Thursday, 10 March 2016

The NEXT FIVE MUSEVENI YEARS REQUIRE HARD PRAGMATIC (MAGUFULIC) REFORMS




On the 18th February 2016, Ugandans cast their vote re-electing President Museveni for his fifth term, following his 30 year rule. The election wasn’t immune to controversy with a realm of issues highlighted by different commentators and election observers. Of particular interest to the economics of this country is monetization of the elections as well as substantial machinery purchase by police. A trend of increased budget allocations has always been a norm during election and pre-election years; the budget for 2006 election year encountered a supplementary budget to tune of 10% of the approved budget, while the 2011 saw a record supplementary budget to a tune of 33 percent of the budget. The same year also encountered a heightened expansion in money supply (inform of deposits and current in circulation).  While 2016 elections have seen the smallest share of the supplements as a percentage of the approved budget, the Financial Year (FY) 2015/16 approved budget was a sizeable nominal increment (30%) from the FY 2014/15.  Notably also the annual budget allocations nearly remain split evenly between development and recurrent expenditures despite the increased focus on infrastructural investments.  These trends in part exhibit the large administrative structure anchored around the president; also arguably reflective of the politics of lifetime presidency. As such, there usually pass-through effects on the economy in terms of heightened inflation, shilling depreciation, subdued private sector credit and resultantly a restrictive policy environment as remedy. In the next five years, we need to revisit the basic economic fundamentals that attach sizeable weight to the factors of production mainly land and labour as well entrepreneurship and capital.
Land as a primary factor of production should come high on the scale of preference of reforms but seemingly this has not been the case over the many years. According to the Sixth World bank Uganda Economic Update: “Searching for the GRAIL- Can land support the prosperity drive?”, Uganda's land is largely customary owned with only less than 20% of land registered (compared to 64% in Rwanda, 60% in Kenya and 50% in Ethiopia). The limited registration of land in Uganda coupled with weak institutional capacity for land administration has resulted into illiquid markets (characterized by limited land supply to match the overwhelming demand), consequently affecting development of the financial system and agricultural sector. Land disputes are estimated to reduce agriculture sector output by 5-11%.  Uganda also has a high population density of 194 persons per square kilometer compared to 80 persons in Kenya, and 116 persons in Ghana. This implies land is absorbing the majority of the labor force, without corresponding increases in the level of productivity.

When it comes to labour structure, it has a lot to do with the population growth trend of this economy. The latter has been growing at over 3% over the last decades, as such, going by the classical Malthusian theory of population, Uganda risks a population curse. At macro level, discounting economic growth by population growth implies an annual average GDP per capita growth rate of 3.5% over the medium term. Compounding the current annual per capita of USD 700 by 3.5% implies attaining a lower middle income GDP per capita of USD 1000 in 2027.  While growth rates look rosy, the discount factor is also large.  
In addition, population has consequences for the labour market developments, including but not limited to the rising level of unemployment and falling labour participation rate. This trend is irrespective of the fact Uganda has less than 900,000 degree graduates (just only 2.5% of its population). Over the last five or so years, average income or even wages have fallen in real terms, owing to the precarious economic environment of high inflation and high interest rates. An eclectic view at labour structure shows that the majority of labour force is in self-employment to a tune of 73%, most of whom, are in the informal sector and the agricultural sector. Informality is a reflection of market failures and calls for proactive government intervention.

By and large, the business as usual approach needs a tweak. Reforms are urgent, but difficult. There is need for an effective public service and this will require a couple of hard choices ranging from restructuring to reinforcing accountability.  Holistic restructuring is necessary, as opposed to the isolated Kampala Capital City Authority (KCCA) and the Uganda National Roads Authority (UNRA). As a matter of fact, few public institutions would garner high private sector interest if they listed on the stock exchange markets, a reflection of inefficiencies in these entities.  The KCCA and UNRA examples show that hard decisions have to be encountered, jobs may be lost, but these short term costs will be compensated by long term benefits. For example in the 1990s, the Swedish Social Democrats government made large cuts in the civil service. Around the same time, Canada cut government expenditure by 18.9% without social turmoil – and without greatly reducing health, justice, or housing programmes. They did this while maintaining tax levies, so the result was a reduced public deficit and falling public debt. These reforms in KCCA and UNRA should be subject to review periodically, to ensure there is value for money. Even in the current system, it would be necessary to require that the audit recommendations be either followed according to a strict schedule, or rejected with a convincing justification. The laxity on the latter has arguably had its fair share on the economy. Notably, the audit of the Auditor General's office has been pending for 10 years now.
These reforms can only go as far as the political environment allows. My appeal to the President over the next 5 years is to walk his talk "the next five years – there will be no playing games; no corruption and a more focused budgeting". There are no simple solutions and lasting reforms can only be achieved on the basis of a political and social consensus.

