Sunday, August 5, 2012

On Andrew Mwenda's Review of Prof stiglitz, NSSF and Civil Servants Bank

On Andrew Mwenda's review of Prof Stiglitz, NSSF and 'Civil Servants Bank'.

I read with keen interest and fascination, Andrew Mwenda’s last three articles, under his “The Last Word “column in the Independent Magazine and in more ways than one, they all seem to be interlinked. From his scathing review of Prof Stiglitz presentation at the 20th Annual  Joseph Mubiru Memorial Lecture, to the negative dividend of the democracy on NSSF and finally the Aid cuts to the Rwanda government by western nations France, Netherlands, UK and USA, over alleged support to M23 rebels in the Democratic Republic of Congo. In his rebuttal to Prof. Stiglitz Presentation, the crust of Andrew’s argument is that the distinguished economist and Nobel Peace prize winner did not define the kind of regulation that government should engage in our financial markets and banking sector. He faults Prof Stiglitz for presenting academic and extreme ideological arguments more like his peers back in the academic and political domain in America.  Andrew further argues that the issue is not whether or not states get involved but what specific forms of involvement are necessary for economic and market success. I will attempt to bring into perspective the kind of regulation and state intervention that we need in our current Ugandan context - the kind that Prof Mahmood Mamdani also seems to allude to in his discussion of Prof. Stiglitz’s paper.

For the last 18 months, the most contentious and critical issue in our macro-economic fundamentals has been/ is inflation. The Bank of Uganda and the government by extension fronted three main explanations for the inflation; prolonged drought throught the country that affected agricultural yields and thus caused supply constraints. The food/agricultural produce was not enough for both the local and regional export markets. Secondly were the offshore factors; imported inflation from food and commodity products, high oil prices on the world market and finally the down-side effects of the Eurozone and global financial crisis that hindered our export earnings and thus put pressure on our foreign exchange.

In light of the high inflation the Central Bank adopted a tight monetary policy framework to reduce the quantity of money in the economy and thus mitigate the risks of inflation due to huge private sector credit. Unfortunately this inflation targeting monetary policy also hurt production ventures and manufacturing. The CBR mechanism did not only target private consumption credit but also business communities like traders and manufacturing industries that need credit for expansion and growth. A better approach would have been to have different CBRs for private consumption credit and investment/production credit. (As explained by Mr. Kitamirike, the CEO of Uganda Securities Exchange in his article, Balancing between inflation control and investment growth, Daily Monitor 14th February 2012) Only Central Bank and or government regulation would deliver such a paradigm thus mitigating risks of stifling growth due to high interest rates as evidenced last financial year. The Central Bank Rate, CBR is also a clear indictment that we are not a free-market economy as we would want to believe. Interest rates are simply the price or cost for borrowing, and banks are primarily financial intermediaries. Banks ought to link the spare cash in the economy (savings) as supply with the investors (demand) that want to grow and expand their production lines. Free-market enthusiasts argue that when interest rates are set by Central Banks, they don’t indicate the market fundamentals of supply and demand but they actually send wrong signals. The inconsistencies notwithstanding, we should have social policy and regulation to build huge pools of savings that investors and manufacturers can tap into and access affordable credit for expansion and job creation. The sole reason why the Bank of Uganda is able to control (and in effect distort) the financial and credit markets is because it is the lender of last resort and the chief custodian of money in the economy. (Which is a regulatory provision too).Where does the Central Bank get its money? It is primarily the Government’s banker. Where does Government get its money? Government revenue is majorly from two sources; taxes and borrowing. In some instances, it gets grants and aid from donor agencies and rich western nations – the kind USA, UK and Netherlands have cut from Rwanda.  Taxes, the primary source of government revenue are dependent on the tax base and health of the economy. Government borrowing through taking loans or issuing bonds simply implies government is able to tap the spare cash in the economy (for domestic borrowing) or in its peers’ economy (foreign borrowing). A loan from China simply implies China has spare cash or savings that they are willing to lend out. This leads us to the social policy and regulation that government can engage and use to build our own savings pools to foster indigenous investment and growth, free from the whims of foreign powers and donor agencies. NSSF, with a membership of slightly over 450,000 has monthly collections in excess of Ugx 40 billion and an asset portfolio of Ugx 2.7 trillion. We have a Civil Service of over 320,000 people with an annual wage bill of over Ugx 2 Trillion. If each employee saved just 10% of their monthly income, they’d raise Ugx 200 billion in one year. This is enough to start up a Civil Servants Bank. From the Financial Statements and Reports published by banks for the year 2011, total net profits earned by Stanbic Bank, DFCU bank and Barclays Bank summed up to slightly over Ugx 180 billion. It is clear, financial services sector is lucrative and there is an increasing demand for credit to boost both production and consumerism. Why can’t ordinary Ugandans enjoy these profits and benefits too?  We just need the right pro-people regulatory framework and social policy to harness these opportunities. With annual savings of Ugx 200 billion, the Civil servants can finance the construction and set up of at least one manufacturing or agri-processing plant each year. Nile Breweries Limited is setting up a new beer plant in Mbarara at a total cost of $80m (Ugx 200 billion). In five years (one presidential and parliamentary term of office), Uganda’s Civil Service can finance and own five major manufacturing entities in Uganda. They can also have a Venture Capital Fund that invests in SMEs and other agri-business initiatives. The dividends from these ventures can be an annual reward for the savings. It is clear that with minimum effort, Ugandans can be at the heart of the country’s economic development. Such ventures could also build social cohesion; reduce risks of conflict and democratic contestations. The example of the NSSF Board debacle where we have half the members with no knowledge of finance, equity markets, venture capital and investment, but are propelled by democracy to such executive forums, can be better managed where we engage them on their turf. If workers Unions and Cooperative firms were given means and framework to save and invest in SMEs like agribusiness and commercial farming, you would never see them interested in swimming in the deep waters of corporate financing, venture capital and long-term investments. The neo-liberal reforms of the early 1980s that shut down cooperative unions have not delivered tangible results for the wanaichi. Ironically, the same neo-liberal reforms that championed democracy and elections have propelled the same wanaichi to the complex arena of corporate finance, venture capital and investments.

