Commentary

Is Uganda government shutting down the economy?

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By Fred Muhumuza

Posted  Friday, September 5  2014 at  01:00

In Summary

In Uganda, government has made several decision and no decisions with implications of shutting down the economy. The negative slope of 0.72 for the trend line across economic growth rates over the last decade is good evidence.

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When you take no decision, you must take responsibility of the consequences. Nearly one year ago, the United States Federal Government entered a shutdown that crippled economic activities, leading to losses estimated at $24 billion in 16 days – more than the size of Uganda’s economy.

This was after Congress decided not to pass a law appropriating funds or a continuing resolution for the interim authorisation of appropriations for financial year 2014. Congressional failure to decide followed a decision of the Senate not to agree with certain recommendations of Congress.

In Uganda, government has made several decision and no decisions with implications of shutting down the economy. The negative slope of 0.72 for the trend line across economic growth rates over the last decade is good evidence. I will explain this negative development using two examples – at sectoral and macroeconomic levels.

First, the resolution of Parliament to cancel the Umeme contract and subsequent investigations, by the same organ of government, on the NSSF purchase of shares. It may not be a written strategy but government decided to incline finance the energy sector through public loans and private equity (generation), public loans (transmission) and capital markets for distribution - Umeme.

The decision of capital markets requires government to minimise uncertainties on Umeme as a going concern. Once the future of Umeme remains in balance, and a key investor like NSSF is being questioned, other current and potential investors will stay away or withdraw.

Cabinet must decide to discuss the parliamentary resolution and decide to shelve it as it is not financially or economically viable.

Otherwise, the continuing dark cloud will trigger less private interest in Umeme, result in a poor distribution network and loss of revenue for the energy sector and consequently, a possible shutdown of electricity and the economy.


Second, government decision to borrow domestically on, literally, short-term terms to finance long-term investments in infrastructure creates an asset-liability mismatch.

The liabilities/loans of government will fall due within a year or less (for interest) and 3-5 years for the principle, when most of the investments are not complete. The assumption that government will pay back by taxing a more competitive and productive private sector, as a result of the investments, is questionable.

We should not forget that even chicken eggs need three weeks to hatch and several weeks for the chicks to be ready for consumption.

Meanwhile, the current interest bill for government of more than one trillion shillings will soon be joined by the bill on principle repayments. While these demand notes come in, government will still need money for its business.

The two complementary budget pressures will trigger a debt-revenue spiral that will eventually lead to a government shutdown. Of course there will still be government but its doors for access to public services will be shut.

What will not be there is a lot of the private sector as many businesses are already collapsing due to government decisions.

The current private debt levels for individuals and companies are a serious consequence of both public and private decisions made and not made.

The decisions on private lending and borrowing cannot simply be left as a private affair between borrowers and lenders.

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