Monday, July 1, 2013

Uganda's Economic Performance: No Paradox, No contradiction.



ECONOMIC PERFORMANCE INDEXES AND CORRUPTION: NO PARADOX. NO CONTRADICTION.

Andrew Mwenda’s Uganda’s Incompetence Paradox in his column The Last Word for this week’s The Independent Magazine, makes for interesting reading. He fronts the unorthodox argument of how economic performance indexes contradict the underlying assumptions that we hold about corruption and ineptness of our government. It goes without saying that there is no paradox and no contradiction here. It is all in black and white. Uganda’s economic performance indexes are directly related to the state inefficiency and corruption that continue to lock us down in a developmental down time.  A look at Uganda’s export portfolio since 2008, indicates that traditional exports i.e. cash crops; coffee, tea, cotton, tobacco have had minimal growth with earnings from coffee fluctuating due to changes in global coffee prices. The Non- traditional exports e.g. fish, cocoa, hides, maize, petroleum products, sugar, animal/vegetable fats, cement and cellular phones, iron and steel have registered exponential growth over the last 5 years. The bulk of these non-traditional export commodities are either produced by a small formal manufacturing sub-sector under industry or they are re-exportation of imports e.g. fuel,  cellular phones etc. The small formal manufacturing sector also shoulders a huge proportion of taxes. The paradox here is that the sectors at the heart of our exponential growth in exports are not the biggest employers on the market. Export growth has not translated into increased job opportunities for our youth. That is the contradiction. If the growth in exports was premised on production of goods and services that utilize resources, raw materials and intermediate goods produced by local communities, ordinary households and indigenous SMEs, the growth of exports would have a strong correlation with growth in employment opportunities, household incomes and GDP at large.
Gross Domestic Product as a flow of economic activity which may be measured by analysis of Income or Expenditure or Production, doesn’t seem to have a strong correlation with our export portfolio today and that is the paradox.  The Back Ground to the Budget FY 2013/2014 indicates that Coffee (which is one of our biggest exports, grown by the wider population) worth $370m was exported last calendar year 2012. This is despite the fall in volumes to 162,000 tonnes last year compared to over 200,000 tonnes in 2008. In contrast, the total value of non-traditional exports has grown from $ 1.2billion in 2008 to $1.8 billion in 2012. The big contributors in this non-traditional exports category are iron and steel products, maize, cattle hides, petroleum products , animal and vegetable fat/oil, sugar and confectionary, cement and cellular phones. Maize exports have grown form 66.7 tonnes in 2008 to 175 tonnes in 2012, vegetable oil from 37.7 tonnes to 73.5 tonnes, petroleum from 97 million litres to 128 million litres, sugar 89,000 tonnes to 158,000 tonnes, cement 350,000 tonnes to 556,000 tonnes for the same period. The expansion of a few formal manufacturing or production lines e.g. sugar factories, vegetable oil factories, steel plants or cement factories has not generated the inclusive growth in GDP or widening of tax bases. Whereas corruption and state inefficiency have little or no effect on the production and expansion plans of private production firms, they still indirectly foster high business costs due to poor infrastructure, insufficient electricity supply and reliance on imports for intermediary goods.

Uganda’s GDP at the end of 2012 was at Ugx 53.2 Trillion at current prices according to the Background to the Budget FY 2013/2014. Compared to the Ugx 13 Trillion budget for this financial year, indeed our budget to gap ratio stands at slightly over 24%, the lowest in East Africa. Using the flows of Expenditure as a measure of GDP, this implies that for every $100 spent in the Ugandan economy, $24 is actually spent by government. The other $76 is spent by the three other sectors in the economy namely; households that engage in consumption expenditure, firms that engage in investment or production expenditure and then finally the foreign markets that buy our exports (goods produced in Uganda). So what is our government spending on that would stimulate production or GDP growth for that matter?
Source: Background to the Budget FY13/14

