Distressed companies: Perfect opportunity for Uganda to learn

By Francis Kisirinya 

The public has woken up to distressing news that a number of our companies have faced challenges to operate economically and are at risk of destruction/receiverships.   There is nothing as distressing to entrepreneurs as losing their companies to creditors.

In Uganda's case, it is even more painful given the tortuous and painful journey one endures to start and grow the business.

Finding the capital, navigating the legal and regulatory regime and finding appropriate skills is a nightmare. Entrepreneurs are forced to use high interest loans to finance their businesses.

Besides, the heavy burden of repaying bank loans, exorbitant rental charges, high power and transport costs, taxes, levies and duties condemn entrepreneurs to very long hours of work, heavy personal sacrifices sometimes including risking their health and family life to have a chance at success.  While the entrepreneur is responsible for internal management of their company majority of the issues that companies face are creations of the economic environment they operate in.  

Besides lack of effective demand brought about by monetary tightening to fight inflation, the country has for many years lacked cheap and appropriate finance/loan options, good roads, cheap and reliable power, and supportive legal and regulatory regimes including the tax framework.

The absence of proper regulation and enforcement has created unfair competition in the market, increase in counterfeits and substandard goods, discretionary tax Law implementation and increase in corruption.

It is therefore not surprising that companies are distressed.  Government is culpable for this state of affairs. The stubbornly high interest rates have been attributed to high domestic borrowing by Government to pay for its very large administrative expenses and lack of effective interventions to bolster production for the local and export markets. We all recall that the fortunes of the Uganda economy turned for the worse in 2011 because spiraling inflation caused by increase in food prices, in a Uganda endowed with unrivalled agricultural potential!.

In fighting that inflation, Bank of Uganda increased her Central Bank Rate (CBR) so high and so quickly to tighten monetary policy and subdue consumption thereby reduce inflation. This set in motion a destructive chain reaction through increased interest rates by commercial banks, depreciation of the Uganda shilling against the dollar and reduction in demand for goods and services.

The high interest rates did not only erode manufacturing companies' profitability but curtailed further investments thereby suppressing production even more causing more inflation and more monetary policy tightening.  These shenanigans are responsible for the state of the economy. We are happy that government has come up with measures to address the problems including suggestions on helping distressed companies.

It would be unfair if we don't learn a thing or two from this scenario but most importantly implement the lessons.

Lesson 1:  Balance monetary and fiscal policy

Any economy will have inflationary challenges time and again and the solution must be a package of both monetary and fiscal operations. Where accelerated/high monetary tightening is warranted, Government should always create a source of capital to support production for local and foreign markets.   A fully operational Uganda Development Bank is crucial here to provide appropriate development finance to industry.

Lesson 2:  Create effective early warning systems

In Uganda,  the Gross Domestic Product (GDP) is assumed to be production led only and as a consequence well developed systems for collection of production statistics for instance through the quarterly but late GDP statistics are available. This is a reflection of where the country has come from. A few years ago whatever would be produced could be sold immediately. However, today this is not  the case.

In many industrial countries, markets drive production and this explains the about 55% capacity utilization at most industries today. In such a situation, consumption influences GDP.  There is therefore a need to create a system for collection of monthly consumption statistics. The combination of Production and Consumption statistics would be an appropriate bell weather of the health of the economy and would help policy makers to avoid pursuing a tight monetary policy stance where consumption is reducing or stagnating.

Besides the lessons an opportunity has opened for Government to motivate our entrepreneurs to open up their businesses to outsiders for instance by listing on the Uganda Security Exchange. Besides creating an option for cheaper finance, listing will lead to better corporate governance thereby increasing the chances of local companies' survival of not only bad economic times but also beyond the founders.    

We therefore applaud Government's commitment to revive the economy for all including payment of suppliers by August as well as the move to rescue distressed companies. We would like to emphasise again that monetary policy should supplement fiscal policy otherwise the money injected into the economy to through payment of arrears can be mopped up the next day through monetary operations thereby failing the objective of improving aggregate demand.

The writer is a Director at Private Sector Foundation Uganda (PSFU)