Does Uganda need to rethink the liberalisation policy?

In his State of the Nation address delivered last month President Museveni admitted he was misled into allowing the sale of Uganda Commercial Bank (UCB), saying key intended targets such as bringing down interest rates had not been achieved.
Similarly, while addressing a Cabinet retreat in March at State House Entebbe, Mr Museveni said: “We are not going to allow more privatisation of government institutions,” seemingly agreeing that full economic open up, had not worked as expected.

Economic liberalisation and privatisation were pushed down by the World Bank and International Monetary Fund in many African economies as conditions for aid and donor support.
However, just like President Museveni, economic experts and many government officials are beginning to question the free market theory amid less than expected delivery.
Uganda adopted a free market economy in the early 1990s, opening up all sectors to competition. The open up saw the privatisation of much of government enterprises, some of which have now collapsed under the watch of the private sector.

In his justification for regretting the sale of UCB, the President wondered how interest rates could continue to be high in a banking industry that has 25 banks, a number of micro deposit taking institutions and an estimated 25,000 Saccos littered across the country.
Interest rates currently stand at a market average of 24 per cent but banks argue these are driven by market trends, most of which are determined by the Central Bank.

For instance, in a recent interview, Herbert Zake, the head of communications and corporate affairs at Standard Chartered Bank, told this newspaper, “… our rates are determined in accordance with the Central Bank movements”.
Bank of Uganda has in recent months been revising its key lending rates northwards, increasing by three percentage points since the beginning of this year, as it struggles to contain spiraling inflation which has risen to 4.9 per cent.
Currently the Central Bank Rate (CBR)stands at 13 per cent up from 11 per cent at beginning of the year.

What are the thoughts of government official and experts?
Whereas liberalisations has delivered a flourishing privates sector, the consensus among some experts is it has become flawed, producing an extremely tiny rich class and driving the majority into poverty, according to Ramathan Ggoobi, an economics lecture at Makerere University Business School.
“… government has taken a side seat in regulating the markets”, which as Ggoobi says has led to a situation of “too much market and too little government,” in regard to building policies to guide market activities.
“Banks can afford to ignore the Central Bank and nothing happens. Otherwise, why is the CBR, which is meant to guide commercial banks while setting interest rates, only effective when increments are needed?” Ggoobi wonders.
To put it in perspective, Ggoobi says, some banks have maintained high interest rates even when the Central Bank Rate is low.

For instance, even at 11 per cent for the better part of last year, interest rates averaged at 22 per cent, which is way higher than what the market can afford.
Asked why, the Central Bank cannot intervene, Emmanuel Tumusiime Mutebile, the Bank of Uganda governor has always insisted that “this is a free market. We can only intervene to curb speculative tendencies driven by people who seek to take advantage of market conditions, especially in the currency markets”.
In essence, Mutebile means commercial banks are free to determine their interest rates but can only be limited by competition.
Just like Mutebile, Albert Mugyenyi, an economist at the Central Bank believes liberalisation is a better policy since it weeds out the ‘bad tomatoes’ and leaves space for new entrants.

“In the banking sector, for instance, the bad banks were taken out of the system, saving many Ugandans from losing their savings,” Mugyenyi says.
“The history is there to show. When we liberalised, there has been sectors that have been better regulated. That is why there are few banks that collapse because they (Central Bank) cannot allow them to lend beyond their deposits,” he adds.
However, David Mpanga, a lawyer and managing partner of AF Mpanga & Advocates, says “it is not enough to regulate in the absence of proper [laws] that guide competition”.

“In the absence of a competition law, we have built cartels. We do not have a law that curtails the behaviour of the market,” Mpanga says in reference to alleged price cartels in the fuel, telecom, banking and beverages sectors.
The failure to pass the Competition Bill, which has been in Parliament since 2002, according to Mpanga, has exposed Ugandans to unfair competition, especially in the fuel and telecom sectors.
“It is not enough to have a regulator without any supporting law,” he says.

What government officials believe
Whereas some government officials to some extent question the effectiveness of liberalisation in the current market trends, they believe it would be a disaster to reverse to any model that would be a little closed.
“…we have made gains due to liberalisation, and we don’t want to control the economy. But we should set parameters to reduce over liberalisation,” Amelia Kyambadde, the Trade minister says, warning over liberalisation “has greatly affected us (Ugandans) as most investors take out all the profits instead of investing here”.

Uganda adopted the free-market economy in May 1987 and the economy was fully liberalised in the 1990s after government drove through the privatisation policy.
At the time IMF and the World Bank, introduced a raft of economic modification programmes with the primary objectives of deregulating all economic sectors such as financial markets, labour, and resource (land) markets—as well as privatisation of state-owned enterprises.
This, Kisamba Mugerwa, the chairman of National Planning Authority, believes was the only viable alternative (then) as government, which was suffering with a bruising economy “couldn’t continue subsidising a number of loss making enterprises under its watch”.

Mugerwa says this necessitated a complete transformation with the view of building policies that would attract investors in all sectors of the economy to benefit Ugandans.
Indeed as Mugerwe says Uganda has had some dividends as “MTN is making money because we opened up the market. We collect billions of shillings from these companies. This is why we continue to keep the market open. What we should support is regulation”.

Government signals getting back into business
But the liberalisation trend might soon be reversed as government continues to increasingly suggest it might want to get back into business through a number of institutions such as Uganda Development Bank (UDB) and Uganda Development Corporation as well as reviving the national carrier [Uganda Airlines, which was liquidated in May 2001.

For instance, in his 2015/16 Budget Matia Kasaija, the Finance minister allocated UDB Shs500b as recapitalistion to support agricultural activities, which the private sector has failed to deliver.
Additionally, Amelia Kyambadde says they are planning to recapitalise Uganda Development Corporation as a way of enhancing Private Public Partnerships, especially in the area of supporting the textile industry.
The recapitalisation, she says would as well help to enhance the process of building local content in areas such as procurement and provision of services in the oil sector.

However, some people, including Hashim Wasswa, a development economist, doubt whether there will be any meaningful change since “the same people who were managing the economy (when it had problems) are the very ones trying to realign it”.

The perspective
Ismail Sserunjogi is a shoes and garments dealer in downtown Kampala.
However, his worry is the continued stiff competition from Chinese traders who have the advantage of importing in large quantities.
Such unlimited entry is also a major obstacle of growth for small scale industries because they cannot perfectly compete with cheap imports from Asia.

Supermarkets from Kenya and South Africa are not only expanding (in Uganda) but continue to stock imports at the expense of local goods.
The shopping patterns, according to retailers have also tilted towards imports, which as Serunjogi says has made local business people fail to sustainably run their businesses.