Are the Uganda Real estate Prices sustainable?

I recently went looking for purchase a plot of land with my peanut savings, so the broker on knowing the amount I had in mind- he called his network of brokers to look for me a cheap plot intimating “Ono sente tayina za CHOGM”  literally meaning he does not have CHOGM funds. This arguably among other factors could explain the exponential rise in real estate’s prices in Uganda. It is against this backdrop that I try to explore the sustainability of Uganda’s real estate bubble that characterized by rapid increases in valuations of real property

Unlike the stock market, where most people understand and accept the risk that stock prices might fall, most people who buy a house don't ever think that the value of their home might decrease. The laws of physics state that when any object (which has a density greater than air) is propelled upward, it will return to earth because of the forces of gravity act upon it. The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion. Prices in the housing market follow this law of mean reversion too - after periods of rapid price appreciation (or depreciation), they revert to where their long-term average rates of appreciation indicate they should be. Home price mean reversion can be rapid or gradual. So yes, at some point property prices will come down. The when question is one that has not empirically be answered, therefore the scope is this piece is limited to the key factors that cause the bubble as well pointers to why it might burst.

Economically prices are driven by demand and supply. When demand Outstrips supply, the prices go high and reverse is true. To best understand the dynamics of real estate market, one ought to know the factors that affect both demand and supply of real estate. Assuming the supply is constant (same geographical stock of land), my analysis is limited to the key drivers of the demand side.

Land, real estate prices don’t follow the normal demand law, where the higher demand is driven by lower prices and vice versa. To the contrary, people buy more real estate when prices are high expecting them to rise further. This is primarily driven by speculation as well lack of alternative investments in other sectors like agriculture. The speculation will further stimulated by the huge expectations from the oil sector where the estimates place the value of Uganda's oil assets at a minimum of $75 billion. A substantial amount of this money is to be spent on public expenditure, with a good amount trickling into the property industry. Also worth noting is that a commercial exploitation of the reserves requires about US $10bn of investment which will also inevitably trickle down to  However; Oil trend significant oil revenues (worth 5% GDP) won’t happen until 2030. During the peak period – which is estimated at 15 to 40 years at maximum – revenues will be around US$ 1.1 billion. Often resource extraction often entails little job creation, unemployment rises.

The risk of rising debt levels is that they will likely strain the future oil proceeds. Debt levels increasing simply mean more taxes in future. Currently, Uganda’s post HIPC and MDRI debt is growing at an average rate of 17% per annum in nominal terms, whilst projected to rise to 20% per annum in the medium term and long term frameworks. If we can take a leaf from the Greece or any debt ridden country, austerity coupled with increased taxation only strains the demand levels with a trickledown effect on housing prices

It is reasonable to expect that the number of houses built will increase as approximately the same rate as population grows. However as  much as there is growing demand for real estate and an apparent Huge housing deficits, the structure of the population demonstrates high levels of dependency with over 60% of population below 18years. This coupled with the growing levels of youth unemployment will prospectively lead dwindling demand for non-consumables including land

Real estate bubbles are seen as an example of credit bubbles (pejoratively, speculative bubbles), because property owners generally use borrowed money to purchase property, in the form of mortgages. This is probably the case in Uganda, as in FY 2011/ 12 when the central bank initiated an inflation targeting tool- by increasing interest rates to curb the runaway inflation (30% in November 2011), construction sector grew in real terms at 1.7% in FY 2011/12 compared to 7.8% in FY 2010/11. Real sector activities continue to grow at 5.6% over the last 4 years.  Also notably banks have consequently revised their mortgage valuations way below the market valuations. This move was prompted by dip in housing prices in the center of town. This only points to fact that land and other real estates are wrongly priced primarily due to speculation. E.g. when will land of 1bn shillings in kololo ever pay back?

Speaking of inflation, arguably it could be here to stay primarily. There is an increasing shortage or scarcity of food inputs like land, energy, water etc. yet the demand globally is increasing due to increased population growth rate. Thus the structural changes around oil and food production may be here to stay. With persistent inflation, the consumption share of income of the already small formal sector(less than 10% of the economy) as well as others will increase reducing the available disposable income to clear mortgages or least buy off the overly priced properties.

 

Lastly corruption has a significant premium or call tax on the real estate pricing. Corruption which is estimated annually 10% of the national budget/ about 2.2% of GDP has played a significant impact on the boom in real estate activities. Since the introduction of declaring the source of income for all properties above 50Million, the land and real estate activities have dwindled. Corruption if not curbed in the long run impedes investment especially since it worsens the doing to business indicators as well global competitiveness index thus reducing investor appetite. The expansive Corruption trends will trigger increased citizen demand for accountability which consequently will reduce corruption as well lower demand for real estate products.

