveni’s courage in signing the agreement with DP. Less charitable people would have questioned Mao’s courage, bordering on shamelessness, in selling the party down the river....

More forgiving people will understand that DP is succumbing to the inevitable. DP’s glory days were in 1961, when it won the general election under Benedicto Kiwanuka. Ninety five percent of Ugandans were not born by then.

We want a credible opposition. Any country does. A good opposition keeps government in check. Governments that are left to their own devices tend to veer towards impunity and corruption. But opposition parties all over the world, even in the older democracies know that their place is not guaranteed, they have to fight to claim it. Any laws on the books that protect the opposition in more developed democracies were won through patience, perseverance, sweat and blood.

The ruling houses of Europe, whose kings had absolute power over the land and people, conceded these powers reluctantly. Those who did not read the signs, had their heads loped off and their bloodlines obliterated.

Given the obvious advantages of the ruling parties, the opposition parties have to invest in building structures to counter them. Any party that is not investing in that, will only last as long as the novelty factor of its new leader.

It’s a class the opposition will continue to take until they learn the lesson.

OF MBIRE AND WHY THE REST ARE POOR

Last week it was reported that Kampala businessman Charles Mbire bought about 23 million shares in Bank of Baroda.

 It was a timely buy because every one who has shares in the bank by 21 July will be eligible to a sh10 dividend per share. Do the math.

But for people like Mbire, who has been a major beneficiary of the growth of telecom company MTN, where he has a four percent stake, dividends are really the icing on the cake. While they will expect an annual dividend, beyond that they are looking at whether the underlying business can keep growing in value year on year. Wealth is what you keep not what you earn.

"For the majority of us mere mortals we get excited by the money we have in our hands, the truly wealthy get more excited by the growth in what they own. It’s a different reality that comes from a different mindset...

Every year the do-gooders tear their hair out at how wealth disparities are widening around the world.

In January international aid agency, Oxfam reported that the wealth of the top ten richest people has doubled since the beginning of Covid while 99 percent of humanity is worse off from the pandemic.

On the surface of it the difference between the top one percent and the rest is that the top dogs are the owners of capital while the rest are content to sell their labour. Capital is scalable, while labour is not – you can only work so many hours in a day, while money is not restricted by distance, space or time.

But on a deeper level it’s the mindset of the two groups that is the real difference.

Back to Mbire. On June 24 about three weeks ago he received his dividend check from MTN, along with more than 20,000 other shareholders. Given his four percent holding in the company, he would have come into about sh4b. While the rest of us mere mortals went off and partied away our money, Mbire took half of his takings and made a bet on Bank of Baroda.

I can hear you now, “But at least him he had a lot to invest, for me with my sh100,000 what did you want me to do? It’s too lito (little) to invest.”

My favourite American is Warren Buffett, the richest investor in the world. The story is told how he walked into the lift on his way to work one day and saw a coin on the floor, which had been ignored by all the other well-heeled occupants of the lift, he bent down picked it up, “This is the beginning of the next billion dollars,” he said as he held it up to the light.

It’s that attitude, more than luck or intelligence, that has informed the 92-year-old billionaire’s spectacular investment success since he bought his first share as an 11-year-old.

The truth is, our actions around small monies will be the same around big monies. Because our actions around small monies are not wealth creating, we will never reach a place where we are pulling down sh4b in dividends, leave alone investing half of it to buy other company shares and adding another few hundreds of millions of shillings to our bank accounts. There are no miracles.

Also, what Mbire sees that we do not see, is that he is buying a piece of a business. He does not need his name to be on the entrance of Bank of Baroda, he is in it for it s productive power and if no one knows he owns a piece of the company he is ok...

The wealthiest people in the world do not go it alone. My man Buffett owns 16 percent of the company Berkshire Hathaway, which accounts for most of his wealth. Last week the company was valued at $606b or about 20 times the size of the Uganda economy.

For the rest of us we are driven by ego rather than profit, we would rather point to that building or that company or that farm and say it belongs to us. We would rather own all of a small thing than a piece of a larger thing.

And finally, and related to all of the above, delayed gratification is not just a catch phrase but essential to wealth creation.

Mbire could have found a way to eat the sh2b but instead he has decided to postpone eating it or more precisely, is stretching his eating over many years into the future, essentially having his cake and eating it. For us mere mortals we just eat our cake....

While Oxfam is justified in lamenting the tax dodges exercised by the wealthy, and lower wages of workers maybe they should be focused too on bridging the gap in mindsets between the wealth and the poor. Because after all the orientation of the mindset is a learned skill not genetically passed down.

