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Decisive economic policies needed to avoid recession

By Geoffrey Onegi-Obel

Limitations of the government’s `resource envelop’ budget driven response to the global economic slowdown including its impact on Uganda’s job creation, domestic savings and domestic direct investment

We are already being dragged down by the world wide economic recession. How Uganda comes out of it is a direct function of whether we acknowledge its likely effect, when, and whether we structure a stakeholder response, as opposed to the traditional annual one size fits all ‘resource envelope’ budget driven response.

Mutebile’s response

Governor Mutebile has done his best with an excellent explanation of the origins and effect of the global meltdown on the nation – within the constraints of a Governor’s need to not cause panic as he gathers the tools and ammunition required to manage Uganda’s latest monetary and fiscal policy challenge.

Ugandans who read widely also got it right about the origins of the current slide of the world economy into sustained recession ” and the role ‘toxic’ US mortgage contracts played in triggering the downturn.

However thus far there has been lack of clarity on how such ‘foreign toxic mortgage contracts’ have to do with us in Uganda.

The answer is that the contracts went bad, business collapsed and massive job losses resulted .Then the new jobless in the collapsing major economies of the world stopped drinking our coffee at Starbucks and the price of coffee has begun to collapse ” putting many Ugandans out of pocket. Also as the jobless rate continues to risein the developed countries , they are less likely to meet their commitments on aid, tourist visits will decline , as will FDI , leading to more Ugandans falling out of the already few jobs and out of pocket.

The question which should be asked is whether we have a response, and how prepared are we to respond as Uganda to stimulate the economy into a sustained growth trajectory?

Technically, the ‘plumbing’ for a response to the challenge we face includes the financial services sector of an economy – such as the Bank of Uganda [BOU], the Uganda Securities Exchange Ltd [USE], the Capital Markets Authority, the National Social Security Fund [NSSF] the commercial banks, the Investment Banks, the Development Banks, the Microfinance Institutions the very huge Informal Sector and the National Planning Authority.

This aggregate of ‘plumbing’ only works efficiently when the central bank through the interest rate regime , and the stock market through the yield curve , are both pricing risk in contracts correctly ” and the National Planning Authority has a strategy.

Traditional economists see the development challenge in sub-Saharan Africa as an effort to prevent a permanent and endemic situation of poverty from getting worse ” that African countries are condemned to a `condition’ requiring a permanent state of stabilisation measures. While we may periodically enter into ‘an economic recovery phase’, we tend to never gear into ‘take off phase’, and more often than not lapse back into the realm of ‘stabilisation’ measures – where it is too ambitious to talk of job indicators, domestic savings, and Domestic Direct Investment (DDI).

This is the principle behind the Poverty Reduction Strategy Papers [PRSP] and the various mutations of the Poverty Eradication Action Plan ” the PEAP which currently guides Uganda’s Monetary and Fiscal Policy. It is only recently that the PEAP made specific reference to jobs as an important variable.

Collectively these documents may be called the ‘Stabilisation Measures’ ” and the assumption is that Africa is unlikely to exit from the decades old prevailing poverty indicators in the short to medium term ” so that the only solution is to prevent the situation from getting worse by all means, unless some mineral discovery is made to gear up the economy from ‘stabilization’ into ‘recovery’ and ‘take off’.

Experts on the PRSP model [World Bank Poverty Reduction Strategy Papers] from which the Poverty Eradication Action Plan – PEAP evolved are divided but many have argued and have pronounced that the world wide economic recession will hardly affect countries like Uganda ” arguments based on so called lack of market correlation, and that our poverty indicators and growth trajectory will not change in any significant way.

In other words that since we are already poor, and not expected to get out of poverty any time soon, the world wide economic recession will not change our basic poverty indicators.

Investment Bankers

Investment bankers and capital markets practitioners on the other hand see the development challenge as an effort to introduce monetary and fiscal policy instruments which gear up the GDP growth rates past the 8% job creating rate confirmed by Professor Bevan of Oxford – in the process deepening the financial sector and creating a yield curve to guide monetary and fiscal policy in targeting wealth creation, as opposed to poverty eradication.

For the capital markets industry practitioners, no economy is a basket case ” because the ‘idle productivity’ [subsistence driven productivity without structured strategy] can generate up to 8% points of GDP growth on a typical narrow GDP base.

In our business , the ‘struggle’ is to engineer the 3 or 4% additional GDP growth points to gear up the idle investment GDP growth threshold of the Bevan 8% – and through proven monetary and fiscal policy targeting the ‘hopes and aspirations of citizens’ ” stay the course and keep the economy at above the Bevan 8%.

In short , there is a struggle between on the one hand, the ‘economic policies of stabilization’ successfully executed and designed to halt economic decline in the 1980’s ( but which policies are still the basis of the PEAP 30 years on) and the need to invest in the hopes and aspirations of Ugandans through badly needed ‘economic policies of GDP expansion’ and complete the economic growth cycle which begins with Stabilization Measures, then Recovery Measures , and finally the GDP Expansion or Economic Take off Measures.

Even when we went into recovery in the mid 1990’s and by early 2002, begun to take steps and inch towards economic take off, the iron grip of stabilization measures remained. The necessary introduction of instruments for the deepening the financial sector through the domestication of Foreign Direct Investment [ FDI ] by Domestic Direct Investment [ DDI] ” a necessary requirement for economic take off, was halted by powerful stakeholders who correctly saw a partnership of DDI and FDI as ‘locking out’ local interests.

It follows from the foregoing that the world wide recession will seriously affect us ” and indeed we are already being affected. If it is difficult enough to sustain projected growth rates during a recession, it is even more of a challenge to engineer additional GDP points.

Accordingly the first step for any country is to acknowledge the challenge and move on to develop a stakeholder based country response strategy. It is in this area where we are witnessing the development of two familiar weaknesses in the face of the challenge ” indecisiveness and policy failure.

As a reality check, at the Uganda Securities Exchange Ltd, we are already feeling the impact of the worldwide economic recession with business down some 60% ” as are the sister trading platforms in Nairobi [NSE] and Dar- es- Salaam [DSE]. The USE board is regrouping for a stakeholder-based response to the market downturn challenge

After acknowledging that we are already negatively affected, the question in Uganda ” and elsewhere in sub-Saharan Africa should be: ‘What should be the nature of our country response?’


Dr GA Onegi-Obel is a pioneer investment banker in Uganda who in preparing Uganda for the stock exchange published the ‘Financial Times’ with the help of USAID, then researched for Uganda Capital Markets Industry at Princeton University as an Albert Parvin Fellow . With the help of Governor Kikonyogo and Governor Kibirango ,he finally set up the Uganda Securities Exchange ltd in 1997. He is now best known for the abortive attempt to position the NSSF as the key partner to international financial institutions under a new home-ownership dispensation in Uganda, as well as the key market-maker for the capital markets industry.

Next week, in the last of a two part series, Dr Onegi- Obel discusses possible solutions including a private-sector driven stakeholder structured policy, stimulus package, interest market reform and oil.


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