 

The Oil potential impact with standing, economic theory seems to suggest that the key drivers of real estate bubble that is corruption, private sector credit, remittances, among others like growth of an economy and expectations tend to be volatile in the long run. So given that real estate the real estate prices are growing faster than any macroeconomic variable, worryingly higher than real GDP growth which is a proxy for effective demand/ affordability, the bubble will inevitably burst unless government takes strong stands to regulate the real estate prices as well as put measures in place to control corruption. Construction and housing bubble will burst faster in medium term (5-10 years) than other real estate activities which will in the long run(10years plus) unless regulation happens. This recommendation is in sync with Joseph E. Stiglitz recommendation on the market failures_ REGULATE REGULATE ofcourse in moderation (checks and balances)

 

http://www.africanexecutive.com/modules/magazine/articles.php?article=6759&magazine=400

DRAFT!!! Uganda’s District-lisation Model of service delivery is only Futile!!!!

Uganda had only 16 districts in Uganda in 1959. The number of districts increased in 1974 and 2000 to 37 and 56 respectively. In 2006 there were 80 districts. In 2011 we had 112 districts till Kampala was recentralised or made an independent accounting authority. At 111 districts, Uganda has the highest number of sub-national political units of any country in Africa. Indeed Uganda at 100+ districts surpasses Russia (83 federal states) to become the first country with the largest number of the highest level sub-national administrative units in the world. The Government now has now proposed to increase the number of districts by 25 putting the number at 136 districts.

Government’s vindication for creation is primary for enhancing service delivery and effective administration in tandem with the 179 article of the Uganda constitution of 1995. This however has stirred debate on whether ditrictlisation enhances service delivery. Against the backdrop of the discussion, I highlight a number of reasons as to why this model is only futile.

To start with each district LG structure in Uganda has five political levels: The district (LC 5);the county (LC4);the sub-county (LC 3);the parish (LC 2);the village (LC 1) coupled with a number of administrative positions as well as other political officers Each district has have following standardised 11 cost centres; Chief Administrator’s Office, Finance, Statutory bodies (including Council and its Committees),Production,Health,Education,Works,Natural Resources, Community Based Services, Planning and Internal Audit. This means the creation of a leads to a significant number of new posts at the district level. First, a whole new set of technical and administrative staff must be hired, including a Chief Administrative Officer (CAO), Resident District Commissioner (RDC), deputy CAO, deputy RDC, and a District Auditor, Clerk (and Assistant Clerk), Community Based Services Manager, Education Officer, Engineer, Extension Coordinator, Finance Officer, Director of Health Services, Information Officer, Inspector of Schools, Land Officer, National Agricultural Advisory Services Officer, Personnel Officer and Planner, among others. A new set of district councillors  representing special interest groups (such as women, the youth and the disabled), averaging out to around 12 per new district, must also go on the payroll. Finally, a new district must also accommodate a district Chairman. This in essence points to fact that starting up a district requires substantial investments most of which in the short run are rather administrative. The Local Government Finance commission has demonstrated that each district requires about 1.2 bn for start-up but Government can only avail 100mn which alone cannot set up a descent administration block.

The uncontrolled expansion is imposing a toll on the national budget especially since the local governments hardly raise any revenues. Eg Palissa has annual revenue of about Ushs. 130 million and is represented by 5 MPs who cost the nation about UShs. 900Million. so do we need all these MPs or least the 900mn can be used to improve services in districts. A district is allocated about 2million for school inspection annually.

On the contrary, despite the number of districts having increased by 39% from 80 districts in 2006 to 111 in 2011, the Local government share of the budget continues to dwindle. (For instance, over the MTEF 2006/07- 2013/14 over 69% of the budget is spent on centre programmes and only 31% on Local Government programmes.) As per FY 2012/13 only 21% of the national budget will be spent at the local government level. Also still most of the local governments depend on 90% central Government transfers. Also notably, despite the increase in the number of districts, services are increasing being centralised e.g. the procurement of drugs by NMS, the 10,000kms taken over by the UNRA, centralisation of Kampala city council by central government into KCCA among others.

An empirical paper by GREEN ELIOTT, “Decentralization and Conflict in Uganda”, London School of Economics in: Conflict, Security and Development 8, 4 (December, 2008) concludes that district creation is a platform for entrenching political patronage by the current regime to win elections. This is a synomyous to process to the old American practice of gerrymandering, whereby sub-national political units are altered in size or shape in order to alter the majority/minority status of certain political, racial or ethnic groups. A case in point arguably is when an opposition district is broken into several units and the ruling party spends our natonal treasury to win over the seats for the created units or least break an NRm district into several units. This districtlisation is the reason we have such a bloated parliament of 365 members, the majority over 70% being NRM members, rendering the pertitent discussions always ending up in favour of the ruling party.

