ZIMBABWE CONTINUES TO ACT AS A CAUTIONARY TALE

Last week it was announced that Zimbabwe’s finance ministry was mulling the possibility of a gold standard to shore up its hopeless currency.

Zimbabwe dollar battered by hyperinflation and falling export receipts has become so worthless that Zimbabweans have forsaken it for the South African Rand, US dollar among other hard currencies to transact in their daily lives.

A gold standard would hold the government to a discipline of only issuing as much currency as they have gold reserves (As was suggested in this column in 2008).

"This would have the immediate effect of putting the brakes on inflation and strengthening the currency, but would in the short term be very painful for the man of the street as cash would be in short supply and hard to come by...

How did it come to this? Zimbabwe used to be the breadbasket of Southern Africa, an emerging economy with industries and a growing middle class, better than adequate infrastructure – physical and social and generally an African country on the move.

What happened? In a nutshell, bad politics.

Former president Robert Mugabe and his ZANU-PF under pressure politically, resorted to populism, redistributing land arbitrarily to their cronies and gutting the southern Africa nation’s productive sector with one fell sweep.

It bought them an election but in the process setting the promising economy back decades. According to some reports the country’s per capita GDP has regressed to its 1980 levels, meaning they have fallen out of the middle income status as a nation.

That’s just a number, but for the everyday Zimbabwean it means shortages of essential commodities – Zimbabweans returning home stock up on sugar, bread and cooking oil; it means fuel lines at the stations or walking long distances to work, out of necessity because they cannot afford fuel or transport; it means a real fear of hunger and starvation.

"Zimbabwe is an important case study for us, in the developing world where politicians think they can tamper with the economy to sustain themselves in power, without regard to the long term repercussions to the general population...

Because the truth is, even in Zimbabwe the ruling class are not suffering the hardship and shortages of the everyday man. They still ride to work in fuel guzzling four-wheel drives, take their children to study abroad and have their families treated overseas—Mugabe died thousands of kilometers away in a Singapore hospital.

In Uganda we are no strangers to this downward economic spiral. While it did not start with the expulsion of the Asians in 1972, this clearly speeded it along by decimating our commercial class, a blow we have barely recovered from now 50 years later.

To get the economy back on an even keel, we have had to do some unpopular things like liberalise the economy, which while growing the country’s wealth has concentrated it in a few hands. This last part thanks largely to government inefficiencies and corruption.

While the Uganda macroeconomic stability and growth must continue in Uganda, probably more importantly the economy has to be rejigged to give every Ugandan a fair shake.

This does not mean government standing at every corner dishing out shillings. As popular as that may be in the short term it only serves to create dependency on government instead of self-reliance of the population.

The distribution would take the form of improving social service as a way to improve our human capacity, widespread infrastructure to allow access to market for our producers and improved safety of person of property, through improved security and application of the law.

That it is why it is important to pay attention to corruption whether in government or the opposition, because the perpetrators will seek to protect the status quo even if and especially if, it does not advance the living standards of the everyday man.

This is why given all that we have seen in recent weeks, with opposition politicians just as, if not more, rapacious than the usual suspects, calls for government to own businesses should be avoided like the plague. In fact we should look closely at the champions of these calls because more likely than not they would be the main beneficiaries of the increased surface area for corruption.

The point is this, just as in Zimbabwe, we need to recognize the productive sectors of our economies and rather than disrupt them, because we have no real control over them or because we want some quick political fix, enable them to be more productive through macroeconomic stability and an improved business environment.

Given our economic history, one would think I am preaching to the converted, but the political drama since the beginning of the year suggest that we are leaving the door open for some dangerous political maneuvering that may very well send us back into an economic abyss most of us have no knowledge of. Eight in ten Ugandans were born after 1990.

If Zimbabwe which had already attained middle income status in the 1980s, can be spiraling out of control, let us not think we are immune to the same, whatever the fat cats in government want us to believe.

PERPETUATING POVERTY AMONG OUR ELITE

At the end of last month a video went out showing a convoy of high end 4WDs cars ferrying the final year students of a secondary school to their prom.

The young men, who probably harangued their parents to hire the cars may be excused, we all know how it was to try and impress the ladies at that age, but you have to wonder about their parents and school administration for allowing this to happen.

I will never forget a few years ago seeing one of our friends shelling out sh300,000 for a pair of Timberland boots for her small brother to wear at his final year social, and thinking she was absolutely mad to be paying the equivalent of his school fees for a few hours of flossing.

Inflation has clearly set in, because I can imagine in addition to multimillion shilling outfit, parents now have to hire 4WDs and limousines for the boys to wow their female counter parts.

It makes me laugh to think that we used to be ferried in the school truck for socials. Alighting with all the dignity one could muster from the back of the truck, must have been a very funny sight. Bless the ladies of those days, they could see beyond that to the potential of their boyfriends.

