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The bailout question

bAIL OUT BIG

COMMENT: David Chandi Jamwa

Bailout – How to get it done and done right without using taxpayers money

For the past three months or so I have been seeing myriad opinions, sentiments, emotions, rebuttals, re-rebuttals, postulations, reverse-postulations, forwardings, withdrawals, denials, and in several cases outright rubbish, flying around the Ugandan media with regard to a potential bailout for ailing local firms.

I have been trying to ignore (rather unsuccessfully I should say) this irritating and never-ending public avalanche of points of view on the bailout question. It gets me fatigued and is simply annoying to keep tabs on the “ups and downs” of the arguments and counter-arguments being propagated by parties ranging from learned economists to some ridiculously shallow-minded opinion leaders.

As the British say, enough is enough; and I believe its now my duty, as a citizen of the Pearl of Africa’s Crown and a patriot, to bring some sanity, sense, and direction to this raging debate.

For those of you who may have been on a return trip to the moon (or to the Antarctica for that matter), and have thus have not caught a whiff of this bailout question, the issue at hand is that the Ugandan commercial banking sector has over Shs1.8 trillion (US$533 million) of Non Performing Loans (NPLs), ie about 2% of the country’s Gross Domestic Product (“GDP”) and 5.3% of its total Gross Loans.

NPLs basically mean borrowers who have failed to service their loans, for reasons ranging from the absence of local content legislation, government failure to pay for goods and services it has consumed from the private sector on time, financial mismanagement, astronomical bank interest rates, foreign currency losses, economic slowdown etc. Such borrowers now reportedly face or will imminently face bank foreclosure (e.g. receiverships or liquidations).

A number of these NPLs reside in strategic economic sectors such as steel-making and processing, tourism and hospitality and agro-processing with the respective borrowers employing thousands of Ugandans. There is, therefore, general concern, and it is fair I should say, that if these businesses are left to collapse then the overall economy will suffer from the adverse de-multiplier effect arising from such foreclosure triggered business collapses. Such adverse de-multiplier effect would gravitate around loss of employment, loss of disposal income, erosion of economic linkages (supplier and customer links), reduction in key economic activity that could lead to a market contagion and a resultant decrease in GDP (i.e. economic contraction).

So the `bailout question’ is whether the government should step in or not to save the ailing entities. If agreed, how and which businesses should benefit from such a step in?

As many a serious and critical matter in Uganda, the bailout question has been made uncomfortably toxic by the creeping in of your typical Ugandan Schadenfreude and gloating, grave business community rivalry, senseless opinion leader heckling, and politicking.

For those unlucky businesses included on an unofficial list of companies allegedly seeking a bailed out (that has since been disowned by the government) that was released into the public arena recently it has been the story of the crucifixion of Jesus; they have been tongue-lashed, insulted, demeaned, made fun of and corporately assassinated by the ugly Ugandan public persecution monster.

All that the attacks have done, sadly, is to move the debate farther and farther away from the realistic and relevant gist of the bailout question, i.e. that sensible people know that something, surely, has to be done; we just need to figure out what exactly needs to be done, how, and specifically for whom.

For answers, we must appreciate that bailouts are nothing new; not in the least. Just take a look at some of the famous (or infamous) ones below:

  • June 2016 – The European Union (EU) awards Greece over US$8.4 billion in bailout aid over and above previously awarded debt relief;
  • July 2008 – The U.S. government nationalises the country’s two largest mortgage banks with an injection of US$200 billion;
  • October 2008 – The U.S. financial sector gets a rescue package under which the U.S. Treasury buys US$700 billion worth of NPLs from the banking sector;

2 comments

  1. David, the idea you’re presenting seems attractive but a little harder to implement here. We can stick with using taxpayers’ money – and nobody is entirely against it, most oppose the manner. Ugandans have no problem if Roofings is nationalized or if government buys a number of shares in Bitature’s company equivalent to the amount in bailout.

    We aren’t responsible for past mismanagement of these companies but if we must bail the out, management from now onward needs to follow a path that we know will work.

    The Korea and Brazil examples can mislead. Not everyone knows how IMF plays a role in the relative strengths of our currencies, configuration of our economies and how such bailout money gets scooped back and repaid to the “lender.” The same with Greece and the European powers that spent months negotiating back and forth to reach a consensus on bailout. They agreed on transnational trade deals, revising tax regimes and other ways for a win-win outcome. And don’t forget the Greek is not proud now… they’re not allowed to do whatever they like with the economy, as they’re being supervised by the rest of Europe.

    Do you want to give Bitature taxpayers’ money as bailout for his company and watch helplessly as he buys a yacht? And it’s serious because he’s more known than his company or whatever it does. You see, Ugandans are not opposing for the mere sake of opposing. Of course it’s dangerous to not just oppose and not offer a better idea.

    David you’ve audited companies and big businesses. And not just finances by systems too. What if these companies just need to be overhauled in structure… you know how managing growth can be difficult for firms that started out small and not expecting to become big. Yes, they have grown and employed Ugandans but we need to direct them better… we as a country must have an interest in them.

    I am for government taking these companies over or at least buying a significant stake so that their running from the moment of bailout is not entirely by the same people and/or methods that have run them into debt. This move wouldn’t be new; you must have noticed that in all meaningful bailouts, there’s been a shakeup too.

  2. Jamwa, Jamwa!! The guy that successfully squandered pensioners savings, losing his job and facing jail time, is now your expert brain on turning around economically crippled entities.

    Unfortunately, the article is in itself ambiguous on how exactly tax payers money does not get touched. You correctly identified one of the root causes of the problem – government not paying suppliers who borrowed bank money to effect those supplies. How does FDI into the banks solve this??? You talked of government co-investing and debt relief. Who foots this bill???

    Jamwa, Jamwa, Jamwa!! I’m struggling hard to separate the gist of this content from the author but the name Chandi Jamwa will unfortunately forever remain a disgrace in the face of all NSSF savers, giving Jamwa absolutely no moral authority to scribble anything on good financial management practices.

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