The benefits of creation new districts(most of which are shortterm) with standing, there is limited evidence todate that creation of  districts ehances service delivery. So there is an evident need to evidence based policy rather than the politically driven policies. The latter always may not yield traction

The Booming Ugandan Corruption bubble Requires the ASIan NO Nonsense corruption model  to Burst!!!!
With reference to the latest acquittal and discharge of 2 of the 3 former health ministers accused of mismanaging Shs. 1.6 bn meant for Global alliance for Vaccine and Immunisation(Gavi), a friend intimated that if the 2 are innocent, then Uganda’s corruption is so deep rooted that even the innocent looked guilty. The deep rootedness perception is in sync with the President’s outcry that Uganda is full of thieves” In that regard, we should treat all corruption alleged culprits as guilty till proven innocent rather than the other way round.

Corruption basically means the misuse of entrusted power for private gain. There are mainly 2 forms of corruption; Political corruption and administrative corruption. Uganda arguably is marred with both forms of corruption. Political corruption is when laws and regulations are more or less systematically abused; side stepped, ignored or even tailored by rulers to fit their interests. Public Financial management assessment 2008 notes that “Basic systems are in place, but non-compliance, violations and non-enforcement is common” which signals Uganda’s corruption is largely political. This is well demonstrated by the fact that the Ugandan government has a zero tolerance policy on corruption BUT yet again the president continuously alludes to entrenchment of corruption in his country. Similarly the African peer review mechanism noted that Uganda has the largest implementation gap that is the difference between the country's legal framework for good governance and anti-corruption and, the actual implementation/enforcement of that same legal framework. This perpetuation signals the lack of political will to tackle the problem, and has cemented the Impunity around the corrupt. 

In fact, when one reads “My time to eat by James Kemoli Amata” book, it immediately points to our corrupt banana republic- Uganda! Both domestic and international data sources of corruption allude to deteriorating or worsening trends of corruption in Uganda. The World Bank (2005) estimates that Uganda loses about 500 billion per year through corruption which represented 10% of the Budget. This implies Uganda loses a full budget year every 10 years to corruption!

The first Data Tracking Mechanism report on corruption by IGG highlighted implementation flaws at each stage of the budget cycle (planning, budgeting, accounting and reporting, auditing, and audit oversight) that lead to corruption. Virtually all spending agencies (local government or central Government) have been marred with corruption scandal at some point. The most prominent cases being the now 5 years old CHOGM, the HABA case, the UAC, NAADS, GAVI case, NMS, UNRA, NSSF the list is endless- of which these cases have common denominators or players. The IGG who publishes bi- annual reports to parliament has continuously lamented over parliament’s failure to discuss the reports he presents to them, consequently leading to non-closure of the corruption cases or least the reports will be “DEAD on ARRIVAL” by the time they are discussed.

The IGG notes syndicate corruption that is the interlinked corruption at every stage. The multicity of oversight bodies like audit offices, PAC, IGG, among others only espouses corruption rather than eradicate it. The very reason we see no service delivery at the end- because compromise likely happens at all oversight bodies. E.g. if the former accountant at OPM Kazinda is actually as rich as speculated yet he earned a salary of 1.1m UGX, it points to the fact that oversight bodies above him could have been compromised. A friend who formerly worked at LG centre (district) once told me auditor is always welcome by a brown envelope. Hypothetically Auditors, accountants, accounting officers (Permanent secretaries and CAOs), head of Government projects are rich way beyond their formal income streams. That said, the special institutions of control (ombudsmen, IGG, AG etc.) are also particularly weak, and prone to being overrun by informal politics in Uganda. Also a report from Uganda’s Inspectorate of Government (the Data Tracking Mechanism on Corruption) indicated that corruption has become worse in the police, judiciary as well as in health and education sectors.  If the enforcers or oversight bodies like judiciary or least legislature esp. PAC are corrupt, then how will corruption ever be solved? Against that backdrop- simple indicator would be “Do the PAC reports always reflect the Noise they make? Or rather the noise if for arm twisting?”

Contrary to decentralisation or creation of districts opening up voices for accountability, it exacerbates the corruption through increased networks of corruption. Anecdote evidence seems to suggest  that the presence of Inspector General of Government regional offices is confirmed to be strongly associated with reported corruption cases.

