You possibly heard of the global financial crisis that began in 2008 and later graduated into an economic crisis. These two ugly events have reached proportions last experienced in the 1930s. The crisis manifested through the collapse of big financial institutions, reduction in credit, scale-down and closure of private companies and reduction global demand for goods and services.
Economists view demand as the mother of economic opportunities to the extent that if it is missing, then “pay people to dig and cover holes at the same time”.
The logic here is not in paying people but rather enabling them to use the earnings to restart demand, which will result in opportunities for firms to employ additional people, create new demand and keep the cycle on.
Based on the above logic, the American government responded with a legislation, the American Recovery and Reinvestment Act of 2009, as an economic stimulus package, estimated at US$787b (about Shs2quadrillion), later revised to US$831b (about Shs2.1quadrillion), over 10 years. For comparison, Uganda’s economy is only $23b (about Shs60trillion) In additional to this spending on infrastructure, health, tax incentives, and unemployment benefits, more dollars were directly offered to banks and firms – all in the name of stimulating local demand.
America could not rely on exports partly because, Europe and Canada, their major foreign markets, had also been hit by the same crisis. Besides, America’s main source of demand is the domestic market.The crisis was to affect Uganda through reduced remittances as Ugandans abroad lose jobs and less exports mainly due to less demand in Europe. There were also possible benefits for Uganda from falling global prices of imports due to lack of demand, lower interest rates for investment credit as western countries lowered the interest rates to make it easier for borrowers.
For these reasons, there was talk of “do not let a good crisis go to waste!” If necessity is the mother of innovation, the crisis period was time to review policies and budgets towards stimulating demand and growth by restructuring government to redirect expenditures and purge certain institutions to increase public sector effectiveness.
Years later, the evidence suggests Uganda may have wasted a good crisis by not carrying out significant policy, institutional and budget reforms. Much as the crisis slowed down growth, it did so in ways that were contrary to predictions. Export data shows that most of our regular exports to Europe were not adversely affected in both volumes and value, except cut flowers. Uganda simply failed to increase domestic production for coffee and fish among others.
Remittances remained robust as Ugandans abroad managed to secure the old and new jobs. The low global interest rates acted against Uganda in that speculators borrowed cheaply from Europe and invested, not in the real economy but, in financial instruments (treasury bills and bonds) at very good rates of return. Just remember in 2011/12 Uganda increased the base lending rates to 19- 23 per cent, which was good return for people borrowing at about three per cent in Europe.
To make it worse, the inflow of speculation dollars made it cheap for importers and worse for exporters as imports from Asia and Middle East (India, China, Dubai etc.) increased. While the global response to fight the crisis was to boost demand and exports, Uganda reduced demand through high interest rates and also reduced exports through a strong local currency. In summary, we let a good crisis go to waste and set up ourselves for a bad one.
Local firms are still struggling with unpaid debts while banks are suffering with unpaid loans. Uganda still meets part of the local demand by importing from Asia, where it exports hardly anything, while supply constraints limit exports to Europe.
These unfavourable events undermine growth, jobs, tax revenues, ability to pay debt, and service delivery, which can amplify social tensions and fuel a political crisis.
Dr Muhumuza is a development economist. email@example.com