SPEEDING TOWARDS A CASHLESS SOCIETY

Two weeks ago the Bank of Uganda released the quarterly ”Financial Stability Risk Assessment Report” for the last quarter of 2023.

Long story short most risk in the banking industry is under control and the sector is generally in good shape and has come some way from Covid-lockdown crisis.

That  should be a relief to any one who has an interest in the economy. More interestingly for me is the rate at which cashless payments are  increasing every quarter.

In the last three months of 2023 debit card payments rose to sh581.1b from sh532.9b in the previous quarter a near ten percent jump. In the meantime mobile money transactions  increased in value to sh62.2trillion from sh60.5trillion. To further emphasise the point of the shift away from cash mobile banking transfers increased to 2.4 million

  from sh1.9 million transfers in the previous quarter.

Even more interesting is that over the year  mobile money transactions crossed the sh200trillion mark up from the 2022 figure of sh190trillion transacted on all mobile money platforms.

This trend is a useful one because it means more and more of our cash is being liberated from our pockets, socks, mattresses and other dark, dank places we have been storing our money. This money is finding its way into the formal financial system where it is not only beneficial to you but also  is made available to others who have need for resources when you don't. It would be interesting to track the uptake of mobile money loans, despite their eye-gouging rates.

Basically the more of currency in circulation is in the formal financial sector the better for an economy.

The mobile phone is accelerating this process in Uganda.

If you think about the sh200trillion-plus in mobile money transactions is about $52b or bigger than the economy of Uganda. We can expect this trend to continue as more people  appreciate the convenience and businessmen allow it as an option for payment.

Speaking for myself I save on a fintech app, which gives me seven percent on savings, posting the  interest daily. I borrow the savings of other users from my mobile money provider and I virtually walk around without money in my pockets, because I can pay for anything using mobile money and if the worst comes to the worst reach into my bank account using my phone to meet other needs.

This means I keep my money in the bank or on mobile phone longer. I remember a time when eye watering qeueus used to form at the bank on Fridays to withdraw money for the weekend. God help if you if you did not make it to the bank on time, which used to be 1 pm, on Friday.

The counter intuitive thing is also that money is staying more in the formal financial sector because of the ease of withdrawal.

And this trend has other far reaching implications for the economy. A major reason for the high lending rates is the low savings rates in this economy. As a result the banks charge higher rates.

Banks are often walking a tight liquidity tight rope. Lending out of their capital and the few long term savings accounts. If more of us fixed our money longterm the risk to the banks to get caught in a liquidity squeeze would reduce and they would be able to lower lending rates.

This trend being pushed by mobile money is good place to start.

Of course the major reason lending rates are high is government borrowing from the public and paying double digit interest  rates. It is a no-brainer every money manager will lend to government first and then think about his riskier customers and force them to pay a premium for the  privilege.

But with oil revenues just over the horizon, one can expect government appetite for debt to reduce and the with the trend of more money finding its way into the formal financial sector and bank operational costs sliding, lower lending rates is becoming more of a reality.

To speed up the process towards a cashless society, it would help if government scrapped the larger denomination notes – sh50,000 and even sh20,000, forcing more transactions into the financial sector and even serving a fatal blow to corruption in Uganda.

It is very likely that in five to ten years the clamouring for more  branch opening by banks will be a thing of the past. The competition to reach clients will go online with the banks with the most user friendly platforms taking the day.

 

HOW TO ENSURE “AFFORDABLE” SCHOOL FEES?

Last week parliament tasked the education ministry with outlining punitive measures for schools that charge prohibitive fees.

This is

a perennial lament that pops up around the first term, when parents coming out of the merry making of the festive season, “suddenly” realise school fees are “too expensive”.

The representatives of the people jump on the sentiment and criticise the government in general and the education ministry, in particular for the high fees schools are charging.

This time they have gone a step further and demanded that the education ministry punish schools, which charge exorbitant fees.

You never know whether to laugh or cry in these situations.