The 2011 Transparency International Index indicates a negative trend of corruption for Uganda, now ranked 143 out of 182 countries assessed from 127 out of 178 countries in 2010. Meanwhile in 2011 Rwanda continued to rank highly as the fourth least corrupt country in Africa and 49th in the world.

Although some researchers have argued that a minimal amount of corruption might be efficient because it removes government imposed or allocates scarce resources to those with the highest willingness to pay, the leading view is that on the overall; corruption has adverse effects on economic growth. Economically it affects negatively the investment climate, infrastructure (the pothole culture in Uganda), social equality as well as a tax/ significant effect on inflation which the poor as well end up paying for.

In a nutshell corruption is so politically entrenched in this country; in that there is fear that de- entrenching it will inevitably cost the current regime power.

1.      Given the lack of political will, Uganda needs a Kagame mould or Asian model of zero tolerance to register success against corruption.

2.      At the back drop of cases stalling in courts, and political interference, it is critical that While the investigation and prosecution of corruption (criminal in nature) is solely the responsibility of (1) CID in collaboration with the DPP or (2) the IG (with in-house police investigators), the Magistrate’s Courts Act (MCA), Chapter 16 makes provision under section 41 for any person to initiate criminal prosecutions, otherwise called private prosecution. There are accountability CSOs such as ACODE, ACCU, UDN and even the Uganda Law Society which have filed cases in public interest before.  However the Currently there is no law which enables private citizens in Uganda to pursue these matters by way of civil proceedings, there is need to review the laws in light of the current political interference in the judicial process

3.      As empowered by the leadership code, the IGG should validate civil servants mainly accounting officers’ income, assets and liabilities as well as those of his/her spouse, child or dependant.

4.      Use of targeted sanctions; in neighbouring Kenya and both the United States and European Union threatened targeted sanctions against stubborn political leaders in the administration who were suspected of blocking constitutional reforms and engaging in grand corruption. The sanctions included travel bans and revocation of visas for the leaders and their families.

5.      There is need for closure of the accountability cycle, the PAC reports should be followed through on time, as well the accountant general producing respective treasury memorandum.

6.      There is also need to rotate accounting officers to avoid continued collusion with suppliers or contractors. This has worked effectively in other countries as well as in some statutory agencies like URA

7.      Lastly the voice and accountability starts with you. You are the voice of change especially in light of the envisaged oil influx in a few years.  Otherwise given the prevailing corruption trends, Oil arguably will be a curse

The PARADOX of PLENTY

With proven reserves of 2.5 billion barrels of oil so far confirmed in the Albertine Rift exploration areas, Uganda could be the next important oil producer in Africa. The discovery could elevate Uganda from a low income country to a lower middle income country within the next 25 years making Uganda more of an independent country. Oil defacto has far reaching effects, but I will try highlighting 5 reasons why Uganda will likely be locked in the PARADOX of PLENTY

As much as Uganda has the right vision on oil to invest in the newly found oil resource into infrastructure and other types of domestic capital necessary for economic transformation , the implementation precedence is worrying- as recently noted by the Global integrity report Uganda has the largest implementation Gap in the World. Implementation gap being the deviation between strategy and actual implementation. To be more specific, e.g. the concrete debt strategy aimed at addressing arrears (commitment of government beyond its planned budgets) among others has continued to be prevalent. Also to note in relation to this, is that on the fiscal side, Government of Uganda has become accustomed to use of supplementary budgets most of which are consumption oriented( refer to the budget performance report FY 2010/11 on the ministry of Finance website). Typical non-adherence to plans, budgets among others.

The oil sector is increasingly being politicized. The president often quoted as referring to oil as “MY OIL” spells concerns of running the oil management as his own. Recent cases of CHOGM, HABA case, fighter jets purchase, among others seem to have the president as the denominator. The recently sumbitted Petroleum Bill does not protect the independence of the Petroleum Authority. Although the Bill provides for the independence of the authority, it also empowers the Minister for Petroleum to give ‘policy directions’ to the Authority and requires compliance to those directions. The power of the Minister in this regard is not defined in the Bill and thus political interference is an obvious risk

Lack of transparency and accountability: The process of the petroleum bills presented to parliament on the 12^th of February 2012(bills on the website- www.petroleum.go.ug ) was non-consultative enough- in fact no public consultation was carried out on bill, the upstream or the middle stream bill. The legislation does not contain significant oversight of parliament in the overseeing these institutions. As is Uganda is not yet a member of the EITI, and the bills in the current state don’t guarantee public disclosure of oil related information, and commercial confidentiality exist in these bills. The hasty signing of the oil contracts against the resolutions of parliament points to disregard of parliamentary oversight in the oil process. Lack of transparency exacerbates corruption. According to Transparency International, Uganda was ranked 80^th least corrupt country in the world in 2001 but slipped to 127^th out of 180 countries in 2010

