No short-cut to fundamental change in economy! And it had sooner!

SIR— The article “CERUDEB has sh10b for loans” in your March 13 edition came exactly seven days after a UIA-organised “tea party”, code-named ‘Assessing Finance Workshop,” which took place on March 6, at the Sheraton.For the benefit of those who did not attend the workshop, I asked the bankers as follows:1. Since the 1992/93 financial year, when the Government and the Bank of Uganda allowed commercial banks to participate directly in treasury bill purchases, what economic benefits has Uganda’s economy got from that policy change?2. Have the executives of the financial institutions ever considered the high interest rates as the main cause of poor loan repayment by Ugandans, as opposed to the so-called “Ugandan culture” of not willing to repay loans?I stand to be corrected; but Uganda is probably one of the few developing countries where banks are allowed to trade in treasury bills (TBs) with impunity, at the expense of the individual and/or corporate depositors and the economy in general. Most countries sell TBs to the depositors who either bid for the TBs directly to the central bank or through their commercial banks. They do not permit commercial banks to buy the TBs for their own benefit as such a policy tends to make commercial banks prefer investing in TBs at the expense of lending to the domestic economy.Where banks can earn a non-taxable and risk-free interest of up to 40% per annum by lending to the Government through TBs, it is only common sense that they would prefer not to lend to the relatively more risky business sector.As a consequence:l The interest rates are kept artificially high to discourage the business sector borrowers because the banks do not need this sector in order to survive, since the Government is giving the banks enough and risk-free TBs business.l Existing businesses cannot be expanded and new ones cannot be set-up as a result of very expensive cost of loan capital arising from the high interest rates;l The banks on their part dupe the policy makers by arguing that the reason why they charge high interest rates is because the cost of loan recovery is high, conveniently concealing the fact that it is in effect the high interest rates that make it difficult for most borrowers to repay loans, then1. Unscrupulous businessmen have opened up money lending houses charging interest rates of up to 30% per month! The Bank of Uganda has even gone ahead and issued those houses with enabling licenses! A number of Ugandans have since lost their physical assets to these money lenders. These lending houses have become so wealthy in such a short time.2. The Bank of Uganda’s policy of pumping the US dollar into the foreign exchange market in order to keep the exchange rate down is foolhardy, because the demand for foreign exchange will never be met by the bank’s periodic interventions. Instead, it will lead to depletion of our meagre foreign reserves, with disastrous effects on our import-dependent economy. Furthermore, by encouraging export, instead of import substitution policy, the government is simply taking Ugandans for a ride, since at present Uganda’s manufactured products cannot favourably compete on the world market.In conclusion, I wish to state that Uganda’s future does not lie abroad, but right here within our boarders. Policies that will encourage domestic investors to make handkerchiefs, suitcases, school bags, socks and stockings, etc, at home instead of importing these items from abroad will carry the day. Unfortunately, there is no short-cut.Henry M.B. MakmotKampala