Why local investors should be leveraged for a stable exchange rate

January 19, 2016 in Business, Columnists, Editorial, Finance, Financial Services, Investment, Letters, Markets, Opinion, Policy, Trade & Industry by Editor

To the consternation of policy makers and importers, the Uganda shilling began has in the past two weeks been losing the gains it had made during the last two months of 2012. At the start of the week the local unit had shed as much as 6 percent of its value against the greenback.
The losses were partly attributable to a resurgent US currency but local commentators also pointed to Uganda’s perennially weak exports performance and a surge in local demand as commercial banks adjusted their dollar positions in anticipation of the dividend repatriation season by multinationals which is set to commence in a matter of weeks.
One can safely argue that with the world markets in tumble and soft conditions in Uganda’s major export markets, the shillings woes can only get worse. With an insignificant domestic manufacturing base and heavy reliance on imports, there is little scope for the depreciation of the Uganda shilling to correct itself through a reduction in imports.
Even if that were to be the case, there is no escape from the seasonal oscillation occasioned by the annual repatriation of profits by multinationals. This reality should be cause for an intelligent rethink of Uganda’s investment promotions strategy. In much the same way African rulers tend to be more accountable to western donors than their citizens, Ugandan policy makers appear to have little faith or even interest, in expanding their homegrown entrepreneur class.
This is partly because of a desire for quick fixes. The problem is that this has become the default policy position and incentives have become a favour dished out to the well connected by the fountain of power.
Whatever their failings, Sudhir Rupaleria, Mukwano Industries, the Alam, Wamunno and Mulwana families are good examples of the policy alternatives being advocated in this editorial. Sudhir is almost voracious in his appetite for real estate but he is reinvesting his profits here and thereby expanding the productive and tax base of our economy. His profits go out largely to bring the capital goods he cannot source here. Imagine the possibility of even only 1000 Sudhir’s playing in this economy. As it is, we are exporting capital every time we license a foreign investor or sell government paper at ever steep returns that negatively impact domestic lending rates.
I will not prescribe radical remedies such as ownership caps for foreign investors. But I would pull the brakes on gifting lucrative sectors of the economy to foreign investors through divestiture and offer more incentives to local entrepreneurs to grow.
That is what one reads in the current push to liberalise (or cannibalise?) the pension sector which in the eyes of the agents of imperialism means unbundling the NSSF. And indeed, in no time, global brands have swooped in waiting for the kill. One could suggest that the sector could be liberalised by setting up a parallel pension’s body run around market principles for public servants. But a small economy like Uganda could actually benefit from further consolidation that would see the proposed national medical insurance scheme operated as an add on to the NSSF and the public sector pension fund.
As it is, the Ugandan economy is set for reverse colonization in exchange for ‘good boy’ praises from the international carpetbaggers. Looked at in terms of production, the current arrangement only gives Uganda minimal returns in form of rent since even labour is cheated in the absence of a functional labour policy and trade unions.
To cap it all, foreign investors in Uganda are not committed to the country, do not want even to pay taxes as seen in the kind of lopsided agreements they force down the throats of unexposed bureaucrats or short-sighted local collaborators.
It would of course be naïve to imagine that local investors will be the panacea in the absence of a performing exports base and a strong local culture of rule of law. But an optimal balance between local and foreign investment can contribute to bringing some stability to the exchange rate.