There are a number of issues here, not least of all is how do you  determine what are exorbitant fees.

A man who was used to driving free of charge on Entebbe road may think the sh5000 a trip on Entebbe expressway is exorbitant; A man who is used to drinking a beer at his local Kafunda at sh3000 may scream bloody murder when he goes to one of our higher establishments and they charge him sh10,000 for beer; A man used to paying sh1,000 in a taxi may have some uncharitable words to say when the Uber driver charges him sh15,000 for the same trip into town.

Even more fundamentally, the MPs were not calling for sanctions on government schools but on private schools, which government ideally should have no business setting caps on what they charge as fees.

"Putting a cap on fees will disincentivise investment in the sector and lead to the very thing MPs are complaining about – exorbitant fees...

About 10 million children are enrolled in primary and secondary schools around the country. In Kampala 84 percent of them are enrolled in private institutions. In the countryside this falls away considerably depending on the earning power of the population.

If parliament wants to sustainably lower school fees they need to take a long hard look at that ratio. That number screams for more investment by government in the sector.  

With the power to appropriate budgets, MPs should be talking about increasing the funding to the sector to build, man and equip more schools as a way to bring fees down.

It’s a simple demand and supply equation. The more government schools there are of credible quality the less the gap for the private schools to fill in.

In Sweden where government provides free education for every child of school going age,  private schools account for less than a fifth of all enrolment. 

ERA: THE PATH OF LEAST RESISTANCE IS A CROOKED ONE

Last week Electricity Regulatory Authority (ERA) announced a 1.6 percent reduction in tarrifs for power consumers.

They gleefully reported that this amounts to a sh40b saving for consumers.

ERA can allow these reductions because the “cheaper” power from Karuma dam was coming and would lower the average tariff price.

Everybody including me, is always happy for cheaper goods and services, but not at the expense of the quality of the product or service.

"There is a connection between the mechanical driving down of tariffs and our ever increasing power outages...

Worked into the power tariff is the cost of operations and maintenance for the power generators, transmitters and distributors. As a way to keep tariffs down ERA has severally denied the industry players optimal operations & maintenance budgets.

While this allows them to report a lower tariff it also means that the industry players cut back on their operations and maintenance, a major cause of the regular outages we are experiencing.

Imagine for instance that Umeme has outsourced its troubleshooting function to a company X. Umeme wants to get the service at the lowest possible price without compromising quality. But there is only so low the contractor can go with his price, below which he will have to start cutting back on staff, increasing response times and in some instances leading to longer power outages. Gone are the days when Umeme “Kamyufus” responded in hours. God forbid now you lose a pole or transformer you will be out for a week, as I learnt painfully recently. God help you if you are upcountry.

Secondly, depreciation of assets is another charge to be factored into the tariff. Depreciation allows asset owners to “save” money for the replacement of the asset when it has outlived its natural life.  If the industry players are not allowed adequate depreciation allowances it becomes difficult to replace ailing assets.

Is it no wonder that when South African firm Eskom handed over the Kira-Nalubale dams, there was need for $10m remedial works on the complex..

When the question of replacement of assets was raised with one official, he brushed it off by saying government will replace the assets and they are not complaining.

"Government priorities shift by the day and it is full hardy to put replacement or development of new assets entirely at their feet....

The more sustainable position is to provide an adequate depreciation charge so that the industry players can replace or develop new infrastructure in line with growing demand not according to the whims of the government.

Given the avoidable delays in development with Isimba and Karuma dams this logic should not be hard to grasp.

ERA it can be assumed is looking to implement a Presidential desire to see power tariff, at least for big industry, down to US5cents per unit.

President Yoweri Museveni’s desire for cheaper power to drive industrialisation is hard to argue against. What the technocrats need to grapple with is how to deliver on that desire in a way that will ensure the continued sustainability of the sector well into the future.

While the contracts of the bosses of ERA are a few years, they owe it to posterity to ensure that when they have left we still have a power sector to talk of.

