Insecurity and cost of doing business threaten enterprises development

Monday June 17 2019

Augustus Nuwagaba

Augustus Nuwagaba 

By Augustus Nuwagaba

Of recent, I have been travelling in a number of countries and I have realised that there is general outcry in regard to urban insecurity. This is overtly manifested in high levels of crime, including broad-day-light murders. This situation is not healthy as it translates into reduced investment, because if there is anything that threatens business enterprise development, it is insecurity.
As enterprise development slackens, people lose jobs, they become poor and as they lose earnings, they resort to securing their consonance through mischievous activities, including crime.

Therefore, it is not surprising that Kampala is experiencing high levels of criminality, resulting into loss of life. There is need to diagnose the root cause of the problem, and devise appropriate solution. This is because you cannot solve a problem by the same means which created it. As J. Sachs, former economic adviser to Kofi Annan counsels, “deprivation and poverty are worst enemies to peace and security”.

In Uganda’s case, government has attempted to install cameras, which is a good measure, but is insufficient to curb crime. As Robert Mc Namara, former American Secretary of Defence and President of World Bank once counselled, “poverty in rural scattered settlements is not as dangerous as poverty in conglomerated urban enclaves. If cities do not deal effectively with poverty, poverty will deal destructively with cities.”
Another impediment to enterprise development is cost of doing business. For instance, the 25 commercial banks available in Uganda continue to operate under a high interest regime that cannot enable borrowers to thrive with their economic activity. The interest rates are determined by a number of factors prominent of which include high fiscal deficit (government expenditure that surpasses revenue), which forces government to domestically borrow (issuance of government securities, etc), a phenomenon that crowds out the private sector, hence driving interest rates further in the ceiling.

The central bank has intervened to tame high interest rates through the CBR (Rate at which central bank lends commercial banks) a monetary policy instrument that has been used since 2011. The expectations is that if the CBR is set high, prime lending rates from commercial banks would also correspondingly rise and the central bank would be able to reduce private credit, hence controlling money circulation, there by dampen inflation spiral.

The contradiction, however, has arisen where the Central Bank has reduced the CBR hoping that commercial banks would respond through corresponding reduction of interest rates, but this has not happened! Instead, interest rates remain high despite significant reduction of CBR. For example, the CBR is currently at 10 per cent, but the current average interest rate from commercial banks is 19 per cent.
This demonstrates minimal influence of CBR as a monetary policy transmission mechanism to cost of borrowing (interest rates). Of course, if this continues, the result will be contracting economic activity as was clearly demonstrated in drastic reduction in economic growth in Financial Year Y 2016/17.

Having deeply studied the financial system in Uganda, Kenya, Ethiopia, China and the United States, I have come to two conclusions:
l It is difficult to control interest rates without creating sufficient financial depth. The major commercial banks in Uganda are foreign and the first three hold more than 76 per cent of available financial assets. The problem is how the central bank can guarantee financial behavioural response from foreign-based commercial banks.


This is because they are few (oligopolistic) and secures their financing capital from sources that are totally independent of the central bank. The implication is that if the central bank insists on tough measures, they can hold the entire financing system at ransom, hence, sending the whole economy to “sneeze”. They can, for instance, simply sit as a cartel and set their interest rates just like fuel products stations used to do, and the country will have few options because of their dominance in the financial sector.

l The high fiscal deficit exacerbated by continued high domestic borrowing by government simply crowds out the private sector. This is because Commercial Banks naturally find it more financially prudent to lend to government (government securities) because of 100 per cent risk-free. The implication is that it is the reduction of domestic borrowing that will largely free private sector credit to open competition, boost economic activity which will enhance aggregate demand and eventually harness economic growth that is sacrosanct for sustained bill of health of the economy.

From the foregoing illustrative analysis, it clearly emerges that to revitalise sustained and inclusive growth, we need:
Domestic mobilisation of financial assets. This should be achieved through establishment of indigenous financial institutions. The quick win here is to list such indigenous financial institutions such as commercial banks on stock exchange, as the most viable way of pooling cheap financial resources. This will cultivate financial deepening in the real sense, as opposed to the current mere geographical access of commercial banks, which does not guarantee utilisation of bank services and products. Ownership through listing will also inculcate financial discipline through creating self motive incentive.
The Agricultural Bank of China (ABC) is currently the 4th largest bank in the world, having pooled financial assets amounting to $24b through listing on stock exchange. This bank employs more than 100,000 people. It charges very little interest rate and is a major driver of Chinese economy.

Domestic borrowing should focus on investments with higher multiplier effects. The aim should be to avoid consumption borrowing, such that each US dollar borrowed must first demonstrate how much it will generate. It is such “high value” indebtedness that will eventually drive benefits that pay off the very debts initially incurred.
In conclusion, there is no dispute that the Ugandan economy is growing phenomenally. However, what is contentious is whether that growth reflects the reality in the life of the ordinary people.

Prof Nuwagaba is an international consultant on economic transformation in the African region.