How govt turned the economy around

BUDGET    ECONOMY     INFLATION

The Uganda economy is far from perfect, but it is important to look back over the journey that has brought us thus far.  Paul Busharizi looked back to 1986 and the beginning of this administration and tried to chart the course that took the economy from rehabilitation to recovery and set the foundation for eventual transformation.

The Mityana-Mubende-Fort portal road is a 225 km long thread of tarmac winding up from the Lake Victoria basin to the foot of Rwenzoris. It is straddled by lusciously green vegetation of tea and natural forest. Temperatures fall as you climb into our own rift valley highlands and visibility hampered by mist is not uncommon.

Few know the relationship between this road and the Sheraton Hotel Kampala, which in 1986 was known as the Kampala International Hotel. It has for long has dominated the Nakasero hill and overlooked the central business district, an oasis of serenity in comparison to the frenetic pace outside its gates.

In the 1987/88 budget, new finance minister Crispus Kiyonga reported that the tarmacking of the Mityana-Mubende-Fort Portal road and the rehabilitation of the Kampala International Hotel was thanks to barter deals of our crops - most likely coffee.

Both projects were undertaken by Energoprojekt a contractor from Yugoslavia, then still a single country in eastern Europe. After the collapse of the Berlin wall in 1989 and the subsequent collapse of the USSR (Union of Soviet Socialist Republics), Yugoslavia imploded giving birth to Bosnia and Herzegovina, Croatia, Serbia, Slovenia, Macedonia, and Montenegro.

People refer with derision to the NRM's barter trade days but these were a response to a difficult situation and the arrangements were never intended to be a permanent way of trading with world markets.

Kiyonga reported in that budget that the country was suffering severe balance of payments problems, with inflows from abroad outweighed by the outflows to pay for debt repayments, imported goods, and services.

He said the balance of payments position had deteriorated to minus-$58.5m in 1984 from -$32.9m in 1982. He was speaking in 1987 and one can expect this position had worsened by then.

This may be a small figure when seen against our present reality but the 1984 negative position was 30 percent of our total exports in 1986.

The barter trade was a stop-gap measure to get the economy back on its feet as they negotiated for aid from the donor community.

Also, the initiative didn't last because we were not producing anything in the volumes or of the quality, to pay potential suppliers of capital goods and equipment we sorely needed to rehabilitate our industries and infrastructure.

The currency reform of 1987, which lopped off two zeros and charged a 30 percent tax on all liquid assets while controversial, had the double benefit to the government of raising desperately needed revenue through the levying of the 30 percent tax and reducing the money in circulation to that extent.

However, inflation soon galloped off again to peak at 240 percent in 1988 while the revenues collected were swallowed up as soon as they hit the treasury - 50 percent of the monies realized were committed to paying the government's indebtedness to the banks at the time.

Another controversial initiative was the liberalization of the trade in foreign exchange through the legalizing of forex bureaus, a decision that was taken in the 1990/91 budget.

Prior to this, to get hard currency legally one had to apply to the Bank of Uganda. Because of the serious need for this hard currency for essential imports, the central bank prioritized the little foreign currency they had for imports of plant and machinery, medicines and agricultural inputs at a prescribed official rate, which barely reflected the reality in the market.

However, a parallel market had developed, whose rates were often multiples of the official rates and offered a lucrative sideline for officials with access to dollars at the official rate.

This move was made against a backdrop of falling export receipts from coffee, which accounted for up to 80 percent of export revenues and more than 50 percent of tax revenues. In an interesting twist of fate up to that point, coffee prices had been steadily falling on the world market since the NRM came to power in 1986.

The world price of coffee had shed a dollar between 1986 and 1990 when Kiyonga reported the country's crop had fetched an average of $1.25 sending our coffee exports receipts plummeting by 60 percent during the period.

So liberalizing the market was a counterintuitive maneuver intended to attract more hard currency into the country as the shilling became fully convertible. It was evident that significant amounts were changing hands on the kibanda market why not bring them out into the open and tax them as well.

The critics - probably the beneficiaries of the old arrangement of selling official dollars on the kibanda, warned that this move would lead to capital flight from the country at an unprecedented rate a situation the country can least afford, but the opposite has been proved true.

In light of the competing demands for its resources, the government finally decided it could no longer hold up the coffee sector and in his 1991/92 budget speech, Kiyonga announced that the state monopoly Coffee Marketing Board (CMB) had been disbanded and four coffee unions authorized to export coffee.

By this time our coffee prices on the world market had fallen below a dollar a kilo and clearly, farmers were voting with their feet, leading to a reduction in coffee exported to two million bags from the previous year's 2.3 million bags.

With this one stroke government stopped trying to fight the market - by trying to pay farmers better than the world market would allow, passed on the burden to the private sector.

Against criticism that they were sounding the death knell of the coffee industry, it caught a second wind and the liberalization was just in time to take advantage of a coffee boom, the type the industry had not seen since 1976.

The challenge of having to raise government spending exponentially to rump up public service pay, finance rehabilitation works around the country, prosecuting an anti-insurgency war were playing havoc with money supply and failing government's wish to bring inflation under control.

Finance minister Jehoash Mayanja Nkangi in his maiden 1992/93 speech lamented that just when they thought they had got inflation under control the previous year's budget that was heavily reliant on donor support which did not materialize had forced government's hand.

The opening of the taps led to a 51 percent increase in money in circulation. As a result, inflation jumped to 63 percent from the previous year's 29 percent.

To correct the error government took drastic actions including cutting the budget by 17 percent, which cut was applied only to the fourth quart of the 1991/92, he introduced the treasury bill auction as a means to mop up excess liquidity and boosted efforts to improve revenue collections.

The government's measures worked better than anticipated that in the next year Mayanja Nkangi was proud to announce that inflation had plummeted to minus1.3 percent.

 "I do not believe that our battle with inflation has met with only transitory success. Improved fiscal control was not achieved by the stroke of a pen in one round of unrepeatably draconian expenditure cuts.

Fiscal and monetary control has come from fundamental improvements in the systems of economic management consistent and regular cash flow management on the fiscal side, closer scrutiny of expenditure decisions, greater coordination between the central bank and Ministry of Finance and Economic Planning and the restructuring of the management of monetary control," Mayanja Nkangi told the NRC.

The minister said that the stabilization did not affect economic growth, which was registered at seven percent that year.

Inflation was never to reach the late 1992 levels of 40 percent until 19 years later, when inflation peaked at 30 percent in October 2011 due to a combination of regional drought and campaign-related expansion of money in circulation.

With the taming of inflation through controlling government expenditure and the use of treasury bills and bonds to mechanically suck money out of circulation, the government has been able to consistently hits its target of five percent annual inflation since.

This has had its downside as the government has expanded its borrowing from the public. But the central bank is adamant that in the absence of increased productivity in the economy their use of monetary instruments will continue in defence against inflation.

The critics say that the government is crowding out the private sector and is solely responsible for high lending rates that obtain in the market today.

In an attempt to bring down lending rates government embarked on the controversial sale of the Uganda Commercial Bank (UCB) whose branch expansion to 136 at one time, increased lending to rural farmers and a crude attempt at crony capitalism almost felled the country's biggest lender.
 

NEXT; Government looks to privatization to give the economy an added boost