THE PROMISE OF REGIONAL INTEGRATION

This week was a hectic one as far as regional diplomacy goes.

In Khartoum erstwhile enemies President Yoweri Museveni and his Sudanese counterpart Omar El Bashir brought together rival leaders of South Sudan, President Salva Kiir and Riak Machar to sign a peace deal, which it is hoped will bring the near five year blood bath in our northern neighbour to an end.

Meanwhile Ethiopia and Eritrea opened talks after almost 20 years of hostilities. The two countries went to war in 1998 over disputed land along their common border, cutting off Ethiopia from its most convenient route to the sea.

In Kenya President Uhuru Kenyatta hosted his counterparts on the Northern Corridor Integration Projects Museveni and Rwanda’s Paul Kagame. The body language of the latter two did not betray any unusual tension between the too which was a relief given the rumours that have been swirling around in recent weeks.

During the Nairobi leg Museveni said that Uganda was benefitting massively from the East African common market, reporting that the dairy and maize industries in Uganda would have long been dead had it not been for the free access they have to the region.

This last point is crucial and is one our leaders should focus on rather than any parochial of perceived slights.

The Dairy Development Authority reported this week that dairy exports more than doubled to $130m in 2017 from $60m the previous year. It would not be a stretch to assume that this jump in export receipts has something to do with regional demand.

Uganda’s ambition to be a middle income country in coming years will be greatly aided by open markets, because our market is too small. The same goes for our neighbours.

"The population of the East African Community (EAC) stands at about 170m. The urban population of the region is 34 million or just about the size of Uganda’s population...

However to unlock the potential of this market, billions of dollars in joint infrastructure investments have to be put in place. The nature of these investments and the long term obligations that come with them means that as region our leaders cannot be seen to be bickering among themselves.

For example Ethiopia has invested massively in power generation. It has more than doubled generation capacity to 4200 MW from 1800 MW, which is double their 2000MW peak demand. SA if that is not enough there is an additional 7000 MW of power generation capacity under development.

Ethiopia needs to exports its power otherwise be saddled with these white elephants. So it needs to mend fences with Eritrea, ensure South Sudan cools down and demand its power. Ethiopia has also dialed down its language in negotiations with Egypt, which is concerned about Ethiopia’s damming of the Nile. Egypt too can be a massive market for its power.

Kenya, Uganda and Rwanda need to be pragmatic about their dealings since investments in power, rail and road are critical for all three and none of them can go it alone.

Clearly our mutual dependence, for decades blurred by artificial borders, is now at the fore of driving the geopolitical agenda. Which is as it should be....

Centuries of war in Europe came to an abrupt stop after the Second World War with the creation of the European Coal & Steel Community (ECSC), the precursor to the European Union. The ECSC was a recognition that to rehabilitate Europe resources – physical and human had to be pooled for the benefit of every one.

The politicians can maintain their little fiefdoms but the economy should transcend the borders.

The people of the region have no issues. Our borders are really only on paper if one were to see how border communities interact. It is often that our leaders have their own issues that are extrapolated to the rest of us.

However increasing dependence means that our leaders will have to shelf their issues or resolve them personally to maintain their relevance in our lives. We first approaching irreversibility on regional integration and they are being forced to seat up and take notice.

THE ROOT CAUSE OF OUR POVERTY

Last week a report FinScope Uganda 2018 was released which detailed how accessible financial services are to us and it also showed why wealth seems to evade us at a persona level.

Financial inclusion is an important measure for economies.

On a personal level the more people have access and use financial services the more economic activities they can engage in which may have beneficial consequences on their standard of living and the viability of their businesses.

"On a macro level greater financial inclusion is correlated to the ability of economies to mobilise domestic resources which has consequences on lending rates and the ability to invest in long term development projects...

The recent study, the fourth in a series that dates back 2006, showed that financial inclusion in Uganda while it held steady at 78 percent from the 2013 one, showed that more people are shifting towards using formal institutions for their financial needs.