Uganda GDP is LIKE Kampala SHOPPING malls, Rosy in short run BUT SUSPECT in the LONGRUN



The Ugandan economy today lends credence to the famous Africa rising of the 2000s, and recent economic trends suggest an Africa rising paradox but a far better continent than the one dubbed hopeless of the 1990s. An aerial view of Uganda's banking sector, telecommunication, and the supermarket industry among others over the last five years suggests the struggle for the private sector is imminent as exhibited by forced acquisitions, mergers, farm downs, downsizing and closures. This has not been helped by the exacerbating economic fundamentals globally and domestically that are characterised by heightened inflation, depreciating shilling, and high interest rates. The latter is highly associated with the monetary policy response by the hiking of the Central Bank Rate (now at 17%) and growing government domestic borrowing through issuance of treasury bills and bonds reaching UGX 10.7 trillion in February 2016. The 364 Treasury bill rate reached 24.6% in February 2015 compared to average lending rate to private sector of 25%, implying the institutional investors including banks will prefer to invest in the government securities than the risky private sector given that government is considered risk free.

All these factors weigh negatively on Uganda's GDP. To many , GDP is abstract but stands for Gross Domestic Product, which is a measure of the level of economic activity over a period of time usually a quarter or year. GDP essentially looks at monetary value of all output (goods and services) generated within boarders of an economy, irrespective of who generates it (foreigner or Ugandan). Every country wishes to have expanding GDP, which in itself is an indicator of economic growth. When GDP expands, employment increases, workers, business and governments are better off. The latter would garner more revenue from heightened economic vibrancy of households and firms. However, high grow rates can fuel inflation, usually a case of too much demand, common with fast growing economies like Ethiopia.  The reverse is true, when the euro zone encountered recession in 2014 (consecutive GDP decline over 2 periods); the zone subsequently registered a deflation (prices falling over a period of time), a case of demand deficiency.
By and large, Uganda remains a small economy despite posting impressive average GDP growth rates of 7% annually between 1990-2010, before slowing down to an average of 5% over the last 5 years. The recent slowdown implies output gap (the difference between the actual output/production capacity of an economy and its potential output.  Uganda’s GDP was UGX 75 trillion (USD 25 billion) at the end of June 2015 and is expected to grow at 5% reaching UGX 79 trillion (USD 23 billion) in June 2016. In UGX, the economy would have expanded, but due to shilling depreciation, the value in dollars would be less. Over the long term, the exchange rate has increased from UGX 400 to the dollar in 1990 reaching UGX 3400 to date.   The key growth fundamentals backstopped by prudent fiscal and monetary policy related largely to influx of foreign capital, aid, private investments and resultantly employment in absolute numbers as well as labor participation increased. These streams of income and investments supported largely the evolution of the service sector, and asset (land and real estate) bubbles.  The growth of the latter exceeded the growth if the formal income and revenue streams (mortgages, remittances and household incomes), implying a mystery stream of income- arguably corruption.
GDP usually doesn't take into account the depreciation of the capital and buildings. The earlier  estimations also included some activities that have since sunken; a number of infant businesses that die within the first five years (statistically high), many buildings that have stalled, the roads that don’t last five years and number of half occupied shopping malls.  Overall the challenge has been that public and private investments that supported the earlier growth transition didn’t not focus on raising productivity in key sectors; manufacturing sector has only accounted for 7% of national output or GDP over last decade. Structural transformation hasn’t resulted; the interlinkages between sectors (agriculture, service and industry) remain very weak. The economy remains largely informal; accounting for 49%. Financial markets remain illiquid, small and undeveloped. While Uganda has bred business gurus, including the five that made it to the Forbes magazine list of richest Africans in 2012- each worth more than USD 50 million, none has yet to register any of their business companies on Uganda Securities Exchange (USE). The supply side of the national budget-public revenue has not grown significantly as a share of GDP, Revenue accounts for only 13% of GDP. All these factors emphasize structural impediments.
The macroeconomic policies may have dealt with short term economic fluctuations but the problems often go deeper than just demand (growth) dynamics. For example, monetary policy has been effective in controlling inflation by curbing demand through high interest rates but on the other end, inflation is rather a supply problem. The inflation cycle seems to be repetitive every three years, associated with global food and fuel prices or the domestic drought.  Fixing supply problems requires structural policies.
To a layman, the Ugandan economy may be equated to GARDEN CITY, very promising in its infancy but long term sustainability is suspect. The true ownership also remains blurry.