On my first trip to South Africa in 1996 no one knew what loadshedding was. In Uganda we were suffering daily loadshedding by then – if you had power in the day today, you wouldn’t have power in the night tomorrow. A recent return to the rainbow nation and loadshedding is now a permanent fixture in their vocabulary.

If you look back into the roots of the current dire situation, under investment in the sector is at the top of the list.

The way we are going we are heading there.

So you have reduced my tariff but for more times than I like, I have to power up my generator to produce power. Even at our current tariff it costs almost ten times more at US80cent per unit or about sh3000 per unit, to use a diesel generator than use the  power from the grid, so who is complaining about expensive power?

It is really a no-brainer. For any producer given the choice between cheap but intermittent power and dearer but consistent power supply, they would opt for the latter over the former.

Don’t take my word for it, lets do a survey especially of the big energy consumers and see what they say.

Lowering tariffs the way we are doing is good for the technocrats but not for our industrialisation ambitions.

UGANDA’S RECORD FDI AND THE MAN ON THE STREET

In November audit firm Ernst & Young (E&Y) released a report on Africa’s economic prospects.

"In the report “Pivot to growth” E&Y reported that Uganda attracted a record $10b in foreign direct investment in 2022 or seven in every ten dollars of FDI that came into East Africa that year....

This was driven by projects in the oil & gas sector.

The news left the man on the street scratch his head at how come he never saw this money.

The confusion comes from our not understanding how FDI is reported and secondly, how such monies when they do come, trickle down to the everyday man.

Reading the report one realises that when they talk of $10b in FDI booked, they are reporting the monies committed for a project. So in our case for example, our share of the $10b East African Crude Pipeline (EACOP)for which final investment decision was reached in  2022 would be included in this number.

The funds of course will not arrive in one lumpsum but will mostly be parceled out over the duration of the project.

Why we did not see immediate improvement in the contents of our pockets is largely a function of what the project will need or buy locally.

The planning, design, plant and machinery will be  bought abroad and paid for there but are factored in as project costs. Foreign contractors may very well be paid in  to their accounts at home.

Local contractors, suppliers, hospitality and service providers are beginning to smell the money.

But as we all know there is no one as quiet as a man who has been paid. The loud ones are the one who are not in the slip stream of the money...

In years after commercial viability of our oil finds was determined in 2006, government has written into law what sectors of the industries servicing the oil & gas sector can be ringfenced for Ugandans. These were mostly food, hospitality, security, logistics and other low capital intensive sectors.

So if you are a friend, relative or business partners of the local businessmen who have already seen some contracts you are not complaining.

But also while the oil & gas sector may very well effect some major changes in the greater scheme of things our 200,000 barrels per day at full capacity, is really not much to write home about.

Nigeria last year averaged 1.35 million barrels per day, Angola came in second at 1.1 million barrels per day and Algeria at 908,000 barrels per day.

That being said businessmen are reporting that they are beginning to feel an uptick in demand, starting the middle of last year and one may imagine some trickle down is beginning to show its head.

The relative stability of the Uganda shilling which traded in a a narrow band of sh3750 – sh3850  may also indicate that some of that oil money is already coming and supporting the shilling.

Kenya across the border saw its currency cross the sh160 to the dollar mark before Christmas, a trend that continued into January. Some of the reasons were falling commodity prices and a flight for the exit on indications our eastern neighbour is set to default on some key international loans.

Whether you will earn from the oil & gas sector or not will depend on how you are positioned. As a worker the industry has stringent accreditation standards that have to met before they can look your way, for contractors and suppliers the same.

"The expectation is that at least $20b will spent until first oil in 2025 and so it may not be late to position oneself to draw from the oil wells...

The money will not come dripping with oil and easily recognisable as coming from the sector, but it will come.

Many have been called to partake  but few will be chosen.

PRESCRIPTIONS FOR UGANDA'S NEXT 38 YEARS

Last week we commemorated 38 years of the National Resistance Movement (NRM).