In 2013, 26 percent of Ugandans relied on informal institutions for their financial requirements a figure that dropped to 20 percent in FinScope Uganda 2018.

This trend is important. The formal institutions, in this study banks, Micro-finance institutions, savings cooperatives (SACCOS), mobile money operators and insurance, aggregate these resources and lend them out to the productive sectors of the economy. This is as opposed to the informal avenues such as keeping money at home or in savings groups, which have limited ripple effect.

The more money in the economy that finds its way into the formal financial sector the better, as my money when I am not using it can be lent to economic actors in need who would use it to support or expand businesses.

A strong trend has shown up in the last two reports and that is the use of mobile money platforms to drive financial inclusion.

Mobile money services were launched in 2009. In 2017 the report says sh54trillion exchanged hands over these platforms -- easily half the GDP of Uganda, up from sh44trillioni n 2016.

Of the formal means of access to financial services mobile money channels long overtook banks as the preferred choice of most Ugandans. This should not come as a surprise as there are an estimated 22 million mobile money subscribers as compared to five million accounts in the whole banking industry.

With the introduction of mobile money services we do not only now have means to transfer money but now one can even pay for goods and services, borrow money and even take out insurance.

"The growth of mobile money has also dispelled the myth that Ugandans cannot save with median amounts reported in the survey at sh30,000 saved on people’s phones. Our “poor” saving culture is clearly a function of access to saving mechanisms that we can trust....

But financial inclusion in and of itself will not necessarily improve people’s wellbeing.

The study revealed several things that perpetuate our hand to mouth existence,  that need to be broken for this new access to be more beneficial.

One, that less than half or 47 percent of Ugandans keep track of the money they receive and spend. Secondly that Ugandan adults are unlikely to seek financial advice and those who do about 56 percent turn to family and friends.

And related to that last one 39 percent of adults do not have a plan to acquire the assets they aspire to.

While one of the first things to do to pull people out of poverty is help them earn or raise their incomes, for people to banish poverty people they have to keep more and more of what they earn. 

The latter does not necessarily follow from the former.

The challenge is that our expenses tend to expand to consume any new income we may make.

So beyond financial inclusion, and the report points this out, there is an urgent need for financial literacy across the population.

How does one behave around their income? How does one leverage their current income to ensure financial freedom in the future or at least financial independence? What are the available investment opportunities? How do you run a sustainable business?

"Financial literacy will also help with the knowledge that all the resources we need to improve our standard of living are within easy reach of ourselves...

It’s a cliché, but the truth is it’s a mindset thing. What’s the difference between two people of equal income one of whom saves 10 percent of his income religiously and the other who doesn’t? Or worse still two people of different income with the lower earner having more assets to his name than the high income earner?

Raising incomes is desirable, increasing access to financial services as a worthy goal but to banish poverty we need to commit to universal financial literacy and narrow income disparities.

IS THE POLICE BEYOND REDEMPTION?

On Wednesday President Yoweri Museveni gave an appraisal of the state of security in the country, allaying the public’s fears and outlining what will be done to strengthen the security situation.

The president’s speech came in the wake of the arrest of former Inspector General of Police General Kale Kayihura and several police officers.  Allegations of everything from running protection rackets, murder, arson, drug trafficking, gun running and illegal repatriation of refugees are reported to be of interest to the investigators.

And this is only what we can deduce from recent press reports.

Twenty years ago Justice Julia Sebutinde was tasked with investigating the police and making recommendations for its running into the future.

"During the nearly two yearlong inquiry, not unlike what the above officers are being investigated for, the emerging stories caused sharp intakes of breath around the country. When she was done with her work the police had been revealed as an organised criminal organisation that instead of fighting crime was not only abetting it but its officers and men were actively involved in criminal activity...

The report should have prompted a clean out of the police.