Thursday, 20 August 2015

Dollarisation an Economic time bomb( published in the independent, Newvision and Monitor)


In recent times, the media has been awash with digital migration, a term that has cascaded into politics, digital and analogue presidential candidates. Kampala waved good bye to analogue signal in June and since there have been massive adverts for digital migration. As a recent recruit to DSTV in recent months, I have noticed that the pricing for the different packages has been on an upward swing largely pegged on the exchange rate. Another classic example of business pegged to the foreign currency is the Electricity Regulatory Authority pricing of electricity units, which has stifled debate among economic practitioners regarding the use of exchange rate as variable for adjusting electricity tariffs when it is already captured in the core inflation computation. Pegging of business pricing to exchange rate is essentially used by investors to cover the exchange rate risk, often time known as covered interest rate arbitrage.
In the extreme case, a country with perpetually weak currencies will face a situation where the citizens of a country officially or unofficially use a foreign country’s currency as legal tender for conducting transactions. Increasingly the major shopping malls around Kampala charge rental space in the US dollars and so are many other business entities like hotels, schools and land. The corruption cases surface in dollar terms because understandably those who offer bribe use the dollar. The statistics also indicate that there has been growing trend of foreign deposits as share of the total deposits, also referred to as dollarization. This by June 2015 stood at 43%. This makes Uganda one of the most dollarized economies in the world. Increasingly also the commercial banks hold significant assets in particular loans in foreign currency; foreign currency loans account for 45% of the total loans. The trend has been growing, like cockroaches, you never only seen one. The private sector expectations have been triggered with the trend likely to continue to grow, as foreign currency is seen as currency for the future. Dollarization in part reflects growing inflationary and volatile outlook, in particular with investors holding non-monetary assets priced in foreign currency rather than investing abroad. Zimbabwe is one recent example, as a result of hyperinflation and associated depreciated currency value of ZW$10 billion to 0.33 US$ in July 2008, was forced to adopt the use foreign currencies (USD, EURO and Rand) as official currencies. This is what is regarded as official dollarization. In African History, 24 other African economies have practiced official dollarisation, some as a result of colonisation while others as result of economic, social and political disturbances. Uganda's previous dollarization was between 1906 and 1920, when the East African Rupee was used
Uganda today grapples with de facto dollarization, where there has been a gradual adoption of the dollar by the general public without deliberate support from government legislation. If the trend is not reversed, it could have far reaching effects on economy through various transmission mechanisms. The most obvious and direct channel being compromising effectiveness of the bank of Uganda monetary policy conduct. The increased dollarization literally means strength of the dollar against the shilling, implying it would first and foremost keep the central bank at its toes in trying to ensure stability of the exchange rate, in the extreme at peril of drawdown of its reserves. The reserves have since 2008 deteriorated from 6 months of import value to the current 4 months of import, in part owing to the stabilisation efforts of the exchange rate by Bank of Uganda as well as fiscal slippages. In addition, the exchange rate depreciation exacerbates inflation expectations, as highlighted in the July monetary policy statement; it is expected to be between 8-10% over the next year. Management of the rapid depreciation of the exchange rate and the associated upward swings in inflation presents any central bank a nightmare bearing in mind the other supplementary objectives of creating a favourable environment for investment and growth as well as ensuring financial stability.  In the end, the central bank independence may be compromised.

By definition, broad money supply encompasses currency in circulation, local currency deposits (demand and savings) and the foreign currency deposits. With the latter growing sizeably implies the central bank's control of the money supply will be compromised as most of its instruments are tailored to controlling currency in circulation and the local currency deposits. The commercial banks, the main holders of the foreign currency deposits face a heightened foreign exchange risk exposure, mainly due to fact that foreign exchange deposits are responsive to the interest rate differentials (difference between local interest rates and regional or international rates).  

In a nutshell, dollarization is a response to economic instability including persistent depreciation of the local currency and high inflation, as investors diversify their asset portfolios. In the long run, the store of value, unit of value and the medium of exchange functions of the Uganda shilling will be compromised. Against this backdrop, the solutions should be tailored to addressing economic instability and this will require a concerted effort to address institutional, regulatory and structural bottlenecks to Uganda's competiveness. In absence of the addressing these, de-dollarisation direct measures are essential. Nigeria for example has put an embargo on importation of foreign currencies as well as the acceptance of foreign currency deposits by commercial banks into the country to stem the dollarisation of the economy.
http://www.monitor.co.ug/OpEd/Commentary/Dollarisation-of-our-economy-is-a-ticking-time-bomb/-/689364/2831930/-/11g8pliz/-/index.html

Corruption is an economic evil in the longrun.


Corruption is an economic evil( published in monitor on the 20th august 2015)
On the 11th August 2015, while Andrew Mwenda was on NTV news night, he intimated that there is no evidence that corruption is an impediment economic development anywhere in the World. This statement is quite fallacious and ill-informed of the existing empirical evidence.  Mwenda's arguments were premised on largely correlation to argue causality.  Correlation however doesn't mean causality. Secondly, while economic growth and economic development are interchangeably used, they don’t mean the same. Economic development encompasses economic growth plus social economic transformation like poverty reduction, income inequality and improved human development indicators. A simplistic (however, contentious) measure of economic development is GDP per capita with countries that have a GDP per capita of USD 1045 are considered as low Income countries.