 

 

 

SRI LANKA, THE CASE FOR POPULAR THINGS NOT BEING RIGHT

In the last week we watched with jaws to the floor as the Sri Lankans overrun the presidential palace in Colombo and sent their president fleeing from the country.

This is the climax of months of protests at the poor handling of the economy and the general corruption of that government.

Looking back the government of Gotabaya Rajapaksa in anattempt to win some cheap popularity points, following elections in 2019 scrapped or reduced a raft of taxes including PAYE and VAT. In addition, he got the hairbrained idea to turn the country in to an overnight producer of organic crops and banning inorganic ferterlisers to push this agenda.

 

"In the 1980s some dismissed US President Ronald Reagan’s economic policies, leaning heavily towards liberalization of the economy, as voodoo economics. But Reagan would not hold a candle to Rajapaksa...

By cutting taxes government revenues were severely affected and government capacity to deliver services – security, health and education, hampered. Also, their ability to service their obligations, not only to foreign lenders but to the local private sector as well. By banning the use of ferterliser they affected food production and just as important the exports of tea their major foreign exchange earner. With exports receipts in the toilet, they failed to pay for their fuel imports.

As a result, the Sri Lankan economy has imploded triggering the worst crisis in the country, which won independence in 1948.

As we watched the masses taking “power” it occurred to me that many of the people who celebrated the cuts in taxes are the very ones trying to run the president and his cronies out of town. The irony.

These events cement the truth behind the saying “What is popular is not always right, what is right is not always popular.”

It offers a good lesson for countries all around the world facing unprecedented economic stress. Following the near universal lockdowns due to Covid of the last two years, countries around the world are trying to fire up their economies, which had slowed to near zero, a situation not helped by rising prices globally.

Its understandable that in the face of such pain people will come up with suggestions like government should reduce prices or that government should forgo taxes to keep prices down or that businessmen should be arrested for increasing prices.

"It is basic economics that when you try to subvert the laws of supply and demand, it never ends well. At best you can only provide temporary relief but even that relief will be washed away by the pain when the laws of supply and demand eventually prevail...

What is true is that if an economy has been run prudently and the gains from growth are equitably distributed to economies will be more resilient in such cases and even have intervention options that lessen the pain even for a little while.

While it serves little purpose to cry over spilled milk, such crisis expose gaps in our processes.

As a country we need to be more determined in collecting more taxes. And not through loading more and more taxes on existing tax payers but by roping in more economic players into the tax net. ON the flip side we need to take a microscope to our public expenditures, flush the excesses and keep only those expenses that work towards development.

As in everyday life so is with countries and governments. If you costs are under control, in hard times you will be much better able to survive and even thrive than your neighbour, who is borrowing money he doesn’t have, to buy things he doesn’t need, to impress people who don’t care.

The truth is that the economy is cyclical, as day follows night, when the economy is booming, as impossible as it seems during the good times, you know that bad times will follow. When you embrace that reality you will operate differently. You will spend prudently and save aggressively when times are good in anticipation of the inevitable bad times. You will then find that the bad times are not as bad for you as your neighbour is suffering and in the good times you will thrive spectacularly.

BANKING SECTOR IN 2021 AND ITS ROLE IN SUPPORTING ECONOMIC RECOVERY POST-COVID

By the end of  April 2022, all the banks completed their statutory reporting on the state of their finances in 2021 pointing to a recovery, a hesitant one but promising nevertheless.

According to analysis by the Uganda Bankers’ Association (UBA) consolidated industry results 2021, profitability (total comprehensive income) among the tier one banks grew strongly by 33 percent due to an overall growth in revenues of, 14 percent, coupled with a three percent reduction in costs.

"Concerns about bad debts ballooning out of control  at the expiry of  the all credit relief measures and other concessions afforded to borrowers, remain a concern and the industry view is cautiously optimistic mainly to support economic recovery in a post pandemic environment....

The industry saw a six percent rise in deposits, an indication that despite the Covid-related challenges of the last two years, the general public remains confident in the sector. While marketable and trading securities held by the banks grew by a tenth compared to 2020, private sector lending almost matched this, growing 8 percent although this was a drop from the previous year’s 12 percent growth, 

On an aggregate industry basis, shareholders  saw their return on equity drop  to six percent compared to nine percent in 2020 and from double digits previously. The above not withstanding some of the individual banks posted much higher ROE.

