Why Ugandan pundits are mistaken in their understanding of why some foreign firms have quit our market
THE LAST WORD | ANDREW M. MWENDA | A couple of multinational firms have pulled out of Uganda in the last one decade. Oil giant Shell sold itself to Vivo, Barclays Bank to Absa while Kenyan supermarket giants Uchumi and Namukatt went under. Recently, Africell followed by South African supermarket chains Game and Shoprite also decided to exit. Consequently, Ugandan pundits have been trying to explain this development.
Led by Timothy Kalyegira, a man of many doomsday projections for Uganda (and Africa), some people have been claiming that this is a sign that our economy is failing. Last week, newly appointed Permanent Secretary to the Ministry of Finance, also secretary to the Treasury, Ramathan Goobi, posted on Twitter that he had formed a committee to assess the cause of these developments.
It is intriguing how a section of the Ugandan punditry and journalism look at economic issues. Economics does not study the behavior of individual firms and individual entrepreneurs. It studies the aggregate economy, focusing largely, though not entirely, on the growth of GDP. It doesn’t matter – really – which individual firm closes and which opens or who buys and sells. That is a matter for business schools, who study the economy at the micro level of the individual entrepreneur and/or the firm.
The primary policy question for Uganda’s economy therefore is not, and cannot be, which company is exiting the banking, oil, supermarket and telecommunications sector. Rather it should be the performance of these sectors at their macro level. The critical questions for economists should be: how many bank accounts are being opened, what is the total value of bank assets, deposits and profits; how many mobile phone subscribers are we adding, how many people are getting online, how many phones are being sold etc. If consumption of these items is growing, it matters less at the macro level which individual firms are failing or succeeding.
The only policy issue at a micro level would be if many Ugandan-owned firms are failing and being taken over by multinational firms. This would mean our citizens are losing control of the economy, which is increasingly getting into the hands of foreign firms. The impact of this is that an increasing share of the surplus produced would constantly be externalised as dividends by foreign firms, or through transfer pricing and other tricks multinational corporations use to rip-off host countries.
As the reader knows, Uganda sold itself out to multinational firms long ago. The commanding heights of our economy are already in foreign hands. What is happening now is that one multinational firm is selling herself to another multinational firm. It is only in the supermarket sector that foreign firms have been beaten by local firms; especially Capital Shoppers and Quality Supermarket. Of course, the exit of South Africa’s Game and Shoprite has been occasioned by the entry of the French Carrefour.
Back to the exit of firms and Kalyegira’s misunderstanding of basic economics and ignorance of the facts. Most multinational firms exiting Uganda specifically and Africa generally today cannot be doing so because the market has grown smaller. Uganda’s (and Africa’s GDP) was much smaller in 1990 when Shell was a major player in the Ugandan (and African) retail oil sector. For instance, in 1996 consumption of oil products in Uganda was 682 million litres per year costing $147 million ($256 million in 2021 dollars). Today, consumption of oil in Uganda is 2.3 billion litres per year worth US$ 1.25 billion. Surely their exit cannot be that our economy has gotten worse.
Barclays was in Uganda in 1995 when total deposits in our banking sector were Shs383 billion (or Shs1.468 trillion in 2017 prices), bank assets were Shs724 billion (Shs2.755 trillion in 2017 prices) and profits were Shs10 billion (or Shs38.33 billion in 2017 prices). It exited Uganda in 2019 when deposits in our banks were Shs23 trillion, bank assets Shs33 trillion, and profits were Shs883 billion. Clearly the growth of the banking sector has been phenomenal and therefore Barclays could not have exited because the aggregate banking market had shrunk.
In the telecommunications sector, where Africell is exiting and where Celtel, Zain, Orange and Warid have previously exited, the same applies. In 1995, Uganda had only one mobile telecom company, Celtel with less than 2,000 subscribers. By December 2020 there were 28 million active telephone numbers with more than 20 million internet subscribers. Revenues in this sector grew from Shs 1.4 trillion in 2010 (or Shs1.89 trillion in 2017 prices) to Shs3.6 trillion in 2019, almost doubling in nine years and reflecting an annual average rate of growth of 17.6% against GDP growth of 6%.
In practically every sector, whether we talk of cement, beer, soda, etc. there was been impressive growth. Incidentally it is only in agriculture where growth has been slow, sometimes stagnant and where there has been no growth in productivity i.e. output per unit factor input – whether of land, labour or capital. If companies are exiting, I am inclined to believe that it is because liberalisation has increased competition and many of them cannot cope. The reason cannot, therefore, be the size of the pie but the margins that are falling as a result of increasing entry of many players in the market.
So Goobi did not need to set up a committee to study why some firms are closing. He needs to study the growth of each of these sectors over time – unless the cause of their closure is related to political harassment or punitive tax administration. Barclays and Shell made a strategic decision to exit the African market at a global level, for reasons that had little to do with the performance of our economy in Uganda and the African continent generally. In fact they stayed when Africa was stagnating or even economically retrogressing in the 1970s, 80s and 90s and left when it is growing.
One factor leading to the exit of many international firms is the level of competition. Uganda (and Africa generally) liberalised most of the economic sectors which once were closed. In Uganda, Shell enjoyed a cartel of only seven major oil distributors. However, liberalisation brought an influx of oil dealers in their hundreds. Intense competition has driven down prices, reducing margins. The same applies to all other sectors. Only those able to innovate can survive this scramble for the fittest. The most adversely affected firms are those who were not willing to change their ways.