According to the Ministry of Finance Planning and Development’s Performance of the Economy Report June 2012, for the financial year 2011/2012 (May 2011 to May 2012), Uganda imported goods worth over $4.8 billion compared to export earnings of $1.8 billion. Some of the goods on the import list include Cereal and cereal additions worth $220m, Sugars, sugar preparations and honey worth $193m, Vegetable fats and oil (crude, refined and fractioned) at $200m, Furniture, beddings and, mattress materials at $16m, Footwear at $32m, Fish, beef, meat, eggs, dairy products, vegetables and fruits collectively imported to a tune of $25m an equivalent of Ugx 62.5 billion shillings. Uganda on an annual basis imports goods worth over $700m that can easily be produced locally, if only we’d engage the right regulation and appropriate social policy. We would eliminate the downside risks of supply constraints and imported inflation if we are able to produce some of these imports. Trade Unions, Cooperatives, SACCOs, Uganda Prisons, Women Groups, Local communities, Secondary schools, vocational institutions etc. can be supported with farm inputs, fertilisers, machinery and extension services to produce the cereals, vegetable oil, animal fat, cotton, fish, milk, eggs, poultry etc. instead of importing them.

We all seem to be fascinated and impressed by the Asian/China mode, but we are not willing to walk the talk. The china-model is premised on pro-people regulatory framework and social policy. It is anchored on indigenous ownership of key sectors of the economy e.g. banking, production and export markets. It is built on a strong savings culture and low consumption but high investment paradigm. Here in Uganda particularly, it’s the complete reverse. All the integral sectors of the economy are owned and or controlled by foreign companies and multinationals, and that in more ways than one doesn’t cushion us from capital flights, FDI reductions, foreign influence etc. Kenya and Tanzania, our regional peers have strict and pro-national regulation to foster indigenous ownership of the economy and production sectors. Tanzania has restrictions on purchase of stocks and financial products by foreigners. No IPO or rights issue in Tanzania has been unsuccessful because of such regulation. Kenya has strong local banks that started out as cooperatives and micro-finance institutions e.g. Jamii Bora, K-Rep, Family Bank and Equity Bank. In 2008 Equity Bank bought Uganda Micro Finance Uganda LTD at $25.3 m (Ugx 64 billion), and has now extended to Rwanda and Sudan. If all the 320,000 civil servants in Uganda had contributed just Ugx 200,000 each, they would have raised the Ugx 64 billion to buy Uganda Micro Finance LTD. With their monthly salaries, savings and deposits, they would be able to grow its cash assets and thus create a huge pool of savings to provide credit to SMEs and individuals.

Professor Mamdani in his discussion of Prof Stiglitz paper captured the right mood for a bold paradigm shift in his concluding remarks and I quote “Not only has the market wrenched itself free from society, so is the state trying to do the same. Not only do market forces threaten to colonize society, the state too threatens to devour society. Free markets are not a solution for poverty; they are one cause of modern poverty. State sovereignty is not a guarantor of freedom; it threatens to undermine social freedom. The challenge is not how the state can regulate the market, but how society can regulate both the state and the market.”

With the above indicated initiatives and socio policies, it is clear society and wanaichi will be at the heart of the integral facets of the economy e.g. banking, financial markets, manufacturing and production and thus be able to engage, regulate and partner with the state for economic growth that is all inclusive and sustainable.

Agaba Rugaba

Civil Engineer and Socio-political /commentator.