So how come the same tendencies seem to have resurfaced publically nearly twenty years after Sebutinde delivered her report to the appointing authority?

Either, the criminal elements were not entirely weeded out and continued with their nefarious deeds, inducting new recruits in to their evil ways and perpetuating the criminal gang nature of the police.

Or a new criminal element overlaid or replaced the old system, its power growing to the point that it harboured grander ambitions than just shaking down traffic offenders, abetting highway robbers and protecting drug traffickers.

It is scary to think that with the near fourfold expansion of the police since the Sebutinde report, these criminal activities spread out from Kampala and went countrywide.

It is safe to say that the breakdown in police discipline – like many other things in this country, has its roots in the Idi Amin era. Based on the British constabulary the force was designed to enforce the will of the colonial government. Brute force was their default mode. With a breakdown of law and order and inadequacies of budgets the police would find it easy to prey on the very population they are sworn to protect.

The NRM initially focused on putting down insurgencies in east and northern Uganda, left the police to its own devices. With the rebellions put down it was time to turn attention to the police. But we seem to have chosen the path of least resistance, continuing with business as usual instead of general and systematic overhaul of the force. As a result the force has never been purged of its colonial hangover nor its criminal elements and the culture has co-opted everyone who has come in touch with it and like a drug made the drunk with a sense of their own importance.....

It did not help that the police is operating in a situation of endemic corruption, where everybody has a price and allegiances are in a constant state of flux.

Abraham Lincoln once said that if you want to know a man’s real character give him power. With enhanced numbers and budget the police has just become more of what it actually is.

Which brings me back to the President’s statement on Wednesday.

The speech was interesting more for what he didn’t say than what he said.

In his speech the president outlined a series of measures, 10 in number, that would improve the country’s security situation. The measures among which were improved registration of the arms in security agencies, electronic chips embedded in vehicle number plates, installation of cameras on roads and highways and the building of a modern forensic lab, are all medium to long term measures.

Apart from banning boda-boda riders from wearing hoodies, there were no short term measures to beef up security.

THE CHALLENGE OF BUDGETTING FOR A POOR COUNTRY

(This article was published in the New Vision in 2011)

Last week Spanish Prime minster Mariano Rajoy in a text to his finance minister urging him to hold out for a better deal in negotiations for a bailout of Spanish banks said. “We are the number four power in Europe. Spain is not Uganda.”

When the text was released the Uganda social media chattering classes went into overdrive, so much so that the furor became a story on the BBC.

Spain is a much richer country than Uganda based on per capita figures alone -- $31,000 for Spain and $1,250 for Uganda adjusted for living standards ion the respective nations. But their economy is in a much sorrier state. 

Their economy is contracting, they are suffering the after effects of property bubble burst and their banks are hobbled with so much bad debt that their collapse could threaten the future of the Euro zone. The bailout of the banks could cost upwards of $100b according to conservative estimates.

Finance minister Maria Kiwanuka read her second budget on Thursday and it was very hard to see the glass as half full.

"The economic growth halved to 3.2 percent from the previous year, revenue collections came in short of budget and more than 10 million people are living in abject poverty, more if you do away with the subhuman requirements – living on less than a dollar a day, abject poverty calculations entail...

Our situation compared to Spain is not unlike the situation US billionaire Donald Trump found himself in the 1990s when pointing out that the beggar on the street was much better off than he was. Whereas the beggar had nothing to his name Trump was indebted to the tune of billions of dollars. The pan handler is probably still where he is while Trump is now stronger than ever.

Faced with the challenge of making investments that will spur more and more growth – good economics, and on the other hand dribbling in the hard decisions over time versus all at once – good politics, you had the sense Kiwanuka was struggling.

With our ratio of revenues to GDP largely unchanged for the last decade and donors tightening their purse strings, while our expenditure demands continue to grow with a rising population, something has to give. And that most likely will be a tightening of our own belts in the short term or until investments like the power dams and roads push up productivity and hopefully improve our lives in the process.

