Monday, 23 May 2011

Uganda's consumption bubble will burst

Uganda’s Consumption bubble will burst!!!
Uganda is a country which is largely rural with 80% of population rural bound, and 70% of its population employed in agriculture. This means Uganda has a small formal sector which ideally pays the tax, bears the tax burden and according to the Uganda national household survey 2009/10, 24.5 %( about 7.5 million) Ugandans still live in poverty means one can’t afford the basic necessities/caloric needs like food and shelter. Also noting that the population is increasingly becoming younger with 60% of population under 18 years, means Uganda has a high dependency ratio of 115 percent.Dependancy eats the working population income leaving them with limited savings. 
Despite the high dependency and high unemployment levels, Monday to Sunday, week-in week-out, 365 days a year, you will be assured of party time in Uganda and more particularly Kampala bars. There are theme nights by different bars that attract masses 7 days a week in all corners of town. No wonder we are ranked among the top notch alcohol consumers by volumes consumed annually bearing in mind we have large informal drunk amounts not taken into account in the comparisons.  Strangely you will notice that Ugandan’s are quite generous to churches, some churches reporting Sunday collections of about average Ushs 200Million collections. Every month, one has to part with wedding contributions least one could save minimally UShs 100,000 to that cause monthly. Gone are the days when owning a car was a luxury for the corporate class yet the minimum expenditure on fuel alone given today’s prices is Ushs 300,000. Given the potholed Kampala, the breakdown of the cars is likely to be monthly. Most corporate class fellas stay in the moderate upscale locations (not affluent) whose rent prices today are exorbitant. To those who own homes they are largely funded through mortgages which eat big chunk of one’s salary each month, to a tune of about 50% If you also delve further into the same class you would notice that they go out on dates more than once a week.
Since Government does not provide adequately the basic necessities like Education and health; we also have to spend much of our little savings on the same basic necessities. Also bearing in mind our economies are prone to diseases, inevitably we have to spend on our health. The aforementioned expenditure excludes the most basic need basket of goods and services like food, fuel, clothing and energy. The common basket of goods and services used to compute inflation figures has been prone to inflation especially food whose inflation in April 2011 was 39.3%.
Economists have always observed that with inflation firms tend to be slower in adjusting wages commensurate to the price movements, meaning in real terms the salary earners earn less when there is inflation. To put this in context - one friend recently narrated he bought a descent meal at 3000 UGX 4 years ago and now the same food costs 8000UGX(166% increment), his rent that was once 250,000 UGX is now 500,000UGX(100% increment) yet his salary scale has only changed marginally over the years by about 10%.  In real terms he is worse off than he was 4 years ago. Also notably when inflation is high, rather than companies increasing salary scale commensurately, they instead reduce the number of employees. Use few to do same work-efficiency
Against that backdrop, arguably incomes/expenditure of average Ugandans are consumption bound or basic needs share of income/expenditure is high, thus less savings and investments. One is left to wonder how is this expenditure funded? The unfortunate answer is our expenditure per capita is higher than the income capita meaning expenditure is largely funded by the private sector credit from banks including the unsecured salary loans- of which the non secured loans are also on the increase. These loans fetch interest rates averaging 20-25%. Unlike Governments which could get debt reliefs on their debt, the individuals don't and if anything could lose their property (if the loan was secured) on failure to pay.

It is not strange to find a young graduate more likely to ‘invest’ in a black berry (i-pad, galaxy or any android based phone) before any savings for future. Another would rather borrow for boda boda than walk from their residence say in Mbuya to Makerere University Business School, even when time is available. Hotel, bars are one of the major profitable ventures and less is being invested e.g in production for export (both traditional and otherwise).
Arguably Uganda is largely consumption bound yet produces little. Low production reduces employment and in the long run, there will be no income to support the consumption. What is regarded as savings is actually immediate tomorrow’s consumption. Talking of savings, we still witness limited collective savings like investment clubs and limited stock market participation. If we don't re-adjust to live within our means, this consumerism is unsustainable. (Unlike governments which could get debt reliefs on their debt, the individuals don't if anything could lose their property (if the loan was secured) failure to pay-repeated from above). Drawing from the US experience, once the consumption bubble bursts, it will have spill-over effects on business slump and credit default rate would likely increase thus creating a ‘Uganda crisis’. However Uganda’s economic crisis wouldn’t lead to the famous Global crisis.

1 comment:

  1. My take on this is that we need education reforms in our nation. Our education system is British inspired and trains us for white collar jobs, implying that the expectations of a young university graduate are quite high. Throughout my university days, I didn't have any lecturer who gave any career guidance and the expectations in the job market (I wouldn't blame them since they are outputs of the same education system).

    I always find less educated people to be better financial managers, and all this comes from engaging in managing personal finances at a much earlier age. Ugandans are simply less financially educated. (I would also call it a total lack of common sense)

    NB: You left out the corporates that have fallen victim to the wrath of loan sharks/ unregistered money lenders !