By Enoch Twinoburyo
The Bank of Uganda at 50 years panel debate themed “Central Banking in market driven economy” underscored the primary roles of the central bank being stabilisation, i.e. price and financial stability. These stabilisation reforms ought to compliment by effective communication by central bank. It was emphasized that central bank can only execute its mandate efficiently if it is granted operational and institutional independence. At the same forum, a question was raised regarding the increasing number of companies that economically encumbered, of which some are supposedly under receivership. The list of 65 companies has a collective non-performing loan exposure of Ushs. 1.3 trillion shillings, just 2% of the GDP or 5% of the total commercial banks’ assets. This share is rather small, compared to Europe’s fourth largest economy – Italy whose share on risky loans is 20% of GDP. 50% of those loans are characterised as non- performing loans. The interesting perspective however, is that the bailout alternative remains off the table. So the question remains whether the proposed bailout for Ugandan companies makes economic sense.
At a macro level, there are compelling reasons for a no bail out. Idealistically bailouts perpetuate an ineffective status quo, risking a trumponics (bankruptcy after another). This too big to fail syndrome also comes with economic disincentives, and essentially only used in economic downturn/crisis cases (not mere economic lapses). The Bank of Uganda supervision report for 2015 in June 2016 indicates that banking sector remains solid, liquid, profitable and well capitalised despite the rise in Non-Performing Loans (NPL). The banking sector’s total assets grew from USh.19.6 trillion to USh.21.7 trillion between December 2014 and December 2015. Profits after tax increased by 12% to UGX USh.541.2 billion in 2015. For the corresponding period, the volume of NPLs grew from USh.389.6 billion (4.1 percent of total gross loans) to USh.573.4 billion in December 2015 (5.3%). Overall, Uganda’s growth remains solid at about 5% growth.
This position is shared by the Stanbic bank Uganda CEO, Mr Patrick Muhweire, who while at the LeoAfrica Economic Forum 2016 on the 22 July 2016 intimated the regressive effects of the bailout. He intimated that these bailouts would not address the fundamental structural problem of unemployment, citing his bank (largest bank in Uganda accounting for 18% of total banking assets) only employs 2000 people. So collectively these companies don’t employ a sizeable share of population. The majority of these companies fall under service sector, which employs less than half a million Ugandans.
The alternative to debt is private equity and should be the first line that these companies should explore. Deductively there is a reason these companies are not listed on the Ugandan Stock Exchange markets or least issuing corporate bonds.
Can Uganda afford the bailouts? The government bailout would imply borrowing to meet the obligations of the private sector, at the expense of youth now, who will have to bear the burden. The Ushs. 1.3 trillion bailout package is approximately 7% of the budget for FY 2016/17 and 10% of the domestic revenues for FY 2016/17. Domestic public debt alone is nearly equivalent to the domestic revenues, Uganda collects. The level of domestic interest payments account already for a sizeable share of the budget at 10%. The existing stick of debt remains susceptible to both domestic interest rate shocks and exchange rate volatility. In a simple illustration, the depreciation of shilling by Ushs. 600 in 2015 increased the stock of USD 5 billion by Ushs. 3 trillion (or 27% of the domestic revenue FY 2015/16)
Bailouts are essentially a stabilisation remedy to warrant restoration of liquidity in the financial and private sector. They performed quite well in the US and many economies during the recent financial crisis, in most cases, the governments have made dividends on the bailout stimuli package. The conditions for bailout must be in place, in order to avoid the negative implications on borrower discipline that largely has offsetting effects on real economic activity. Government of Uganda is yet to yield any dividends from the recent incentive (bailout scheme) scheme towards some companies (Hotels) during CHOGM Stabilisation policies don’t address structural problems, which are underpinned in the current mess. The answer for these companies lies in restructuring these loans, rebuilding their internal management process to efficient levels and then tapping into equity for alternative sources of financing. The main bottlenecks to doing business are the key areas Government should focus its citizen’s resources than selective crony capitalists.