Our needs are huge. In the budget the minister pushed up the works ministry’s budget almost twice in order to steer more and more of the budget towards road construction and rehabilitation. We upped the education budget almost by a fifth. These two are key to future growth of nations.

"Analysts who started watching China three decades ago reported that they were investing a lot on building ports, road, rail and other communication networks. They poured in prodigious amounts in to their education systems especially science and technology. They have been doing this consistently for more than 30 years and are not letting up now as the second largest economy in the world. The challenge with infrastructure and more so health and education is that the returns on investment my take decades to show....

Political pressures often prevent countries from making the long term sustained investment required to attain take off.

The noises from government suggest the they are prepared to take the tough political decisions to lay the foundation for takeoff. We have done it before and we can do it again.

In the 1980s the Ugandan economy was a pale shadow of its current self: Revenues were anemic, the public sectors were hemorrhaging even the little we collected and in addition stifling the private sector through monopoly corporations. In order to turn it around government privatized the companies, liberalized the markets and focused on stabilising the economy. All politically unpopular decisions at the time, but we bit the bullet and as an economy we are better from the experience.

Back to the #SpainisnotUganda protest. Spain has the advantage of having access to the bigger markets of Europe and so access to credit, expertise and all it would take to turn it around are all within reach. But Spain is going to have to take many politically unpopular decisions, expect a series of fallen governments as they try to dig themselves out of their current economic woes.

As for Uganda expect more belt tightening in coming years as we try to make the long term choices needed to move us to the next level.

NEWS ANALYSIS--UGANDANS DEALING MORE WITH FORMAL FINANCIAL INSTITUTIONS

KAMPALA – The recent release of the financial inclusion report, FinScopeUganda2018, shows that Uganda is moving steadily towards universal financial services coverage driven by the increased uptake of mobile money services.

Financial inclusion is a useful metric to track because it points to savings mobilisation and access to affordable credit, both critical to domestically driven development.

According to the report 78 percent of Ugandans have access to and use financial services, both informal and formal. While this figure was unchanged from the last report released in 2013 there has been a marked shift towards the use of formal and away from informal financial services.

In the previous report 52 percent used formal financial services versus 26 percent for informal financial services which has now changed to 58 percent and 22 percent respectively.

Even more commendable is that financial inclusion has increased from 57 percent when the survey was first done in 2006. And use of formal institutions has experienced an exponential leap from the 28 percent low figure registered in the first year the survey was done.

It is not hard to see why.

"The leap from 28 percent in formal financial inclusion in 2009 to 52 percent in 2013 coincides with the launch of mobile money services in 2009 and its dramatic uptake subsequently...

In the latest report it shows that the uptake of mobile money services across localities, gender or age groups are miles ahead of commercial banks, Savings & Credit Cooperative Schemes (SACCOS), MFIs or any other formal financial institutions.

It goes further. In the rural areas 18 percent of the population have access to mobile money agents a low figure which shows up favourably when seen against zero percent for banks, standalone ATMs and Micro-finance institutions.

A similar pattern is repeated in the urban areas where 54 percent of the population are within easy reach of mobile money agent as compared to two percent for banks, standalone ATMs. What was interesting is that in urban areas more than four times as many people at nine percent have access to their SACCOS than to the banks.

In 2016 sh44 trillion worth of transactions were registered on all mobile money platforms a figure that grew to sh54trillio, up by almost 25 percent in 2017.

The greatest impediment to this growth is the cost of a hand set.

However mobile money platforms are largely used for money transfers a trend which should change with the recent introduction of savings, credit and insurance products.

Also something to watch out for is that financial inclusion is skewed towards adult, urban males.

So the challenge for policy makers, entrepreneurs and the financial service providers is how do we lower the cost, expand the availability and tailor make products for these populations that are excluded?