The best insight on this is from the monthly “Performance of the Economy Reports” by the Ministry of Finance, Planning and Economic Development. According to the April 2013 Report (at 10 months into the FY 2012/2013), Ugx 6.76 Trillion had been received in Revenue and Grants. Revenue from both URA tax revenue and Non- URA revenue amounted to Ugx 5.73 Trillion and Ugx 160 billion respectively. Grants for both budget and project support totaled Ugx 878 billion for the 10 months in the financial year.  However the government consolidated expenditure for the first 10 months in FY 12/13 was to the tune of Ugx 8.21 Trillion thus a fiscal deficit of Ugx 1.45 Trillion. As has been the wont of government, it addressed the fiscal deficit using both external financing (net) and domestic borrowing to the tune of Ugx 856 billion and Ugx 749 billion respectively. This is not any different from the outlay of the FY 13/14 budget. There are major resource shortfalls in the budget that will require borrowing from both the external market and domestic markets. With the latter approach, we risk “crowding-out” the private sector players since banks always prefer government debt to private loans due to the risks associated with private sector lending. In effect growth of private sector credit shall slow down thus less finance available for production investments and business expansions. The projections in the FY 13/14 budget are not any different from last year’s. Ugx 1.905 Trillion has been allocated to the Local Government with Wages and Recurrent expenditure taking over 80% of the total allocation to the sector. The BTTB 2013/14 further indicates that over 50% of total budget allocations (as indicated in the medium term expenditure framework) shall cover wages and recurrent expenditure at Ugx 2.33 Trillion and Ugx 3.90 Trillion respectively. Only Ugx 4.2 Trillion and Ugx 2.23 have been allocated and allowed for domestic development expenditure and donor funded projects.

Source: Background to the Budget FY13/14
Furthermore, we may want to look at GDP in terms of production to establish what sectors contribute the bulk of value addition in this economy. According to the Back Ground to the FY 13/14 Budget, the value of economic activity in the Agriculture, Forestry and Fishing for the calendar year 2012 amounted to Ugx 11.789 trillion which is 22% of Nominal Gross Domestic Product. Food Crops production  account for more than 50% of the value of economic activity in Agriculture, Forestry and Fishing, and more than 50% of the Food Crops production is non-monetary economic activity. Close to 10% of GDP is non-monetary. It is no wonder that Uganda’s tax to GDP ratio is at the low end compared to peers in the region. A large proportion of the production can’t be taxed. Further to note is that the contribution of Food Crops to Agriculture had doubled in the last 4 years, from a total of Ugx 3.35 Trillion in 2008 to Ugx 6.57 Trillion at 2012. The Industrial sector’s value of economic activity amounted to Ugx 13.67 Trillion for the calendar year 2012 thus contributing 26% of GDP indicating that for every $100 worth of goods or services produced, $26 is from the industrial sector e.g. manufacturing, mining, water and electricity supply etc. The manufacturing and construction sub-sectors aggregately contribute 84% and 20% of the Industrial Subsector and GP respectively. The services sector accounts for 47% of GDP with the Whole Sale and Retail Trade subsector contributing 36% to the whole Services sector and 17% of GDP. The other big players in the Services sector are Hotel, Transport and Communication, Banking, Real-estate services and Education each accounting for averagely 4% of GDP. It is clear that the bulk of the value of economic activity in our economy is concentrated around, Manufacturing, Construction, Whole Sale and Retail Trade and Food Crops Production. The former two are dominated by a few formal players while the latter two sub-sectors, which engage the majority of Ugandans in both retail trade and food production, are dogged by informality in the retail trade sector and the fact that more than 50% of economic activity under food production is non-monetary. This offers insight to our low tax to GDP ratio.

The role of the state in such circumstances ought to be designing and implementing an approach that stimulates production and capital accumulation that create opportunities for both earning income and wealth creation for a wider society. This argument is best fronted by Andrew Rugasira in his “A Good African Story”. Both Western Countries and the Asian Tigers utilized the strong mix of both indigenous capital and state intervention in developing economic systems that foster capital accumulation and wealth creation for the indigenous people. The suggestion that Uganda and Africa at large shall do it any other way is where the ideological debate is. 

Agaba Rugaba
Socio-political commentator.

Thursday, June 20, 2013

UGANDA’S FY 13/14 BUDGET AND ITS FISCAL EMBARRASSMENTS



UGANDA’S FY 13/14 BUDGET; NO TRANSFORMATION ON THE HORIZON.