Uganda credible economic growth levels of an average of about 7% has not translated in to inclusive growth but rather growth bound with social economic inequalities like regional inequality have continued to grow. Refer to the UNHS 2009/10. Economic forecasts seem to indicate that a country that grows at an average of 7%, should achieve middle income status in 10 years- using the 71 principle( 71 divided by average growth rate gives the number of years required for transformation). Oil undoubtedly will likely lead to high levels of growth but non-transformative growth is what we should expect if we are to project from historical paths.(Reference should be made to similar structure economies in Africa e.g. Equatorial Guinea,DRC , and Nigeria).

Oil resource and poor governance is a bad cocktail. Anecdote evidence from African oil economies seems to point to the realism of the likely curse on our economy BUT this is only conditioned on the bad political governance and is a long run phenomenon. Premised on bad governance, the resource curse is transmitted through 3 main channels: excessive domestic consumption, debt overhang, and real exchange rare over valuation. The resource boom when accountability is lacking allows politicians to expand public sector employment or to directly boost private consumption. Bad governance also discourages savings, increases overall spending which is normally reflected in the appreciated exchange rates. The resource rents in bad governance economies will end being misallocated and wasted as the resource base gets depleted while non-resource tradable sectors get marginalised.

In a synopsis, the risks above but limited to those, if not mitigated soon enough, the PARADOX of plenty will rein on our country. Not least mentioning that the recent signing of South Sudan- Kenya pipeline deal through Ethiopia is a clear indicator of lack of trust by neighbouring countries. Uganda could potentially lose out the comparative advantage of its oil resources in the region; Tanzania recently discovered oil which increases the number of neighbours with the oil resource. Kenya too is on the hunt.

CAVEAT: Polinomics (politics plus economics) = zero economics=politics. So if the political reform supports effective extraction, production and the rest of the value chain, then oil resource could be curse-less

Uganda not immune to contagion of the Euro Crisis

What Euro zone Crisis means for Uganda.(article as of end september 2011 published in the Uganda Bankers institute quarterly publication)

From late 2009, fears of a sovereign debt crisis developed among fiscally conservative investors concerning some European states, with the situation becoming particularly tense in early 2010. This included euro zone members Greece, Ireland, Spain and Portugal and also some EU countries outside the area. In the EU, especially in countries where sovereign debts have increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany. The pronounced sovereign debt increases in only a few eurozone countries has become a perceived problem for the EU area as a whole. If it wasn't for the euro, Greece's debt crisis would be an isolated problem -- one that was tough for the country, but easy for Europe to bear.

The EU debt piling and the Euro zone currency crisis, threaten not only the collapse of the Euro currency but the future of European Union and the health of world economy. The EU consists of 27 countries of which 17 countries share the EU currency .These economies depend so much on government spending as a percentage of GDP in that austerity will negatively impact on growth and still leave a high debt to GDP ratio . According to the EU's statistics body Eurostat, Italian public debt stood at 116% of GDP in 2010, ranking as the second biggest debt ratio after Greece (with 126.8%)

There are fears of a possible Greek default that continues to sway the financial markets; Portugal and Ireland are going through deep recession (just about the solvent camp) whiles the likes of Spain and Italy are solvent but illiquid. The likely debt default by Greece could spell Turmoil in the Euro zone and the EU at large, as there are fears of contagion. This could spark the debate on getting rid of Greece which would permanently undermine the security of troubled economies the famous PIIGS(Portugal,Ireland,Italy,Greece and Spain) of EU as well create the divide between the 17 countries of the Euro zone and remaining EU ten.

There is no simple solution to EU debt crisis but for certainty a rescue plan calls for collective support to the insolvent and illiquid countries, and imminently supporting the Greece in its inevitable debt restructuring as well as shoring up the European banks to withstand sovereign debt default. Thanks to the Germany Parliament that voted on September 29, 2011, in favour of expanding the powers of the European Financial Stability Facility (EFSF).Under the plan, the EFSF will be enlarged to €440bn (£382bn)-see http://www.guardian.co.uk/business/2011/sep/29/germany-backs-euro-bailout-fund. It will also be given the ability to give “precautionary loans" to struggling European countries, buy EU government debt, and provide funding to shore up the capital reserves of European banks. The vote approves the increase of Germany's guarantees from €123bn to €211bn. Germans approval though still faces the legislation challenges by other Euro zone countries, By 28th September 2011-Five countries (Estonia,Austria,Malta, the Netherlands and Slovakia.)were yet to ratify the measures The biggest concern being Slovakia since it did not participate in the first Greek bailout of 110 billion euros in May 2010.. As much as this wades off the immediate threat of a Greek default, the real debate remains on whether there will be enough funds to bail out larger economies such as Italy. Today banks don't have money and so don't some governments in Europe

