ECONOMIC MALAISE;Maria Kiwanuka Should Rethink Strategy

Any economy that badly needs to invest and create jobs cannot be the same economy lending at 26-29%.

It’s official; government has no money to meet all its obligations on schedule. It’s also official; businesses are at their lowest point since the beginning of this financial year. And it’s official that Uganda is finally becoming vulnerable to the economic uncertainties hitting the western world. Yes, ask anyone, in civil service or private business, and you will get the same answer: things aren’t moving! So, what the heck is going on?

For starters, Uganda relies heavily on government expenditure. The trillions of Shillings we see in circulation come mainly from government agencies, contractors, ministries, civil servants’ salaries and then down to the shopping malls and markets. But for some reasons, government has not been spending as much lately; and as a result, the purchasing power of the masses has been low. This has in return led to reduced demand for imported goods, grossly reducing tax levy from imports and cutting government’s spending options further. This is what a vicious cycle of poverty now looks like.

But why is government cash trapped? At the beginning of the international financial crisis in 2008, Bank of Uganda (BoU) went on record to say that Uganda would not be affected by the fallout! With the usual economic jargon, our experts assured us that we would remain insulated from all the turmoil although they wouldn’t predict how long the global financial crisis would last or which mechanisms Uganda would hatch to assert its economic independence, as if that were even possible in this era.

But now we know that most of our central and commercial bankers failed to diagnose our domestic economic problems and fell short in analysing the combined long term impact of the financial crisis on Uganda.

The value of the Shilling is unstable; our Balance of Payments (BOP) is bad. With a pittance of exports, visavis a bulk of imports, the Shilling’s competitiveness on the world stage remains very low. Plus, Uganda maintains some of the highest level of trade deficits in the world. May be the export of oil will reverse that, who knows!

Yet global financial problems in Europe and the United States have led to less Foreign Aid to Uganda, less Foreign Direct Investment (FDI), less tourism trips to Uganda, less Kyeyo remittances and less NGO funding. So with fewer Dollars in our pocket, we have to ask BoU to dig from its reserves to enable us import things that we need. Besides, we have to buy the available few Dollars at a huge cost.

Then there is a problem with bank interest rates. Any economy that badly needs to invest and create jobs cannot be the same economy lending at 26-29%. Investors will not take those kinds of loans and businesses will either close or operate at break-even point with no expansion whatsoever.

The Central Bank has reduced its Bank Rate several times recently, in a bid to induce commercial banks to reduce their lending rates but all in vain. They argue that high rates are a result of other factors (mainly the high cost of doing business). It’s at this point that BoU should raise its Minimum Capital Requirement for all commercial banks to force them to merge and benefit from the economies of scale. It would be more sensible to have six well capitalised commercial banks that would lend at lower rates other than the current 25 banks that duplicate costs and pass those costs to the borrower.

Secondly, fiscal and monetary policies alone will not work if bold steps are not taken to resuscitate the economy. Government Investments should move from Government Payroll to Agriculture, infrastructure, health and vocational education. Increasing the size of an already bloated pay roll through creation of new districts must stop forthwith. Corruption must be addressed and exporters should receive tax exemptions. Local investors should receive equal treatment like foreign investors do and politicians should stay out of the way when technocrats are find solutions for our economy.

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