 In Mwenda's recent facebook post he argues that estimated corruption of about 10% of the annual budget is not the cause of bad services. He also points to the fact that recent efforts by Ministry of Finance cleanup of the register to remove ghost workers saved 230 billion in a wage bill of 3 trillion. That is about 7%.  While, poor service delivery is a manifestation of many factors including corruption, both are indicative of institutional and regulatory weakness. These arguably are very costly to a nation. To start with, 10% of the 2015/16 budget is UGX 1.85 trillion shillings and only 3 sectors of works and transport, energy and education have more. This amount compares favorably amount of interest payments by government for its debts and more than the amount government intends to borrow from the domestic market of UGX 1.4 trillion. The latter at current interest rates will attract interest payments above UGX 200 billion (50% of the agriculture budget). In short, if 10% of the budget is lost annually, a full year of the budget is lost every 10 years.

Common in literature and Mwenda's citation is the high-growth countries in East Asia exhibiting corruption tendencies inter alia of - bribery, patrimonialism, cronyism, and rent-seeking. What however, is often missed the primary growth drivers; inter alia the institutional strength and factor productivity reforms that were encountered in these economies. A recent study compares the Sub-Saharan Africa which includes many countries that are stagnating in the category of low-income countries; the same characteristics that were in many East Asian economies in the 1960s before exhibiting spectacular growth performances onwards. This study shows that East Asia has been characterised by growth-oriented governments and strong states, which have had the capacity to contain corruption and prevent threshold effects and the fall into lower equilibria. In East Asia, corruption exists but is controlled, channelled, and submitted to growth objectives because states have the capacity to achieve this.Forexample successful anticorruption campaigns in both Singapore and Hong Kong, China were implemented when they were both still relatively poor.  In contrast, in Sub- Saharan Africa, vicious circles and endogenous causalities may have created poverty traps, where weak states, predatory political regimes, generalised corruption, commodity-based market structures and windfall gains reinforce each other.

Corruption however is often intrinsically difficult to define and measure, so institutional and regulatory capacity can be used as proxy for corruption. Another commonly used is the Transparency International corruption Index which examines over 175 countries. In the top 21 countries, only 5 countries (New Zealand, Luxemburg, Iceland, Uruguay and Barbados) have a GDP of less than USD 200 billion. Of the 21 most corrupt countries, 19 of them have an annual GDP of less than $100 billion. The other two of Venezuela and Iraq each have GDP of above USD 200 billion.  The majority of low income countries, also associated with low Human Development Indicator scores, are associated with high corruption perception and this negative correlation provides prima facie evidence of the negative impact corruption has on value creation.
The corruption and economic growth consensus however remains mixed, with a few studies indicating corruption can actually spur economic growth at least in the short run. Essentially corruption (public) spurs private sector creation-as exhibited by the growing private infrastructure and businesses but at the cost of public infrastructure which is too is a fundamental driver of growth. Corruption breeds ironies for example officials of ministry of education taking their kids to private schools.  

In a literal lenses( captioned from discussion with a few colleagues), I'll illustrate with a few crude examples Police accepts bribes for issuance of driving permits or let off a reckless driver – Now quantify the cost of lives lost (include impact on dependants) and serious injuries due road carnage which flourishes because of corruption has allowed untrained drivers/riders on the road; Medical equipments are stolen, monies for repairs of equipments swindled, drugs diverted to private clinics, medical doctors abscond from work, fake HiV results, Global fund swindled etc – how many lives lost due to these malaise (infant mortality, maternal mortality etc)? What are the social and economic costs? Substandard roads works, axle load control disregarded, narrower roads, roads without signs etc – how much damage to the economy that this cause? At what cost? Teachers abscond, shoddy or incomplete classrooms constructed or money swindled altogether hence the future of children, especially belong to the poor is left in ruin. In economic terms, how much are the total cost of these children's future. Pensioners are defrauded, ghosts earn more than real people, real people are paid peanuts, not paid for months etc

Corruption may have considerable adverse effects on economic growth, largely by reducing private investment, and perhaps by worsening the composition of public expenditure and revenue, thereby undermining public trust in the government. This diminishes its ability to fulfil its core task of providing adequate public services and a conducive environment for private sector development. In the long run, corruption associated growth may dwindle and wealth distribution challenges may entail the delegitimization of the state, leading to severe political and economic instability. Corruption in Uganda has to be dealt with head on, small or big fish, and the quick wins start with addressing the inefficiencies in public entities that are rated highest in receiving bribes. Welfare audits may also come handy. Removing the Institutional and regulatory impediments to growth is better than circumventing them by corruption.