The Euro crisis may also be only the first episode in which post-financial-crisis vulnerabilities converge to such devastating effect, implying that similar dangers for developing countries could emerge from sovereign debt crises. The Crisis in EU defacto will have implications on all frontier markets including in our economy (Uganda) esp. the banking sector due to increased financial volatility and the economy as a whole The transmission mechanism of this crisis will be felt through the entire financial services industry:

Most EU’s big spenders like Germany, France and Spain are taking necessary budget cuts as remedy to current debt crisis coupled with afore mentioned hard hit economies and this could  imply that Ugandan exports will be affected. Uganda exports coffee, tea, fish, flowers, vegetables and tobacco to EU countries. Uganda’s tourism sector which fetched USD 660 Million in 2010 and Remittances from Ugandans abroad will likely reduce as a lower euro will reduce the purchasing power of European tourists travelling to developing countries, and the value of remittances originating from Europe.

Due to the global nature of currency interconnected markets, Foreign Direct investments are expected to reduce. The higher interest rates on loans in Europe today and the apparent negative real interest rates, both foreign direct investments and portfolio flows are expected to reduce. The World Bank President Robert Zoellick intimated recently ahead of the global finance leaders in washington the week of 20^th september 2011 that stock markets in developing countries have been hit hard and capital flows have declined sharply since August when the euro zone's debt crisis intensified.  The markets have witnessed a flight-to-quality phenomena of late. Gold, Silver, the Yen and the Swiss Franc have seen tremendous growth in demand due to their perceived safe haven status, and this has pushed the price of the commodities to historical highs while the currencies have firmed strongly against the dollar.  However it should be noted that over the last few years, China and India have been major providers of FDI to Africa and to Uganda in particular. While the FDIs from the EU to Uganda have been majorly to the nascent Oil and Gas industry which implies FDI levels may not necessarily reduce significantly. The Euro crisis may constrain trade and other bank credit available to developing countries as it raises questions about the viability of European banks—especially those based in developing countries whose assets likely include large amounts of their own government’s bonds. But all international banks will be viewed as having either direct or indirect (through other banks) exposure to the developing countries-Uganda inclusive

With the EU debt crisis investors are switching to more stable currencies like the Dollar. In the week (22^nd -26^th September 2011) the Euro hit the record low (as per that time period) against the yen as investors thought safe haven in Japanese yen. The same week, the Ugandan currency hit an all time low of 2920.  Against the backdrop of envisaged reduction of exports, FDI, and remittances, the Ugandan currency could depreciate further.

Reducing development aid: Uganda’s main bilateral partners are from Europe  so as EU countries are pressed to cut budgets or least some of the countries are insolvent or illiquid, the development aid budgets will likely reduced as evidenced by some of the EU bilateral development partners who are reducing the partners countries they give development aid. Since the Global crisis in 2008, the development assistance has been on the reducing trend and projected to reduce further. The reduction is not solely based on the crisis but also on the fact the with Crisis, there is an increased demand for results and accountability

Source: IMF estimates and projections

However, the Euro Crisis coupled with the US credit rating worsening and China showing signs of weakness, especially in exports and labour osts have been rising steadily due to second round inflationary effects, the Crisis could be more devastating Uganda  than it was in 2008-. As much as the 2008 crisis had limited impact on Uganda and Africa as a whole but this time around there is slim silver lining for Uganda compared to the previous crisis. The fundamentals of macro-economic stability are poorly calibrated this time around. Inflation is edging higher(September headline inflation at 28.3%), the local unit is depreciating unabated, import cover is slightly above 3 months, corruption which acts as a quasi-monetary easing mechanism is still rampant, the fiscal regime is too lax given the economic cycle not forgetting the aforementioned transmission mechanisms FDIs, remittances and reduced exports . This is also backed by the World banks president’s statement that poorer countries had less fiscal space compared to 2008 to counter an economic downturn and some were “walking a monetary policy tightrope” trying to balance inflation pressures and effects of the euro zone crisis.

