How the coffee boom changed the economy

By Paul Busharizi

Mayanja Nkangi in his 1994/95 budget speech reports how the liberalization of coffee marketing was proving such a big success.

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 BUDGET       NKANGI     COFFEE

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.

Ssalongo Mukasa looks back on that time with great fondness. On the verge of cutting down his coffee trees – their cooperative had not paid him for his coffee for two years.

The effect of the disbandment of the Coffee Marketing Board (CMB) meant that he was now being paid cash for his crop thanks to the new competition and getting paid more.

“For the same amount of coffee, I was earning twice even thrice as much. Life was a party,” says Ssalongo, who still has about 5000 trees.

Mayanja Nkangi in his 1994/95 budget speech reports how the liberalization of coffee marketing was proving such a big success.

“In 1986 when international prices were over $4 per kilo, farmers only received US cents 13 per kilo; earlier this year when prices were around $1.20 per kilo farmers were getting almost US cents 40 per kilo, three times the 1986 price,” Nkangi said.

But this success threatened to throw the government’s plans for the economy into disarray.

1n 1993/94 coffee receipts jumped 61 percent these and other factors saw the shilling appreciate 22 percent, putting a pause to a 94 percent slide in the shilling’s value over the previous eight years.

A stronger shilling would affect exporter’s – by making them earn less shilling for their dollar and affect farm gate prices and production, which government was trying to jump start.

So as a way to moderate the shilling’s appreciation Mayanja Nkangi proposed a coffee stabilization tax of 20 percent on coffee sold for more than sh1,100 and 40 percent on prices above sh2,200.

The tax was supposed to help smoothen out the fluctuations in the exchange rate so as not only to help coffee farmers but all exporters as well. In addition, the removal of the additional cash would help keep inflation in check.

The tax was unpopular, causing disquiet in the industry not least of all because some exporters were dodging the tax and causing an uneven playing field.

The liberalization of coffee marketing and the safety valve provided by the coffee stabilisation tax did not come a moment too soon because as the minister was reading his budget frost was laying waste to 30 percent of Brazil’s crop. Brazil was and still is the leading producer of the aromatic bean in the world.

It was reported at the time that from the sub-dollar, a kilo levels of the previous year’s coffee prices on the London Commodity’s Exchange that year rose more than fourfold to $4 a kilo.

“If the entrance of competition was good the year of the coffee boom was too good. I could roof my house with mabati. Cement my floor and I even added a few hundred trees,” Salongo said. An attempt to go into dairy farming was not successful.

The stabilization tax was abolished in the 1996/97 budget.

More difficult economic decisions were to come.

In 1996 in a bid to better tap into the growing consumption trends the government replaced sales tax and commercial transaction levy with Value Added Tax (VAT).

Despite a whole year of consultation and training the shopkeepers of Kampala shutdown their shops in protest over the tax bring capital to a grinding halt. They complained it was too difficult to manage and would make them go out of business.

The government stuck to its guns, the shops were reopened by the weekend. VAT collections are now second only to tax on personal incomes (PAYE) as a proportion of total revenue collected by the Uganda Revenue Authority (URA).

Mayanja Nkangi would have been forgiven for being proud as a peacock for the positive trend in the first two years of his tenure had taken.

But an audacious plan to fire up the economy through the sale of state enterprises was going to grey the mop on the finance minister’s head even further in coming years.

As far back as the first budget speech under the NRM in 1986, the government’s portfolio of 100-plus state enterprises was recognized as an unsustainable drain on the state coffers.

In the 1986/87 budget finance minister Professor, Ponsiano Mulema complained that he would need sh22.7b to keep the state enterprises afloat with no hope of any monetary return.

Crispus Kiyonga in 1991/92 speech declared the intention to retain only 16 of the 112 public enterprises, hold majority shares in 23, a minority stake in 13 and the rest be flogged off or shut down altogether.

Mayanja NKangi reported in his 1993/94 speech that nine companies had already been lined up for sale and expected the process of privatization would be speeded up with the enactment of the Public Enterprise Reform & Divestiture Bill, which was before the house already.

In 1994/95 the finance minister reported that 13 public enterprises had been sold off and sh51.7b had been made, “However, as a result of many years of mismanagement, substantial liabilities have been accumulated which will have to be settled from these proceeds.”

He said an additional 11 companies had been offered to prospective investors, 25 were being prepared and18 liquidated.

But no single privatisation polarized the country more than that of Uganda Commercial Bank (UCB), the country’s biggest bank by branch network, which played a critical role in revenue collections and paying public servants.

In the 1980s the NRM government underwrote an ambitious branch expansion drive that saw it grow to 190 branches countrywide. In the 1988/89 budget speech, Kiyonga reported the bank would open 136 branches in the new financial year. This network is one through which the ill-fated Rural Farmers Credit Scheme was channeled.

The Rural Farmers Credit Scheme was intended to provide credit to smallholder farmers.

These two initiatives were to prove the bank’s downfall.

Due to unsustainability, the branch network was pared down to 65 branches at the time of its sale to South African Stanbic Bank in 2001.

While the rural farmers' credit scheme was poorly executed and ended up saddling the bank with more than sh60b of bad loans that had to be transferred to Non-Performing Assets Recovery Trust (NPART) set up specifically to recover UCB’s bad loans.

Government plugged the hole created by the removal of these assets by injecting an additional sh100b in UCB.

“The magnitude of the cost can be appreciated by noting that the sh100b which has to be invested in restructuring UCB would have been more than sufficient to build an extra three classrooms in every primary school in the country,” Mayanja Nkangi told parliament in 1997.

The plan to have it privatized by the end of 1996 proved wishful thinking, as suitor after suitor fell by the wayside until Malaysian company, Westmont, which it was recently revealed was a shell company owned by the now-defunct Greenland Bank.

Following Westmont’s failure to pay for the Bank of Uganda took it over and eventually sold it to Stanbic.

The long drawn out confusion around the sale of UCB was played out amidst unprecedented volatility in the banking sector.

At the end of the 1990s, there was a spate of bank closures, including Greenland Bank’s, which was a bitter pill the government had to swallow in order to rein in the industry, which was for a long time undercapitalized and under-regulated.

The genesis of this seismic shift in the industry was the government’s decision to give greater autonomy to the Bank of Uganda, through the amendment of the act that governed it, and beef up its capacity to regulate the sector.

An emboldened Bank of Uganda went around swinging the ax felling Teefe Bank, International Credit Bank, Sembule Bank, Co-Operative Bank, Trust Bank, and Greenland Bank before the turn of the century. The unpopular action – one central bank official says death threats were issued like confetti at a wedding, helped revitalize the industry and put it at the center of driving economic growth over the last two decades.

As an after note the issues around the privatization process and brought into sharp relief by the shenanigans surrounding the privatisation process of UCB while it did not immediately cost Mayanja Nkangi his position as finance minister, led to the resignation of the state privatisation minister Matthew Rukikaire as well as Leonard Muganwa, who was in charge of the process as director of the Public Enterprise Reform & Divestiture unit.

The critics of the privatization of UCB and the bank closures of the latter part of the 1990s have argued that it delivered the financial sector into foreign hands.

The central bank argues that the banks were poorly managed, would have eventually collapsed under the weight of the bad loans they were carrying and were actually an illegal conduit for wealth from unsuspecting depositors to the banks’ owners, a situation, if left unchecked, would have produced more problems to the wider economy and to the politics of the country.

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