Global economic slowdown likely to squeeze resource-rich nations

Thursday August 15 2019


By Karoli Ssemogerere

The long-awaited economic slowdown is here. Details of the Armageddon and stark headlines have started. The US economy grew by just 2.1 per cent against a target of 3 per cent [after 120 months of continuous economic expansion]. The United Kingdom, the world’s fifth largest economy, shrunk by 0.2 per cent after a year of bickering over Brexit. China and the United States slapped retaliatory tariffs on each other (10-30 per cent), a move which Trump has delayed until December 1.
Most economies will weather the “slow-down” rather than the “downturn” that marked the global economic crises of 2000-2003 and 2007-2010. Tighter financial regulation has restored controls on capital flight. Tighter regulation has also standardised a number of risks. The cost of unsecured debt, cash advances a measure of doing business, has been clustered at the middle as fintech solutions have reduced margins for lending and made lending by big banks either directly or indirectly much easier without costly paper trails. The global economy is also benefitting from lower energy prices. In 2008, a barrel of oil averaged $100 about $40 higher than today. Consumers in many countries haven’t seen relief because the government is heftily taxing this product to make up for lost revenue elsewhere.
In Uganda, fuel, for example, is subject to VAT even though it already arrives here processed and ready for consumption. Rather than wait for future oil price increases, countries like Kenya and Ghana have taken oil to the market favoured by relatively low cost of production and lower transport costs to the sea at $60 per barrel. It’s believed that production sharing agreements in Uganda forecast an average price of $70 per barrel over their term.
Most treasuries are grappling with rising wage bills, rising imports to support higher populations and more affluent lifestyles. After hiking income taxes 15 years ago, governments have returned with strings of levies and indirect taxes to cover new borrowing. Big non-multilateral lenders like China have imposed financing conditions worried that their bellicose borrowers may fail to pay.
Zimbabwe, Zambia reported significant strain on meeting debt repayments. Kenya has made a big bet on debt rollovers using Eurobond issues to free up cashflow in the economy to support higher economic growth. Pressed for cash, governments are imposing record amounts in licensing fees, fines and penalties for non-compliance. This has created a political problem as continental multi-nationals have to comply with fragmented regulatory requirements. MTN, Standard Group, Glencore, Tullow Oil are examples of companies with significant regulatory and tax exposure.
Free trade agreements require governments to liberalise trade, access to resources – commodities. The EU, the world’s largest protected market, is working hard to defend its own opening markets to its farmers at the cost of subsistence farmers in Africa. The Common Agricultural Policy encourages large scale farmers to produce cheaply even where no profit is in sight and promotes selling of the surpluses abroad. A 50kg bag of onions grown in the EU is 30 per cent cheaper than a bag of onions grown in West Africa.
Rising social expenditure (education and healthcare) will require governments to look for more internal resources. High taxation rates are likely to be the norm rather than the exception. This week after years of denial, government tabled two rafts of taxation on NSSF benefits for persons who have been contractually contributing expecting to withdraw their provident benefit at age 55. Government is also planning to impose a levy to shore up payment risks payable to the Uganda Retirement Benefits Authority.
Uganda has the highest contribution rate in the region (Kenya and Tanzania) are much lower.