It is not all doom from the Euro crisis for Uganda and Africa as a whole- While Europe is preparing for a difficult consolidation course, whose nexus is still uncertain, Uganda should  now have the chance to shift into a higher gear, use the benefit of a lower level of debt (though rising) and a younger population and make possible investments that signify a more sustainable use of capital than we have experienced in the past few years

Uganda should;

• Closely monitor and tightly regulate the operations of foreign banks and of their links with domestic banks which may be prudent in the current circumstances.
• rely less on exports to the industrial countries and more on their own domestic demand and regional trade
• Continue tightening of the monetary policy to help revamp the investor interests since apparently the current inflation is higher than the treasury bills( negative real interest rates)Fiscal prudency in line with the national development plan investments needs to be  exercised complimentary to current monetary measures
• Ought to buttress its balance sheet by turning some of its assets into valuable assets that perform well in a downturn, like the one we expect. Gold bullion is a natural start. Silver and diamonds are also fair bets. A strong balance sheet will ensure that Uganda comes out of the global downturn on a much stronger footing.
• should exercise transparency of oil resources and management probably through joining international Extractive Industry Transparency Initiative .The oil proceeds could help bolster public investments, re-build reserves and as well reinforce economic activity

                                                                                                     

lessons u could learn from Asian tigers

The four Asian Tigers (Hongkong, Taiwan, Korea and Singapore) have been the fastest growing countries in the world for the past three decades. These countries have been hailed as models of development for other emerging economies. The main factors argued for their growth are mainly high saving rates and investment rates, outward orientation, factor productivity macro discipline, and other public policies. However there is continued lack of consensus over these factors despite most of the researchers agreeing over the promotion of a dynamic export sector and factor productivity as the major factors of growth.

Common characteristics of Asian Tigers

• Focus on exports: Where as other developing countries use import substitution strategies for economic development, the Asian tigers focused on export oriented industrial development to richer countries. Domestic production was discouraged through government policies such as high tariffs. also trading the surplus with the richer countries
• Human capital development – they developed specialized skills for their personnel in order to improve productivity
• They had an abundance of cheap labour  
• Sustained rate of high growth rates (probably double digits) for decades
• Non democratic and relatively authoritarian political systems during the early years
• High tariffs on imports in the early days
• Undervalued currencies
• High saving rate

A case of Singapore in particular between 1966 and 1990, the economy grew at remarkable 8.5% per annum, 3 times faster than that of the US growth, per capita income grew at 6.6% rate roughly doubling every decade. This achievement seems to be the kind of economic miracle. The employed share of the population surged from 27% to 51%. The educational standards of that workforce were dramatically upgraded. Also the country grew awesome levels of physical capital, investment as share of output rose from 11% to more than 40%.

Factors that engineered the robust growth in Asian economies

Although consensus has not yet been reached by different scholars/researchers and policy makers, the following are the mostly argued to be the factors behind the Asian tigers growth;

Skilled labour force- In the 1960s these nations were poor and had abundance of cheap labour. This excess labour was absorbed by labour intensive industries. Eg in 1965 Korea industry sector only employed 9.4% as opposed to 21.6% in 1980 yet agriculture employment fell from 58.6% to 34% over the same period. The excess labour was transformed into productive workforce through the education reform and yet remained competitively cheap. The focus was placed on education at all levels, all children attending elementary education and compulsory high school education. Money was also spent on improving college and university system.

Capital accumulation With respect to physical capital, the reasons can primarily be traced to the high savings rates. Policies also probably played a significant role in increasing the investment rate of the economy (High savings rates do not automatically translate into high domestic investment rates but nevertheless, the high savings rates have led to high domestic investment rates in Taiwan for example).As much as capital accumulation was key to the growth of these countries, capital productivity (recall labor transferred to industrial sector was accompanied with education reforms to add to its productivity) was essential. Capital productivity was attained through adopt foreign knowledge and technology. The technological catch up coupled with capital accumulation was significant to the Asian tiger’s growth.

Note For most researchers they argue that factor productivity (labour should be enhanced with education and capital enhanced with technological progress) is key for economic growth.

Outward oriented strategies/policies- The more rapid growth can be growth can be associated with much greater openness. Both exports and imports grew about twice as fast in the Asian economies as they did in the latin America. Asian economies maintained much high ratios of exports and imports to GDP. In hongkong and Singapore openness was achieved by ending all restrictions on imports and giving free rein to export sector. In Japan and Korea, and Taiwan, trade barriers were initially during the early 1970s however, the tariffs were gradually reduced. Among the tactics used in different countries were: exchange rate policies to favor exporters, export incentives, and selective tariff protection; financial repression, slowing financial sector development and consumer lending to provide cheap financing to industry – for exports, and for key industries; a high level of consultation between bureaucrats and business – both individual companies and industry groupings.