There is a lot to be proud of. No less a figure than Singaporean former leader Lee Kuan Yew speaking in 1998 did not give Uganda a chance in 100 years to get back up on its feet. At the time the NRM was two years in power having inherited a country that was barely functional and an economy that had regressed to pre-1970 levels...

To add salt to injury there were insurgencies in the north and east, which were taking priority of the meagre national resources.

The rebellion mostly in the north, which lasted into this century, served as a lodestone on economic progress, as almost one in five of the country’s population was not producing or consuming meaningfully.

The end of the war on Ugandan soil from around 2002, meant northern Uganda could reenter the productive economy and the results have been telling.

Uganda’s per capita GDP has jumped almost four-fold to $934 at the end of 2022 according to the World Bank, from $241 in 2002. Interestingly per capita GDP fell back to 2002 levels from $253 in 1986.

One can argue that by 2002 a growth momentum had set in, from earlier reforms that liberalized the economy, but it is hard to discount the effect of the reentry into the economy of northern Uganda and West Nile.

However, an argument can be made that we have underperformed given the human capital we have, the natural endowments and the peace the rest of the nation has enjoyed.

That being as it is I would like to look to the next 38 years to see how we accelerate the development trajectory.

1.       Root out corruption

The recent Auditor General’s report reports a continued trend towards more and more waste in government. Its not that our officials are clumsy and letting valuable shillings disappear into thin air, more that they are keeping more and more of our tax shillings for themselves. This is affecting service delivery, concentrating resources in a few connected people’s hands and even worse, distorting markets by overinflating asset prices and underpricing genuine businessmen. Not only is this trend grinding the economy to a halt but also poses a serious threat to national stability and security.

2.       Leaner government

Relatedly we need to cut back on the cost of public administration, especially because the bloated public sector has increased the surface area for corruption with little attendant improvement in production. Leaner government would allow government to focus on what its supposed to do which is facilitate the private sector to produce and equitably distribute the ensuing growth. Leaner government also means government not succumbing to the temptation to go back into business...

3.       Greater emphasis on human capacity development

A few years ago an argument was made in the The Economist magazine that given a choice between human capital and infrastructure development, the smart money is on improving the quality of the population. The argument was that once the people are better educated and healthy they will find a way around the infrastructure deficits. However, if the quality of the people is wanting all the infrastructure in the world will count for little as they will not be able to exploit it to improve their living standards. School enrollement has to continue to rise but more importantly we need to reduce the drop out rate, about 1.4 million a year the last number I saw. We must increase access to quality health services. We must increase opportunities by improving the business environment to absorb all these quality Ugandans entering the job market.

4.       Continued infrastructure development

While we have made significant strides in infrastructure development – except rail transport, we are far behind what our ambitions require in road, energy and social infrastructure. Using roads as an example we have about 16 km of paved road per square km, which is well below what an average middle income country which is around 80 km per sq km. We have all seen in our various suburbs how much new economic activity is generated when a tarmac road is laid. The same deficiencies are seen in everything from electricity generation and consumption, to health center and school facilities to housing. Infrastructure is what unlocks the latent economy.

Invest in agriculture extension 

A recent study showed that for sub-Saharna africa to make its biggest gains in agriculture investing in agricultural extension services and irrigation are your best bet. we have been seating on our laurels for too long, to thepoint that our agriculture is still using means of pre-agricultural revolution times. Extension workers who will improve the productivity of our small holder farmers is critical. It is a scandal that while agriculture provides the livelihood of seven in 10 Ugandans it acocunts for less than 30 percent of GDP and has not enjoyed double digit growth in any one year in the last 40 years, hence the prevalence of poverty in Uganda.

 

5.        Export led growth

And finally, we need to focus on producing for export rather than import substitution. As the Asian tigers showed focusing on export led growth improves the quality of products and creates more jobs. Import substitution benefits a few connected people, does not improve quality standards and generally lowers livings standards by condemning the population to endure substandard goods. The evidence is all around us the export targeted Lato has better quality products, in adequate quantities and changing the socio-economic status of farmers in Ntungamo than their local competitors who are content to serve the Ugandan market.

