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Insecurity increasingly becoming a threat to enterprise development

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Added 13th June 2019 12:23 PM

This is overtly manifested in high levels of crime including broad-day-light murders.

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This is overtly manifested in high levels of crime including broad-day-light murders.

By Prof. Augustus Nuwagaba
Of recent, I have been traveling in a number of countries and I have realized that there is a general outcry in regard to urban insecurity.
This is overtly manifested in high levels of crime including broad-day-light murders. This situation is not healthy as it translates in reduced investment, because if there is anything that threatens Business Enterprise Development, it is insecurity. 
As enterprise development slackens, people lose jobs, they become poor and as they lose earnings, they resort to securing their consonance through mischievous activities including crime. Therefore, it is not surprising that Kampala is experiencing high levels of criminality, resulting in loss of life. There is a need to diagnose the root cause of the problem and devise an appropriate solution. This is because you cannot solve a problem by the same means which created it. As J.Sachs, former economic advisor to Kofi Annan counsels, “deprivation and poverty are worst enemies to peace and security”. In Uganda’s case, the government has attempted to install cameras which is a good measure but is insufficient to curb crime. As Robert Mc Namara former American Secretary of Defense and President of World Bank once counseled, “poverty in rural scattered settlements is not as dangerous as poverty in conglomerated urban enclaves. If cities do not deal effectively with poverty, poverty will deal destructively with cities.”
Another impediment to enterprise development is the cost of doing business. For instance, the 25 Commercial Banks available in Uganda continue to operate under a high-interest regime that cannot enable borrowers to thrive with their economic activity.  The interest rates are determined by a number of factors prominent of which include: high fiscal deficit (government expenditure that surpasses revenue), which forces the government to domestically borrow (issuance of government securities etc), a phenomenon that crowds out the private sector, hence driving interest rates further in the ceiling.
The Central Bank has intervened to tame high-interest rates through the CBR (Rate at which Central Bank lends Commercial Bank) a monetary policy instrument that has been used since 2011. The expectations are that if the CBR is set high, Prime lending rates from Commercial  Banks would also correspondingly rise and the Central Bank would be able to reduce private credit, hence controlling money circulation, thereby dampening inflation spiral. The contradiction, however, has arisen where the Central Bank has reduced the CBR hoping that Commercial Banks would respond through the corresponding reduction of interest rates, but this has not happened! Instead, interest rates main high despite a significant reduction of CBR. For example, the CBR is currently at 10% but the current average interest rate from commercial banks is 19%. This demonstrates the minimal influence of CBR as a monetary policy transmission mechanism to cost of borrowing (Interest rates). Of course, if this continues, the result will be contracting economic activity as was clearly demonstrated in a drastic reduction in economic growth in FY 2016/17.
Having deeply studied the financial system in Uganda, Kenya, Ethiopia, China, and the United States, I have come to two conclusions:
1. It is difficult to control interest rates without creating sufficient financial depth. The major Commercial Banks in Uganda are foreign and the first three hold over 76% of available financial assets. The problem is how the Central Bank can guarantee a financial behavioral response from foreign-based Commercial Banks. This is because they are few (oligopolistic) and secures their financing capital from sources that are totally independent of the Central Bank. The implication is that if the Central Bank insists with tough measures, they can hold the entire financing system at ransom, hence, sending the whole economy to “sneeze”. They can for instance simply sit as a cartel and set their interest rates just like fuel products stations used to do, and the country will have few options because of their dominance in the financial sector.
2. The high fiscal deficit exacerbated by continued high domestic borrowing by the government simply crowds out the private sector. This is because Commercial Banks naturally find it more financially prudent to lend to the government (government securities) because of 100% risk-free. The implication is that it is the reduction of domestic borrowing that will largely free private sector credit to open competition, boost economic activity which will enhance aggregate demand and eventually harness economic growth that is sacrosanct for a sustained bill of health of the economy.
From the foregoing illustrative analysis, it clearly emerges that to revitalize sustained and inclusive growth, we need:
1. Domestic mobilization of financial assets. This should be achieved through the establishment of indigenous Financial Institutions. The quick win here is to list such Indigenous financial institutions such as commercial banks on the stock exchange, as the most viable way of pooling cheap financial resources. This will cultivate financial deepening in the real sense, as opposed to the current mere geographical access of Commercial Banks, which does not guarantee utilization of Bank services and products. Ownership through listing will also inculcate financial discipline through creating a self motive incentive. The Agricultural Bank of China (ABC) is currently the 4th largest Bank in the World, having pooled financial assets amounting to USD 24 Billion through listing on the stock exchange. This Bank employs over 100,000 people. It charges very little interest rate and is a major driver of the Chinese economy.
2.  Domestic borrowing should focus on investments with higher multiplier effects. The aim should be to avoid consumption borrowing, such that each USD borrowed must first demonstrate how much it will generate. It is such “high value” indebtedness that will eventually drive benefits that pay off the very debts initially incurred. For example, one needs to see where is Uganda’s foreign debt (have not included; Oil Pipeline and Standard Gauge financing debt) of USD 10.7 Billion invested. The country that has demonstrated the viability of “high value” borrowing is South Korea. The country borrowed heavily for financing industrialization and the results are vividly clear. South Korea has not only been able to pay back all the previous debts but has been able to transform her economy. South Korea is currently a major donor to Uganda. This, therefore, means that indebtedness may not be bad. What matters is what you use the borrowed money for.
In conclusion, there is no dispute that the Ugandan economy is growing phenomenally. However, what is contentious is whether that growth reflects the reality in the day-to-day life of the ordinary people. For example, Uganda’s growth derives largely from service sector namely: i) Banking and ii) Telecommunications, which contribute 59% of GDP and is growing at 8.7%. But the Agricultural (primary) sector contribution to GDP is a paltry 23.5% to GDP and declining at 2.5%. Yet, the sector employs over 76% of the population, while the service sectors just employ a handful of people. This situation cannot cause structural transformation the country is looking for. It is because of this contradiction that most Ugandans will continue to contest the reality that the economy is growing. This, therefore, calls for enhancing investment particularly value addition in the agricultural sector. This should be done mainly through appropriate financing of agricultural investments, but more fundamentally on employment creation. The agricultural sector remains the most economically democratic sector to ignite transformation. Otherwise, we shall have jobless and exclusive growth which may not be sustainable. It is not viable to have a secure country where the majority remains outside the growth trajectory.
The writer is an International Consultant on Economic Transformation in the African Region. 

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