Slow growth rates of population- This played a great role in reducing family sizes (dependency ratios), creation of an educated labour force, accumulation of household and government savings, rise in wages and impressive growth of investments in manufacturing technology. 1965 each of the Asian tigers established family planning programmes and as a result fertility declined. Emphasis was also placed on civil education, increasing the rate of entry of women into the workforce and education sector; leading to delayed marriages. By 1995, the average fertility level was an average of two children per family (couple). Compare it with the Uganda’s current fertility rate of 6.7 births per mother. Smaller families produced 3 major demographic changes; slowed growth in the number of school-age children, a lower ratio of dependants to the working age adults and a reduced rate of labour force growth.

Ethnic homogeneity-Most of these Asian tigers had largely homogeneous ethnicity e.g. 98% of the Taiwan’s population is Han Chinese. Most researchers argue that ethnic homogeneity is beneficial with respect to creating institutions that are conducive to economic growth. Ethnic fragmentation leads to lower public expenditure on schooling, worse financial institutions, and lower spending on infrastructure. Also lower transactions are associated with ethnicity homogeneity.

Culture and Religious beliefs- Racial and religious harmony is regarded by the government as a crucial part of Singapore's success and played a part in building a Singaporean identity. Due to the many races and cultures in the country, there is no single set of culturally acceptable behaviours. BUddism is the most widely practiced religion in Singapore, with 33% of the resident population declaring themselves adherents at the most recent census. The religious beliefs of Singapore, hard work, innovativeness coupled with their culture of openness and harsh punishments for criminal offences led to a corruption free economy.

Flying Geese Hypothesis-In this case, countries in East Asia aligned successively behind the developed or advanced industrialized countries in their order of different stages of growth in the wild geese flying pattern. In this pattern the leading goose pattern is Japan, the second tier of countries are four tigers (Hongkong, Korea, Singapore, and Taiwan) where as the third 3^rd stage consisted of countries such as Indonesia, Thailand, and Malaysia).China and Vietnam served as the rear guard in the formation. The “flying geese” hypothesis predicts as labor cost surges in one economy, firms tend to move their investment to the less developed neighboring countries or regions to take advantage of lower wage rates. In the recent East Asian economic history, the phase of flying geese lasts less than two decades. The New Industrializing Economies (South Korea, TheTaiwan, Singapore and Hong Kong) absorbed most of the Japanese investment in the1960s and 1970s when the production cost in Japan rocketed up Eg in the early years Japan influenced most of these countries like Taiwan after the 2^nd world war and these countries adopted the Japanese economic model of economic development. E.g. China external trade development council and the bureau of industrial development were based on the Japanese models. Japan beyond being major trading company with developed countries, it became a major trading company with the Asian tigers e.g. under the policy of agriculturising Taiwan and industrialization of Japan, the Japanese heavily invested in Taiwanese agriculture.

Knowledge driven economy-it was realized that there is need for research and development if a country was to grow to economic maturity. The Asian Tiger governments committed to improving research and development. E.g. in Malaysia the research activity was/is determined by the needs of the industry including the needs of Small & medium industries. Even in these countries, the skills focus was professional and managerial occupational skills, research skills, professorship skill and technical skills. The industries became knowledge driven industries and e.g. in Singapore gradually 2 out of 3 jobs were for knowledged and skilled workers in manufacturing sector and 3 out of 4 of the export services sector. Investment in R&D meant that evidence advised policy decision making in these countries.

Effective and stringent public policies. This consisted of credible macro economic policies that kept inflation low, interest rates low, fiscal policies that focused on raising saving rates and investment rates, as well as policies that enhanced the development of infrastructure. These factors consequently promoted private investment and growth. For example, in Singapore despite the lack of natural resources and the absence of a large domestic market, high growth rates and eventually development were realised. This remarkable success has been attributed largely to sensible and effective policies and the early attention paid to Singapore’s infrastructure

Politically, many of the tiger economies have a recent history of military rule. However, a number of them have liberalized in recent years and Taiwan, Thailand, and South Korea are now amongst the most democratic countries in Asia. This political liberalization may make it more difficult for the tiger governments to resist demands to expand the size of their higher education systems still further.  This kind of political system gives government the leverage to meet its development goals according to what it considers priorities as opposed to a democratic system where issues of equity, gender, ethics, etc are paramount.

Pegging performance to milestones

Much has been written about pegging remuneration to performance in the business world. The unique feature of the Singapore system is that public service remuneration was pegged to performance which was benchmarked against the milestones that had been agreed upon by the agencies and the parent ministries. At the highest levels, political office holders and senior public servants had their salaries pegged to economic performance and the salaries of the top echelons of a group of key professional classes. At the lower levels, compensation was pegged against performance against milestones.

Quality and standardization: Emphasis was placed on production of high quality standardized goods that would compete at the global level. Experts on Standardisation and quality assurance were brought in from Japan, US and UK.