Understandably, bankers did not burst out of the gates to support businesses, who themselves were just finding their feet, after the partial lifting of the lock down last year. The loan to deposit ratio slid to 60 percent in 2021 from 63 percent in 2020.. Signs are however that in 2022 with the total lifting of the lock down in January, the industry is expected to be more aggressive in providing the much needed credit , lifeline to businesses.

The banking industry’s centrality in the economy through its dual role as a mobiliser/custodian of resources through deposits and allocation of capital through credit as well as facilitation of payments, means it must not only up its support to businesses, but equally support government and its domestic revenue mobilization, growth & development plans.

A 2019 study by audit firm PriceWaterhouseCoopers (PwC), commissioned by UBA showed that the banking industry contributed  24 percent ( sh3.9 trillion)  of the sh16.2trillion in tax revenues (withholding tax on government securities, exercise duty, VAT, employee taxes, corporation tax etc) collected that financial year composed of sh3,886 billion arising from financial sector transactions processed and sh639 billion of direct taxes borne by the banks themselves.  

Banks are equally pulling their weight in job creation. The study found that the industry employs about 17,000 people, spending sh690b in wages and salaries. The introduction of Agency banking, accounted for another 6,594 employees in 2019 with commissions paid out to agents amounting to over  sh2.6b

The industry paid  out sh860b for domestic goods and services supporting the sector, these being SMEs who provide various services to the industry.   

"The report further indicates that banking sector invested in communities up to a total of Sh8.258 bn spent on various community initiatives in the areas of education, health and financial literacy especially within the youth and women groups....

The report also covers the industry’s efforts & initiatives in technology & innovation, tackling financial crime, financial literacy & sectors where private sector credit is being channeled.

Finally, the report touches on determinants on interest rates as well what support can be provided by Government to ensure the cost of borrowing drops. These included risk sharing mechanisms including loan guarantees, more favourable tax policies, alignment & coordination of monetary & fiscal policies, especially around domestic borrowing and public expenditure by government, and reform of government and legal operational structures to reduce transaction costs among others.

As the country positions for growth & development in line with NDP III, the banking sector will be expected to bring out its full potential in supporting national socio-economic transformation. This direction is evidenced by the proposals put forward by the Central Bank in 2021 of raising the minimum paid up capital required of supervised institutions to enable banks build a solid capital base and expand credit to support priority sectors like manufacturing, tourism, services as well as oil & gas among others.

Financial institutions are further expected to mobilise funding via syndications which can be a good source of additional capital inflows particularly for large projects. By end of 2019, bank syndicated transactions stood at sh5.7 trillion.

THE LANDLORD & TENANT ACT: DODGING A BULLET? ONLY JUST!

In April President Yoweri Museveni assented to the Landlord & Tenant Act.

The law when it was introduced in 2016 among other things tried to limit rent increments and to restrict landlords to charging rent in shillings, a position this column opposed vehemently.

"No long term good comes from trying to control prices by administrative fiat. It is a tempting option for populists and demagogues but inevitably ends in tears....

This column argued at the time that the decision not to control rent in the 1980s was not only brave at the time, but farsighted and is responsible for the boom in real estate construction over the last three decades.

The housing situation was so bad in the 1980s that for lack of accommodation, whole middle-class families were shacking up in garages, but consoled themselves that at least they were doing so in the “upmarket” parts of Kampala.

By avoiding rent controls investors spread out of the city, introducing us to places like Naalya and beyond, Zaana and beyond and Munyonyo. We argue about the chaos of this urban sprawl, but that’s a discussion for another day. By allowing rent to be determined by the market, investors have found it worthwhile to build estates and apartment blocks, relegating middle class housing shortages to history.

Had government bowed to the populist rhetoric to place rent controls by people, some of whom are now landlords and probably charging in dollars, this real estate boom would not have happened and in fact we would be paying higher rents for the few hovels around.

Thankfully sense prevailed and the MPs adjusted the clauses that insisted on rent controls – putting a cap on annual rent increments and landlords charging dollars to the mutual agreement of landlord and tenant. In my mind they should just have eliminated the clauses all together rather than bite their tongues.

That being said government needs to come up with a strategy, or if its there, execute it, which recognizes the growing housing needs of the low-income earners.

A strategy, which takes into account the lack of affordable credit in shillings, incentives for developers among other things, is important. As it is there is a lot of uncoordinated troop movements as to suggest that there is no strategy for this critical sector to the economy.

For instance, in the recent budget finance minister Mathia Kasaija announced a threshold of sh2.8m in annual rent below which owners will not be liable to tax. That’s monthly rent of just under sh250,000. Landlords who collect more will be charged 12 percent on their revenues. Previously landlords were allowed their expenses including mortgage interest, so this will be a disincentive to real estate owners trying to rent out properties in their own names.