The dominant narrative in the aftermath of FY 13/14 Budget Speech by the Minister of Finance Hon. Maria Kiwanuka has been the claim that Government (read tax payers) will be funding 80% of the Ugx 13.169 Trillion budget. Resource inflows projected at Ugx 10.509 Trillion (representing 81% of total resource inflows) shall be sourced domestically. These domestic sources are; Tax revenue collected by URA to the tune of Ugx 8.486 Trillion, Non-tax revenue Ugx 275 billion, then Ugx 708 billion shall be drawn from government savings at Bank of Uganda and Ugx 1 Trillion shall be borrowed from domestic financial markets i.e. banks. So in reality, we (tax payers) are funding only 72% of the budget since domestic borrowing contributes close to 8% of domestic sources. The other sources of funding in the budget are Ugx 2.453 Trillion in form of Project Support (Ugx 1.752 in form of Project loans and Ugx 700 billion in form of project grants). Budget Support in form of grants and debt relief amounting to Ugx 52 billion and Ugx 168 billion respectively are the other resource inflows expected this year’s budget. So, it is clear that the fiscal deficit (including grants) of Ugx 3 Trillion shall be covered by borrowing Ugx 1.8 Trillion on the domestic market (the domestic borrowing and drawings from  Bank of Uganda), and Ugx 1.2 trillion from external financing on net basis.  
 Cognizant of the outlay of the projected resource inflows, we may now want to ask ourselves, what are we funding or what shall we be spending the money on this financial year that will keep us on the journey to socio-economic transformation as indicated in the budget theme? The best insight on this is from the monthly “Performance of the Economy Reports” by the Ministry of Finance, Planning and Economic Development. According to the April 2013 Report (at 10 months into the FY 2012/2013), Ugx 6.76 Trillion had been received in Revenue and Grants. Revenue from both URA tax revenue and Non- URA revenue amounted to Ugx 5.73 Trillion and Ugx 160 billion respectively. Grants for both budget and project support totaled Ugx 878 billion for the 10 months in the financial year.  However the government consolidated expenditure for the first 10 months in FY 12/13 was to the tune of Ugx 8.21 Trillion thus a fiscal deficit of Ugx 1.45 Trillion. As has been the wont of government, it addressed the fiscal deficit using both external financing (net) and domestic borrowing to the tune of Ugx 856 billion and Ugx 749 billion respectively. This is not any different from the outlay of the FY 13/14 budget. There are major resource shortfalls in the budget that will require borrowing from both the external market and domestic markets. With the latter approach, we risk “crowding-out” the private sector players since banks always prefer government debt to private loans due to the risks associated with private sector lending. In effect growth of private sector credit shall slow down thus less finance available for production investments and business expansions. 

Secondly and more importantly, Uganda’s political and budget architecture is chronically deficient of any paradigm that drives efficiency in resource utilization. According to the Background to the Budget FY 13/14, for the FY 12/13 the total consolidated expenditure including donor funding totaled to Ugx 10.9 Trillion. Ugx 7.5 Trillion was spent at the Centre (Central Government), while Ugx 1.89 Trillion was spent under Local Government. Ugx 1.1 Trillion of Local Government expenditure was on Wages and Salaries, Ugx 390 on recurrent expenditure e.g. rent, utilities, fuel, office logistics, conferences etc., while a paltry Ugx 400 billion was spent on development activities e.g. production, roads, construction, health and education. It is clear the logic that informed Uganda’s decentralization policy won’t be achieved both in the short and long term. The argument that local government brings services closer to the people is political rhetoric that has no reflection in the national budget. The current budget architecture doesn’t deliver services to the people at the grass roots. 

 The projections in the FY 13/14 budget are not any different from last year’s. Ugx 1.905 Trillion has been allocated to the Local Government with Wages and Recurrent expenditure taking over 80% of the total allocation to the sector. The BTTB 2013/14 further indicates that over 50% of total budget allocations (as indicated in the medium term expenditure framework) shall cover wages and recurrent expenditure at Ugx 2.33 Trillion and Ugx 3.90 Trillion respectively. Only Ugx 4.2 Trillion and Ugx 2.23 have been allocated and allowed for domestic development expenditure and donor funded projects. Considering that a significant amount of funding for development expenditure will be reliant on domestic borrowing and donor funding i.e. loans and grants, it is clear the chest-thumping on funding 80% of the budget is not premised on robust fundamentals. We are spending the bulk of resources to sustain a large government that is low on work ethics, management best practices, key performance indicators and efficiency. In its current architecture, the budget won’t foster any social-economic transformation that is buttressed by accumulation and development of capital goods that drive production and wealth creation for the ordinary people.