"These same kids will grow up to be tone deaf MPs and thieving officials wherever they work. They have been set up for a life that they cannot afford to maintain through hard and diligent work...

It is no wonder then that one big shot on social media last week declared that to be rich in Uganda you need to have a net worth of $1.1m (sh4.98b), live in a house valued at at least sh500m, own two sh120m cars and have your kids in schools that charge at least sh5m. What he described was high living and not necessarily wealth.

And that is the thing, we think wealth is most manifest by our spending habits. So these young men are unwittingly being sold the idea that you need to look rich to be rich, which is far from the truth.

It has been shown that wealth depends more on your discipline with money than how much you earn.

There is the urban legend of the manager who cannot make his salary stretch to the end of the month, while his driver, who earns a fraction of his salary, not only gets to the end of the month but has enough left over to invest in his growing empire of mizigo rentals.

The difference between the two men is that the boss is focused on a consumption lifestyle while the driver is focused on investing.

And that is the crux of the matter. There are only two ways to spend your money, you either “eat” it or invest it. In the former case you look rich even while living hand to mouth, while in the latter case you may not look rich today, but you will be building wealth, which may very well lead to a higher standard of living in the future.

A friend of mine has been investing diligently for the last 15 years. He has maintained his expenses as a proportion of his income, to about 30 percent. So while ten years ago his expenses may not have been much to write home about, his expenses now have grown to almost sh5million a month. The remaining 70 percent he reinvests, increasing his income annually in the process.

His mantra is he would rather be rich than look rich.

"I believe our lack of understanding of how to create wealth is why our political leaders jump at any opportunity to dip their grubby fingers in the public till and our company officials do the same....

They think that building wealth comes from grabbing. Being men and women of above average intelligence they soon realise that in order to sustain their high consumption living they need to grab more and more. Which explains their bottomless greed. Hence their need to stay in government. There are enough former public officials walking around shell shocked, wondering where all their money went, because they do not have access to the treasury.

The trick with money is that if it is left seating around it will diminish with time. A function of inflation. And if our brains are wired towards consumption rather than investment, there is no money that cannot be finished.

The lessons our children should be learning are, how to earn money through hard, honest work, to live below their means, saving the surplus and then how to make that money work for them through investment. The biggest lesson of this process would then be that it takes time to create wealth.

Coming full circle to the young men and ladies at the aforementioned prom. By enabling this ostentatious display of wealth, our parents and schools are sending the wrong signals to their young wards, that pretending to be rich makes you rich...

In trying to keep up with these artificial standards these young men and women will not be averse to reaping where they did not sow when the opportunity presents itself.

MTN CONTINUES TO POINT TO THE FUTURE

Last week telecom company, MTN reported its 2023 net profit jumped 21.4 percent to sh493b, on the back of double digit growth across all revenue centers, including voice, which in 2022, for the first time registered lower revenues than the previous year.

In 2022 net profits came in at sh406b. Top line revenues were up 16.1 percent to sh2,629b from sh2,265billion in 2022.

While voice revenues grew by 11.6 percent to sh1,117b, data and mobile money revenues continued the now established trend of beating voice revenues for the third year running, accounting for 53 percent of revenues.

"Shareholders will be glad to learn that final dividend of sh6 per share is planned pending approval from the Annual General Meeting. This brings the total dividend per share to sh18 or a 10.6 percent dividend yield which compares favourably with fixed deposit rates in the market....

As an investment proposition the sh170 a share is becoming increasingly attractive as the earning per share is now sh22.02 up from sh18.14.

In a later conversation with CEO Sylvia Mulinge, who was reporting on her first complete year at the helm of Uganda’s largest company, she attributed the good results to her team’s execution of strategy. A focus on people, infrastructure development and the sharpening of the customer value proposition, led to the company’s market leading performance.

She was unsurprised by the recovery in voice revenues, pointing out that Ugandans are still buying more feature phones than smart phones, so there is still a lot of scope for voice revenues to grow, even if data and mobile money revenues will continue to dominate. In Kenya last year there were about 600,000 more smartphones than feature phones on the market.

Relatedly, as a sign of things to come data subscribers increased by 22.4 percent to 8.2 million. Given that MTN’s total subscriber base stands at 19.5 million, doubling of data subscribers is a real possibility in coming years.

This has far reaching ramifications for improving the ease of doing business in the country with the uptake of delivery services and other e-commerce options. MTN is aiding this growth with their MTNKabode programme by selling smartphones on credit, helping smartphone penetration grow to 39.1 percent. The comparable figure in Kenya is upwards of 60 percent.

 But even more exciting for me is the progress that MTN’s mobile money is making.