But even if you were a real estate company things were not better. The minister allowed only 50 percent of expenses as tax deductible and maintained a 30 percent tax on the net income.

With this move he discouraged people from taking out mortgages to develop real estate as individuals but must have real estate companies wondering whether its worth the pain. The people who will be left to develop the real estate sector are the few individuals who can develop property using cash alone, and we know who those are!

As mentioned earlier real estate development is a critical aspect of the economy. In our case it is so because most of the inputs are locally available – from the bricks to the wood to the cement and even the iron bars. So, encouraging the real estate sector is a way to create and maintain jobs along the whole value chain. The government should be encouraging developers help it provide housing, which they have failed to do, rather than discouraging them.

While the ideal would be for massive real estate developers, the reality is that the vast majority of our housing is being provided by private individuals so it makes little sense to discourage them when you are not providing incentives for the massive developers to come in.

But that this has become law also throws up another disturbing indicator. It suggests that those making these decisions – in government and our MPs, are either not landlords or that if they are, build their rental properties with cash.

 

WALKING THE TALK ON DRIVING EXPORTS

A few weeks ago our officials and businessmen trooped to the Democratic Republic of Congo(DRC) to announce Uganda to the newest member of the East African Community (EAC), in a series of meeting held in Goma, eastern DRC and in the capital, Kinshasa.

We would be amiss if we did not look covetously at our only western neighbour’s vast bounty of natural resources, 90 million population and $60b economy and want to position for the opportunity.

"The way we have seen opportunities go begging in Southern Sudan and even Somalia, where we have contributed in their stabilization with blood, sweat and tears, can very well be replicated in DRC. It is not automatic that because we are their neighbours and that we have historical trade links we will be the biggest beneficiaries of the entry of DRC into the EAC.

Previously government has been content to let our businessmen sink or swim in foreign lands. If there are businessmen who have made an impression abroad it has been largely due to their won effort. Hopefully with last week’s meeting in DRC government is beginning to understand what its role has to be in supporting its businessmen to make inroads in foreign markets.

This is an important discussion. With a population of under 50 million, we do not have a big enough market to support a credible industrial base that can employ our people and raise living standards all around. We need to reach beyond our markets to support our planned industries.

The EAC is a good start. But government needs to be more deliberate in helping our businessmen penetrate even our neighbour’s markets. To feed those markets our businessmen will have to expand their production capacities, which will create more jobs not only in the factories but along the whole value chain.

We need not reinvent the wheel. The South East Asians did it in the second half of the last century and are now the world’s biggest exporters, all this on a natural endowment base that does not hold a candle to our own natural endowments.

It did not happen by mistake. At the time their planners determined that they must export to survive they were plagued with the same issues are we are now poor, unskilled, fast growing populations that were a ticking political time bomb if not put to good use.

They too started by aggregating their markets, using that as a launch pad for their products into the world.

"But the more successful countries went a step further. In negotiating market access, providing transport and communication infrastructure, concessional funding to business targeting foreign market among other things....

Bringing those learning here, how would we help our businessmen penetrate the DRC market?

As part of a national strategy to promote exports first to our neighbours and then beyond, we need to look at our current capacities and target markets where our products – food, cooking oil, cement, soft drinks, beer and plastics, can find virgin markets, in our case South Sudan and Eastern DRC and facilitate trade at a policy level, which policies will inform the nature of interventions to make in the targeted markets.

 

"Government’s plan to partner with DRC in building more than 200km of road network in the east of giant central African neighbour is a good start. But it is only a start...

Eastern Congo alone is more than twice the size of Uganda. In Uganda we have about 6000 km of paved road and we are not doing well. That’s just to show how 223 km in eastern DRC is a molecule in the ocean.

They have an extensive network of airfields however, so the two governments may consider how to upgrade these for interregional travel.

What businessmen have said is key too is some sort of export guarantee scheme. The way it works is based on the reality that to promote international trade, credit has to be allowed, an export guarantee scheme would allow our exporters some relief incase their deal goes south.

The trouble our traders have suffered in South Sudan should be a lesson. This is important because once credit is allowed a lot more business can be done and our businessmen can quickly expand their market share.

In addition, we need to facilitate the collaboration with financial institutions. Carrying wads of cash around only puts our businessmen at risk and increases the chances of fraud. What is taken for granted now in travelling to better countries is that you can deposit your money in Kampala and still go and transact in Europe or Asia. We should move quickly to make this possible in eastern Congo.  Maybe we can facilitate the mobile companies to do this for starters.