 

This is by no means a comprehensive nor original list, the challenge for the next 38 years is the execution of these ideas. Hopefully we will look back in 38 years and we would have far exceeded our expectations.

FOR GOD AND MY COUNTRY!

 

A RETURN TO SAPS IS A REAL POSSIBILITY

In his latest report the Audit General drew a painful picture of how our domestic arrears are doubling every five years with no effective action to slow down this accumulation or pay them off.

The Auditor General John Muwanga in his report of the year that ended in June 2023 said domestic arrears continued to mount by 16 percent annually, inexplicably and illegally.

“Some accounting offices are concealing domestic arrears and paying for arrears which previously were not disclosed nor budgeted for,” Muwanga reported.

“In other instances, the arrears disclosed are not properly supported by evidence of goods or a service. I further observed that some entities have entered in to multi-year commitments without parliamentary approval.”

In simple English officers are paying for ghost products and services, hiding legitimate claims on government while paying the fictitious ones and committing government to debts without proper approvals.

The net effect of this, is that what government owes to suppliers has nearly tripled to sh10.5trillion in 2022/23 from sh3.335 trillion in 2018/19, with no corresponding growth in revenues. During the same period URA collections grew by just over 50 percent to sh25.2trillion from sh16.6trillion. Just by that simple calculation it is inconceivable that government will ever fully pay these domestic arrears.

The worst offenders are Kampala Capital City Authority (KCCA) who in the last year’s domestic arrears jumped almost tenfold, followed by the works ministry, prisons and the finance ministry. That is ironic because the finance ministry is supposed to be overseeing and implementing the discipline around accumulating domestic arrears.

This is a scary situation than is being acknowledged by the government.

So I have a friend who does business with government. They owe him a few billion shillings for work that has been done and certified. His business is on its knees because between government not paying him, URA is baying for his blood, as is his bank. To survive he has been forced to regress into informality. He has adopted two sets of books, cut back on his official payroll and basically insists on being paid in cash and not through the formal financial system.

It does not take a rocket scientist to see what will happen if his methods are replicated across hundreds or even thousands of companies.

URA will huff and puff but will find little love in the private sector. That is not a threat but a promise.

It is so bad, that many banks are refusing to discount government invoices. Previously if a business man won a deal he could take an invoice he had made to government and borrow against it in the bank. Now banks don’t want to touch that “counterfeit” paper with a ten-foot pole. Businesses are slowly grinding to a halt.

This is an unsustainable situation. Our taxes come from private companies and individuals. With businesses struggling they will close down altogether costing jobs in the companies and among its suppliers.

What the Auditor General was describing up there was corruption in very many words. Despite a policy and new blood in the ministry the interest groups around this racket are so firmly entrenched they can openly defy Ramathan Goobi’s best efforts to bring some sanity to the system. Isn’t it just a matter of time before he throws up his hands in defeat or joins them anyway?

"There is even a scarier scenario.  That these interest groups that are a law unto themselves, have actually captured the state...

Ebola is particularly dangerous parasite because it feeds off the host and when they die abandon them for a new host. When it is feeding off the host it has no thought of coexistence, it just feeds off the host in disregard of the hosts continued life.

That is what the Auditor General is reporting is happening in the Uganda government. That the corrupt are feeding off the state without regard for whether it will continue to exist. In fact when every one else is tightening their belts, these leeches are accelerating their eating and to hell with everything.

This cannot end well, especially if good people decide to join in the plunder.

While it may sound drastic you just have to look across the border to Kenya to see what happens when a rapacious clique takes over the state and bend it to their own over the national intersts. For all intents and purposes, they are going back to Structral Adjustment Programme (SAP) -- raising taxes, cutting subsidies and privatizing public enterprises to qualify for much needed cash.