It will be interesting to see too how the recent one percent tax slapped on all mobile money transactions will affect the uptake of the services. The tax comes into effect on 1^st July 2018.

Uganda still lags behind sit neighbours but not by much.

Compared to Uganda’s 78 percent of the population with access to financial services Kenya has 82 percent, Rwanda has 89 percent and Tanzania has 72 percent.

ENDS

THE BUDGET: THE DEVIL IS IN THE DETAIL

The shocking murder of MP Ibrahim Abiriga and the arrest of former Inspector General of Police General Kale Kayihura overshadowed a budget reading which in years gone by would have been a celebratory one.

Minister Matia Kasaija’s sh32.7trillion budget maintained an emphasis on infrastructure development with works and energy ministries between them hogging a fifth of the budget.

The more than decade long push on infrastructure Kasaija suggested are beginning to pay off as the economy seems to have pulled out of the doldrums, growing by 5.8 percent the highest rate since 2010/11’s 6.7 percent.

Last year the economy squeaked out a 3.9 percent improvement in output, lower than the previous year’s 4.7 percent.

Growth in industry and services helped lift the economy off the floor but also agriculture whose growth doubled from the previous year buoyed by good weather, seed distribution and improved extension services.

The devil of course is in the detail.

While agriculture grew at 3.2 percent, according to Uganda Bureau of Statistics (UBOS) figures from 2016/17 agriculture accounts for 24.9 percent of GDP. About eight percent of all agricultural output comes from cash crops. It is not clear whether UBOS is using the primary school definition of cash crops as coffee, tea and cotton. Food crops account for 54 percent of all agricultural output.

This statistic is a double edged sword.

"While it implies that our farmers are able to sustain themselves it also indicates why that may be all they can do. A greater proportion of cash crop production would suggest more rural incomes for the farmers. Without higher incomes in the rural areas through improved productivity or higher crop prices poverty will continue to bite....

You raise productivity through better farming practices and in addition higher crop prices come with easier access to market.

It is not difficult to see why our farmers do not rise up to their productive potential.

To begin with the agriculture sector budget is 0.3 percent of the total budget. The argument that the infrastructure being laid down around the country services agriculture is a valid one. But for agricultural incomes to start rising meaningfully there has to be an emphasis on improved inputs for farmers, extension services and irrigation.

The research institutions get less than 10 percent of the sector’s meagre budget while curiously the discredited NAADS secretariat gets a fifth of the sector’s budget.

Away form the much flogged agriculture budget something happened in this budget that seems to have gone unnoticed.

Last year the government committed to rein its domestic borrowing to under a trillion shillings overshot this resolution by 70 percent and expect to borrow even more from domestic markets.

On one hand it explains why lending rates continue to remain in double digits. Why should lenders invest in private sector project appraisals when they can just shovel over their surplus funds to the government for double digit returns?

On the other hand as the finance minister pointed out some donor funding did not come through and they had to raise the budgeted finances from the local market.

It is safe to say that the donor taps may never flow like they used to a decade or so ago. With improved revenues on our part and differences of opinion on the country’s development priorities this pattern of increased domestic borrowing can be expected to continue. And that is really as it should be.

"No country developed on aid but through mutually beneficial arrangements in trade and investment that were fair and enduring...

Therefore to mitigate against crowding out the private sector government should be looking to mobilise more savings into the formal sector.

There was no mention of that in the finance minister’s speech.

The new tax measures while much criticised were an attempt at expanding the tax base – the levies on mobile money and social media expected to rope in an additional sh400b, with non-tax payers being called upon to shoulder their responsibility.

The mandatory savings written into law by a previous government, was a stroke of genius which has made NSSF the biggest fund in the region. Members now save five percent of their gross and increase in this figure would do a world of good for the workers when they hit retirement and for the private sector who may see lending rates go down as a result.

In the short term we need to keep our fingers crossed for good weather so that the good times can keep rolling on. In the longer term we need to mobilise more of our own resources so as to determine our own development priorities.