Agaba Rugaba
Socio-Political Commentator.

Monday, May 6, 2013

Uganda's Middle Class, China and the Neo-Liberal Project.



 On Kalyegira's Uganda's Middle Class, China and the post-1986 Neo-Liberal Reforms.
Timothy Kalyegira’ s Uganda is a classless society in this week’s The Sunday Monitor is his latest jibe at Uganda’s emerging middle class. He finds fault in the consumption tendencies of this emerging middle class punctuated by wide spread adoption of mobile phones, internet usage, number of cars on our roads etc. He goes further to state that many an African fall short on the middle-class bar as measured by income, attitude, education, personal confidence and intellectual inquisitiveness.
It goes without saying that Kalyegira has been quite unfair in bashing the emerging middle class in Kampala and many upcountry urban towns; Gulu, Arua, Fort portal, Jinja, Mbale, Mbarara etc. Furthermore, he continues to divorce our Ugandan and indeed African historical context from this middle-class phenomenon. This context is defined by two angles; first, the colonial and neo-liberal reforms orchestrated by our former colonial masters and secondly the growing influence of China itself on Africa and Uganda in particular.

Robert Skidelsky, (the famous biographer of Lord John Maynard Keynes) while making a keynote address at the London School of Economics at the launch of his book; How Much Is Enough? Money And  A Good Life, noted that until recently, economists envisaged three stages of economic development. First was the Age of Capital accumulation started by the industrial revolution. The second stage is the Age of consumption; and this is the age where people enjoy the fruits of their frugality. Stage Three (3) is the Age of leisure, also known as the age of abundance.
During the first stage (Capital Accumulation), society saved up a large portion of their income to invest in capital goods and equipment. For Africa, and Uganda in particular, it is important to note that the era of capital accumulation was also the colonial era. So a lot of the capital goods and resources were in the hands of the colonial entities and foreign business firms. From banking to insurance to coffee and tea export, sugar production, manufacturing, electricity generation, construction and real estate etc., the bulk of the capital goods in these lucrative sectors were controlled by the colonial government, tribal chiefs, Asian businesses and foreign firms. This was not by chance. It was by design. The colonial establishment designed and preferred the architecture of our economic system this way. 

So all through Uganda’s early stages of capital accumulation, the indigenous or average Ugandan was sidelined both systematically and technically. Even after the end of colonial rule, there was little or no major effort to design a new paradigm on the allocation of resources and capital goods in the Ugandan Economy. Idi Amin’s expulsion of the Asian and British nationals and Sir Apollo Milton Obote’s The Common Man’s Charter could be seen as attempts at empowering the average Ugandan with the capital goods and the key factors of production. However, the results from the two approaches were not the best. This is best told by Charles Onyango-Obbo in his book Mixed and Brewed in Uganda. He notes, “By 1976, four years after the expulsion of the Asians and the flight of the large European expatriate community, Uganda was near economic waste land. The shelves in the shops were empty, the industries were run down and unemployment was high. Indigenous folks had taken over the bungalows and mansions that belonged to the Asians and the Ugandan middle class that had been forced in exile by persecution. Many of the new property owners had been peasants yesterday, and even those among them who were not had nothing to help them maintain a modern urban lifestyle. To make ends meet, many started growing maize, tomatoes, and potatoes in once manicured lawns in leafy suburbs. Then they brought in goats, chicken and even cattle.”