For starters the value of transactions jumped 44 percent to 133trillion from 92trillion in 2022. To put this in perspective, this year’s government budget is sh52trillion. What this means is that more and more of the money in circulation is being liberated from under our mattresses into the formal financial sector, where it can be useful not only to others who borrow it, but also to the owners who earn interest from it. MTN paid sh42b in interest on savings in 2023,  more than doubling the 2022 figure of sh19b.

And finally, that MTN has sh1,488b in deposits, which would easily have made them a top ten financial institutions in terms of deposits. The previous year deposits closed at 1,207b, a 23 percent increase, which means the deposits can double every three years.

The two movements, in data services and mobile money uptake, is where the telecom industry is going to have a transformative effect on the economy.

Mulinge is intimately familiar with the road ahead for MTN, having been Safaricom Kenya’s Chief Customer Officer, before she came to Uganda,

“If you think about the demographic dividend of this country, 70 percent of the population is under 35 and they're largely digital natives, so many of them will want to get on to our platform;” Mulinge said.

And then “Who is going to own the home? Because whoever gets into your home first, in terms of fiber connectivity and everything it will be very difficult to dislodge them.”

 

TO FIGHT CORRUPTION WE MAY HAVE TO RELY ON FOREIGNERS

It was an interesting week last week.

We had President Yoweri Museveni reporting that corruption had sipped into the military establishment, especially with soldiers serving as enforcers in land disputes. It was also the week that finance ministry permanent secretary Ramathan Goobi called for a leaner government, complaining that the cost of public administration had galloped out of control.

 A related story and probably even bigger than the aforementioned was the removal of Uganda from the Financial Action Task Force (FATF) grey list.

The FATF leads global action to tackle money laundering, terrorist financing and the funding of the proliferation of weapons of mass destruction.

"The FATF, while it has been around for at about thirty years, really got its teeth during the fight against terror, that kicked off at the beginning of this century in the aftermath of the attack on the Twin Towers in New York on 9^th September, 2001...

Uganda along with Barbados, Gibraltar and The United Arab Emirates were lifted out of the grey list last month, while Kenya is still there. One of the major requirements that we have only just complied with, is registering ultimate beneficial owners of businesses that was completed at the end of last year.

Companies with unclear promoters were being used to transfer illicit funds and by lifting the veil on these interests, the hope is that it will be plugging one more conduit for transferring ill-gotten wealth.

As mentioned above these moves have gained impetus since the 9/11 attack on the twin towers, as investigations have shown the people responsible used US financial services to fund and  shift resources around.

A failure to comply with standards and a fall into the FATF blacklist or high risk jurisdictions, would have had far reaching implications for the economy.

North Korea, which is on the blacklist, the FATF has advised other countries that deal with it to subject its companies and banks to extra scrutiny and to close their bank branches and end all correspondence relationships with North Korean Banks.

For country with aspirations to ramp up exports, attract foreign direct investment and encourage its citizens in the diaspora to send back more remittances, such action on Uganda would set us back a few decades.

While western economies are targeting bigger fish, our merchants of corruption, if they know what’s good for them need to seat up and take notice.

There will be greater scrutiny by financial institutions on the sources of income of funds and transferring abroad to hide them from local busy bodies, has become that more difficult, not least of all because of the sanctions on financial institutions if they are found to have abetted transfers of illicit funds, means it will not be business as usual.

Which probably explains the increased number of safes in people’s houses and the proliferation of the forex bureau in the suburbs, because if you think about it, it is easier to handle $100,000 than sh390m.

We can expect that in coming times there is going to be an industry built around money laundering to beat not only local anticorruption legislation but the FATF as well.

Expect a few to be caught in coming days, those who think they can do-it-yourself the process and don’t need the experts.

"Of course Uganda whose economy is largely informal, up to 70 percent by some counts, there are still a lot of avenues for people to launder their ill-gotten wealth. But we have to recognize that these too are fast being sealed....

In a previous life if you stole your billion shillings you could go and buy land, start building. Nowadays you have to justify the source of your income to URA and if it has not been taxed URA would charge a hefty 40 percent of the sum. While if you had stolen the money it would not be a bother to pay tax, but you enter a database, which are increasingly becoming integrated and sometime in the future someone may very well pull this fact up.

Or if you have the land already and decided to spend you ill-gotten gains putting up apartments for sale or rent, the issue of the income to build the apartments will come up.

All these means that that it is that much harder to launder money than it was two decades ago.

"It would be naïve to believe that the coalition of the corrupt will see the writing on the wall and scale back on their actions. More likely to happen is that they will go further underground, employ expert money launderers, but at least the impunity will have been toned down....

Ten years ago this columncelebrated the passing of the Anti-corruption law. Even then the cynics dismissed it as a tick box thing to appease western donors. There are a few score of individuals who have gone through the court and are not laughing.

So let us check back in 2034 and see how much the FATF has changed.

 

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.