All this because revenue inflows have long been surpassed by government expenditure. If corruption was tackled decisively you would be shocked how dramatically government expenses would collapse.

And this is not just macroeconomics. As a proxy of economic activity mobile money transactions in Kenya last year for the first time in 17 years. The small man is feeling the pain in a very real way.

God forbid that we find ourselves back in SAPs because of our indiscipline. But how improbable is that given what we know?

THE ATIAK SUGAR DEAL LEAVES A BITTER TASTE IN THE MOUTH

We all know someone like this. You come together as group to contribute to a business venture, but they despite their initial enthusiasm for the project, are reluctant to contribute to the endevour. The rest of you get it off the ground with the little you have managed to put together and what in patient hope for the coming of their contribution.

It doesn’t come and there is always an excuse why. It is beginning to get on your nerves because the defaulting member is benefitting from the project disproportionately to his contribution. You could have let them freeload – after all we are all friends, but the sheer injustice of the situation is beginning to poison the friendship. And the freeloader seems totally unbothered by the situation he has put you people in, oblivious to the risk of jeopardizing the project all together.

Last week the Auditor General released his report for the year that ended in June2023. Wading through the inane stuff that included air supply in local governments, our ballooning public debt, ghost works in government I happened upon a report about our interest in Atiak Sugar Company.

"If lack of capital is a reason for most business failures in Uganda there is no way, absolutely no way, Atiak Sugar Company will collapse...

The project is located in Amuru district, northern Uganda and has the potential to process 1650 tonnes of cane daily for a production of 66,000 tonnes of sugar annually on the 7,900-acre plantation.

 They have struggled to get off the ground, with production being pushed back from 2016 before limited production begun in 2020, but had to be shut down in 2022 for lack of cane to run the plant following a burning of 3000 acres of their fields. Observers think it won’t be until 2025 when they resume operations.

Industry players in private are not surprised by the teething problems the project is suffering as the promoters thought they would circumvent certain key processes in setting up an operation as they had envisaged.

For a project of this magnitude to take almost a decade after its initial commencement to take off is mind boggling.

But maybe not.

Over the last six years government has pumped sh459b into the project in equity and loans through Uganda Development Corporation (UDC). But also an additional sh69b has been received from NAADS (National Agricultural Advisory Services) for such things as slashing, weeding and planting.

But to break it down even further these monies at sh14m a classroom, build about 40,000 classrooms or almost 6,000 primary schools. This would  put a dent in our horrific number of more than 1.4 million kids dropping out of school annually....

These funds, which are more than were allocated to the manufacturing and tourism sector – sh491b, in the last budget, is five times more than government’s commitment to the project. Government is a 40 percent shareholder in the project for which they were supposed to contribute sh80b.

But it gets better.

John Muwanga the Auditor General reported on government’s partners in the project, Horyal Investment Holding Company (HIHC), “There was no evidence to confirm that the private shareholders had provided their capital contribution to the company.”

All I could say was, Wow!

But not only has government given HIHC a blank check to set up this financial black hole, but also was not adequately represented on the board. Government has only one instead of two board members. This kind of negligence is criminal.

To simplify several of us got together raised money and then handed over the money to the one among us who has not contributed to the business and we are not bothered what he is doing.

Where is the incentive for Atiak to work?  The promoters are already being paid hand over fist before the project starts, why suffer with staffing and operations, when we can just be paid for twiddling our thumbs?

I would love to be wrong but it is not rocket science to see what is going to happen.

"The promoters will throw their hands up in the air in defeat, walk away, government will take over the project to make a show of trying to recoup their investment and eventually give up as well, let the bush grow back and let the machines rust away....

It goes without saying that this country cannot afford this kind of waste on such an industrial scale.

Government actions in this project make one wonder whether they really wanted the project to succeed. If they really wanted it to succeed, the obvious thing to do would be to contract someone who has experience in this business, pay them probably a tenth of what they have already shoveled into this doomed project and just maybe we would have sugar from northern Uganda within a finite time.

And now its on to the next scandal.