October 24, 2017

2017 Budget – Are we at a policy inflection point?

                                      By Patrick Mweheire – Chief Executive Stanbic Bank Uganda

June 19—After analyzing the 2017/18 National Budget, I believe the Government has once again prioritized the right sectors to spend on.

We do need cheaper electricity and passable road networks for a largely agrarian economy to industrialize, become more productive and reduce poverty.

However, our rough estimates indicate that less than 10% of the $2.5 billion spent on two existing hydro power plants under construction in Uganda has been localized. Increasing local content could well be the spur to reviving Uganda’s growth.

Between 1990 and 2013, Uganda’s GDP grew at a compounded annual growth rate of 8.0%, since then we have averaged 4.5% growth, 1.5% higher than our stunning annual population growth rate of 3.0%.

No one has the right idea of things that act like this
Mweheire believes the current 10% local content in the $2.5 billion expenditure for new power projects is unacceptable and suggests 30% instead.

Real incomes are declining and wallets are shrinking exacerbated by a high dependency ratio.  While many positive gains have been made among several fronts, we need to address our recent reduced growth rates.

I appreciate that these are long term projects that will generate returns over an extended period of time, but you cannot isolate the strain they put on the government coffers with no real and immediate trickle-down effect.

We need to connect the dots a layer down and ensure the investment spend has some domestic impact. I recognize Uganda does not have a world class turbine manufacturing facility locally, but we do have world class cement manufacturers, we have world class steel products, etc.

In my humble view and in light of our growth aspirations, 10% local content is unacceptable and we should aim for a number closer to 30%.  Imagine the positive impact an additional local spend of $1 billion would have on our local business eco-system.

We are about to embark on a huge spending spree in the oil and gas sector, an excess of $15 billion will be invested in developing the sector over the next five years.   We will need thoughtful investment and guidance from the Government to ensure that a broad section of Uganda’s local corporates and SME’s benefit from this significant spend.

We estimate that GDP will double between 2020 and 2025 due to the impact of this sector. We do however need this growth to be more inclusive and it will not happen without appropriate planning between the public and private sector.

The challenges in the agriculture sector, which employs 70% of Ugandans, need to be addressed. Certain aspects of the sector have been managed without proper end-to-end coordination.  Close to 50% of all the arable land in the entire East Africa region is in Uganda and we are yet to harness this opportunity.

We approach each problem in silos and seem to solve one issue at the expense of another. We need to improve credit access to the sector at a micro-level, boost productivity by utilizing more mechanized methods of farming and reintroduce the cooperatives that allowed for scale and urgently address the land tenure system which has allowed for massive land fragmentation.  All these interventions will go a long way in boosting productivity and allowing us to harness this natural competitive advantage.

We need to unlock financing and make accessible more affordable credit to the private sector.  In 2016, we saw private sector credit growth grind down to less than 6% year-on-year growth, half of the double digit growth that we had gotten accustomed too in the recent past.

We must urgently address the structural challenges that are keeping the cost of credit relatively high. The government needs to strike the right balance between the quantum and cost of domestic borrowing in order to address the ‘crowding effects’ concerns.

The one-year Treasury bill was as high as 19% a year ago setting the tone for high borrowing rates across the country.  We need to deepen the financial markets by liberalizing the pension sector, up-skilling financial markets players and mobilizing more domestic savings.

With savings at less than 20% of GDP, Uganda lags the continent in savings mobilization and therefore over relies on short-term debt financing even when it is not appropriate.

The government must also eliminate domestic arrears which have now exceeded UGX2.7 trillion (just over $750 million) or 10% of the budget. These arrears create a real strain on businesses and have a knock-on credit quality effect on private sector loans. A medium term government financing plan that takes all these issues into account and balances affordability and growth is urgently required.

Lastly, we must address bureaucracy and allow the private sector to function much more effectively.  Unlocking our growth potential will need “all hands on deck” and excessive red tape undermines the bond between the government and business and ultimately compromises private sector growth.

To that end, we hope to see more interventions that streamline the regulatory framework, increase efficiencies and reduce the cost of doing business.  Uganda was ranked 115th in the World Bank Ease of Doing Business 2017 survey.

I know that we can do a lot better.

It’s evident that Uganda needs a massive step change in dealing with our national challenges. We have a great silver lining in our nascent oil and gas sector that is a much needed catalyst for growth. However without connecting the dots, we are likely to miss another great opportunity to truly achieve inclusive and sustainable growth.

 

 

 

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