Many years ago I remember enjoying a Nile Special beer in Bunia, Eastern Congo. It was a sight for sore eyes. The only problem was there wasn’t much to go around before the bar run out and the entire had run out. New supply was not expecting more stock for a week.

There probably hundreds of opportunities going begging like that today.

BUDGET POINTS TO BIG TEST FOR GOVERNMENT

On Tuesday finance minister Matia Kasaija read his 2022/23, sh48trillion budget.

There were some highlights, like that the economy grew at 4.5 percent, faster than the previous year's 3.5 percent and is expected to grow at 6.5 percent in coming years. The dark clouds came in the way of the jump in inflation to 6.3 percent.

The Parish Development Model (PDM) has breathed some new life in our budgeting process -- the more than 10,000 parishes around the corner will each receive sh100m to support data collection, production and financial inclusion. It will be interesting to see which parishes or districts are able to execute the model better.

"In Kenya the devolution of government, a higher level of PDM, and now about a decade old has seen the capital city, Nairobi's share of GDP fall to about 25 percent from more than 50 percent a decade ago as a result of the regions deciding and executing on their development priorities. There has been a disparity of course, in execution, with the better regions seeing tangible developments in quality of social services and infrastructure.

The PDM may very well be the answer to how we can more equitably distribute the economic growth we have been enjoying over the last three decades, but whose benefits have really been concentrated among the urban elite.

The cynics will not be blamed for not giving it a chance, because of the failure of previous initiatives and because of endemic corruption in our society. They will be wrong in the first instance and the money may very well be with them in the second instance.

Comparing the PDM with past initiatives, is like comparing passion fruits and oranges. Previous initiatives were not well thought through and were really dead on arrival. The PDM on the other hand is well thought out beyond the finances committed to the project. Unlike other initiatives that focused only on dishing out cash, the structure and mechanisms for execution have been laid out.

Execution of the project will be hampered by corruption, but the hope is that when the people at the grassroots are clear about what is due to them and what it is for, they will be better able to hold the respective officials to account and ensure things are done. Government should consider also having a competition to see which parishes or districts utilise the funds best as a way to spur results.

"But the big test in the next financial year is how government responds to the rising inflation...

In October 2011 inflation peaked at 30 percent, the highest it had been since 19 years prior, in 1992. Government brought prices under control by being unflinching in its resolve to control money supply, even if it hurt the private sector, the hangover from which we are still paying for.

The inflation this time is a different animal. Unlike 2011 when it was a result mostly of  government campaign spending, regional food shortages also played a part. This time around government spending isn't an issue -- government spent less than it was projected to spend in the last budget, but external factors like rising oil prices,  supply disruptions caused by the Covid lockdowns and the Russia-Ukraine war are the major drivers of price increases not only here but all around the world.

When your inflation is internally generated by say, government printing money, to bring inflation under control you suck excess money out of the economy. The challenge with that is that it also puts the brakes on the economy, putting the brakes on the economy is the last thing we want to do now. Coming out of the Covid lockdown the natural response is to turn on the taps and let the money flow to let the economy recover.

But the current inflation is not being driven by excess money in circulation as explained above. And so sucking up excess liquidity is not going to be very useful especially as it would slow economic recovery...

In this case government will be crossing its fingers that the food harvests are good so that food inflation does not add itself to imported inflation.

But most importantly, government has to hang on to its resolve to maintain discipline in its spending, because if government loses the plot and starts printing shillings, inflation will run out of control and we can very well see a return to double digit inflation, which will set us back another few years.

Thankfully, unlike Kenya we have come out of the campaign season. In our eastern neighbour bowing to political pressure the government has done some questionable things, including providing a fuel subsidy, they have now been forced to lift because they can not afford it, expect a crazy jump in pump prices in Kenya after July 1st.

In Turkey the government hesitation to take the painful but much needed steps to bring prices increases under control last year has seen inflation jump to 70 percent -- this means prices are doubling every 12 months!

"It bears repeating, inflation not only has an immediate impact on our cost of living but also discourages saving or investment and encourages speculation, which in turn feeds the price increases. A vicious cycle that when it gets out of hand is hard, without much pain to rein it in.

There will be a lot of snake oil salesmen, suggesting all sort of remedies to the price increases, (they have already started), but the only solution in the current circumstances is for government to be doubly vigilante on how it spends as we wait for the international storm to wash over.