It is evident that all through the colonial and post-colonial periods, the average Ugandan was at the bottom end of the economic pyramid. Furthermore, the design of the economic system was indeed intended to dis empower the local Ugandan and it is no surprise that the post 1980 neo-liberal reforms indeed served to buttress economic marginalization and dependence. The Ugandan had to stay at the consumer end of the economic cycle with little or no empowerment to have an input. The neo-liberal project created a critical mass of elite corporate workers with jobs in banking, finance, government, manufacturing, media, telecommunications, real estate, transport etc. thus easing the pressure on unemployment in the early 1990s. It is only natural that this Ugandan corporate class with meager resources and no access to capital goods, would prefer consumption to the frugal saving for future investments. 
Globalization also offered wealthy individuals, firms and business in western capitals and stock markets an opportunity to venture into the virgin African markets for cellphones, internet, fabrics, electronics, cars, cereal, construction etc. The foreign firms that  set up shop here in the early 1990s did not only transfer capital that was looking for a healthy return on investment but they also transferred skills, technology and more importantly work cultures and lifestyles. A Sales Representative of a bank or telecommunication company in Kampala was expected to look and act the part like a sales executive in London or Johannesburg. 

China has also played a role in the creation of this “shallow” middle class in our humble Uganda. Deng Xiaoping, the post – Mao leader of China, famed for leading China to a market economy is known  to have famously stated that “to be rich is glorious”. He encouraged people to start businesses and accumulate wealth and capital. This approach bred the “Fast Growth and Quick Money Culture”, amongst Chinese entrepreneurs, firms and the general population too. Dr.Fang Yang, one of China’s most widely known economists and Director of the National Economic Research Institute,   in a BBC Documentary; China An Insider’s View notes that the lure of quick money is also part of the first stage of economic development.  Dr. Fang argues that the first generation is mainly interested in making money and the lure of quick money is high, the second generation is more interested in public issues, public goods and services and the third generation is more into academic issues ,intellectual curiosity, science, technology etc. He believes the Chinese will have to go through all these stages of economic development. More and more Chinese individuals and firms are increasingly thirsty for capital goods, money and wealth. This lure for quick money explains China’s approach to capital accumulation and wealth creation. China has adopted the low-cost-mass-production paradigm for fast growth and quick money. This low-cost-mass-production approach in China and the hunger to double their capital and wealth in the short term has made it possible for Uganda’s peasantry and middle class to access a wide range of cheap but poor quality consumer goods (the buy-one-get-two-free-type-of-goods) in shops and retail stores. To feed this hunger for fast growth, quick money and capital accumulation, China continues to make in-roads in both Africa’s markets and resource fields. The East African May 4-10 2013 carries a report on China’s $11bn worth of investments in East Africa in the last decade. 40% of this went to Uganda alone in form of infrastructure projects and direct investments. China’s cocktail of market ideology and nationalism is in stark contrast to the neo-liberal gospel preached by the western powers; USA and EU. China combines market ideology with nationalism and central planning. This is not the case with most African countries and Uganda in particular.
 
With Globalization, it no longer matters who owns and or controls the capital goods. Capital will always follow the markets and consumers. (At least that is what we’ve been made to believe). As President Museveni has noted before, a factory in Uganda owned by an Indian or Arab investor is indeed considered a Ugandan factory! The reality is that we are deficient on a critical mass of Ugandans with the desired competences, attitudes, capital goods and technology to compete both regionally and globally in regard to design, development and production of goods and services.  
One could make the argument that unlike the Chinese, our Ugandan society and economic system tend to discourage communal economic links and social groupings that would ideally be more efficient in capital and wealth accumulation. Furthermore, there isn’t much incentive for savings and investment in our economy. The interest rates on savings accounts with financial institutions or return on investment on small enterprises are quite slim. Ugandans have indeed cut their losses and moved on to the consumption stage, with or without strong savings, investments or capital goods.

Robert Skidelsky further offers insight on the conspicuous consumption tendencies evident in both the developed world and Africa’s emerging middle-class too. “Having more seems to make us want more or different; this is partly because we are by nature restless, easily bored. This is because wants are relative, not absolute; the grass is always greener on the other side. The richer societies become, the more individuals in them feel their poverty to others. There is the bandwagon effect, when we want goods because other people have them, and then the snob effect when we want goods because other people don’t have them.” 
I guess the historical context and our inherent desire for more and more explains the consumerism culture exhibited by our emerging middle class in Uganda.

Rugaba Agaba