THE STATE OF THE NATION ADDRESS: SAYING WHAT WE HAVE FORGOTTEN

At the beginning of the state of the nation address President Yoweri Museveni pointed out that over the last decade or so expenditure on infrastructure has been ramped up significantly following a decision by the government to take over the development budget from the donors.

He reported that the expenditure on roads had jumped to sh4.78trillion in the current budget from sh398b in 2005/06. A similar movement was seen in funding electricity, from sh176b to a peak of sh2.858trillion last financial year to now sh2.77trillion.

During the same period revenue collections have grown to sh12.7trillion from sh2.23trillion.

What is interesting about these numbers is that the rate of growth in the budgets of roads and infrastructure far outstripped the rate of growth in tax revenues or even the general economy....

The GDP of the country grew to $25.53b in 2016 from $9.01b in 2005.

The budget on roads and electricity grew by a compounded annual average of 25 and 28 percent, while the budget grew 17 percent and the economy at a compounded rate of 10 percent.

When national budgets grow faster than the economy it is an indicator that someone is playing catch up.

In our case the deficit in infrastructure caused by the two decades of turbulence during eth 1970s and 80s needs no explaining.

What it also suggests is that while the new investments played some role in pushing up GDP numbers that when they are all commissioned, up and running we can expect a sustained jump in economic growth over the next few decades.

The caveat of course is that we cannot continue at the same rate of growth in GDP, until we bridge the deficit, which we are not about to, and that we maintain effectively what we have already built.

Infrastructure enables economic activity and unlocks suppressed demand. The experience in our life time of mobile telecommunications and even the uptake of generated power is testament enough.

When we were trying to get funding for the 250MW Bujagali dam, which would have double our power generation capacity when it came online, then finance minister Syda Bumba was made to jump through hoops by the donors, hopping from capital to capital to get written commitments that the Kenyans, Tanzanians and Rwandese will consume the “excess” capacity of Bujagali.

But with little help from our neighbours we have consumed all Bujagali’s power and when the 183MW of Isimba dam come on line later this year it will not have been a moment too soon.

Of course this emphasis on infrastructure development has kicked up a lot of criticism. The major criticism being that it was responsible for the cash crunch in the economy, with a lot of the contract fees going abroad.

In the “good old days” when most construction was on schools and health centers, our local contractors got their fair share of the business and the money was very much in evidence. But the bigger infrastructure projects are beyond their scope and understandably not as much money as previously is flowing in.

We can write this down to “There is no gain without pain”.

Another major criticism has been that this new infrastructure may prove redundant as there is little economic activity to justify their construction, hence the joke about building roads to dry cassava.

What comes first, the economic activity or the infrastructure? Is it a chicken and egg situation?

I want to believe that when the infrastructure in place the economic actors will appear to take advantage of it and with them will unlock the aforementioned suppressed demand.

Another caveat is in order. This assumes that we get value for money in our infrastructure, that they are durable and of good quality to facilitate existing and new economic activity.

And that has got be a greatest challenge. That corruption is delaying projects, inflating their costs and affecting their quality.

The China situation is a good one to look to.

"When Deng Xiaoming declared that “To be rich is glorious” kicking off the China’s economic boom they committed as much 8.5 percent of its GDP on infrastructure development...

From 1978 to 1990 when the GDP eventually took off the economy grew at about nine percent a year.  This was when a lot of infrastructure was being laid down. In the following 20 years when the infrastructure was commissioned the economy grew at compounded average of 15 percent. It has since slowed to about six percent from 2010 to 2016. This can be attributed to the larger economic base.

Because the truth is there can be no industralisation without infrastructure development. Like sinking a foundation of a building you will have to pour down a lot of material before you can even lay the first course of bricks.

Infrastructure is not everything, there is the quality of the human resource and the institutions, infrastructure issues are probably the easiest to resolve, but little happens before you have infrastructure.