Government long term goals
KAMPALA – The coronavirus has brought war conditions. We need the war cabinet to deal with the economic crisis. Restarting and restoring the economy is a general goal but it should not be considered in isolation. It should be related to long term goals of government which include social economic transformation of the Uganda society. This has eluded this country and indeed African countries for years. Today over 26% people in Uganda are below the poverty line (2017). Less than a dollar per day and about 50% live on less than US $ 2 per day. If you go by our rural population, its 80%, it is also reported that 60% of the population is engaged in agriculture which contributes about 25% of the economy. Most of them are on subsistence production. It means that the people who really are poor are many. These figures have to change for the better.
Shutting down an economy has challenged millions of people who live day to day. It is massive unemployment. These people need urgent attention of government. Uganda has to act urgently and now has tremendous opportunity not only to restore the economy but put it on a path that should benefit the large number of people in the country. The consequence of failure to restore and improve economic normalcy is not only social unrest but sliding into abject poverty. The situation will be worse if COVID 19 medically wrecks the nation. It still has potential to do so if our leadership doesn’t take optimal decisions and if people don’t behave in a desired manner.
Uganda’s economy has been growing over the last 30 years or so at an average of about 5% per year. From past experience, cases of Japan, China and Singapore among others, an economy needs a sustained average of 10% per year for over 10 years to be able to transform into a developed economy. Uganda’s economic growth figures, may be the highest achieved could have been 7.5% in one year, otherwise the figures of an average at 5% growth rate in GDP per year cannot produce the desired results. But there must be a check on our population growth figures. With a population growth rate of over 3.5%, there can be no meaningful reduction in poverty in the economy. This means that Uganda is actually short of the necessary numbers to enable it to transform not only into a middle-income country but into a developed country. And when you add the fact that this growth is coming from a few individuals, this growth is not impacting the majority of people in the country.
Uganda’s vision 2020 had envisaged achieving a middle-income status by 2020, this year! Middle income is when per capita GDP of a country is between US$1,026 and US$12,475. Uganda is US$642! A new date of 2040 has been set. Without change in a way we do business, this may again be elusive. As is often said we have economic growth but we don’t have economic development. Knowing well that 80% of the people live in rural areas and agriculture occupies about 60% of the population, it is clear that the growth in the country is not impacting on the entire population. This is the change you need to see. Those figures must change considerably to see economic transformation in the country. In developed countries, an average of 3% of the total population is in agriculture! That 60% in Uganda should move to industry and services. The economy will be growing.
We need a target GDP growth rate of 10% per year. But how do we do it? This is the quality of our decision making. We have the expertise to indicate what we do to achieve. We need 100% literacy rate within 3-5 years. This is crucial in mindset change and building a middle class. It is also important at improving the quality of entrepreneurship, persons and ideas. If you attempt to incubate not so literate People in business start-up, you will not succeed. We can indicate what we want to do to get to the middle income status. Address agriculture! Address IT. Check our expenditures on both. If you want something to die, don’t make it a priority. We can also address population growth with simple solutions. All these should be targeted for growth
Addressing the problem. Strategies.
Government must take some immediate measures to kick start the economy. These will be a set of policies including monetary, fiscal, education, health and environmental policies among others. Government must also address some of the unique aspects of the economy that are not functioning properly. Or those that are bottlenecks to economic growth. As short-term measures are implemented, government must address long term issues, removing bottlenecks and providing policy directions to ensure growth and development. Some bottlenecks may be dealt with in both short term and long-term measures. It is an enormous and horrendous task.
The measures to restore normalcy will not be ordinary policies and decisions, the status quo must be disrupted. We must be ready to abandon what we know and what we have done so well. It is said that if you continue to do the same thing and expect different results, you must have something wrong with you! The country needs to restate its development goals and evolve short-term, medium-term and long-term strategies to achieve them. In this part two (2), I will deal with only immediate measures.
The Immediate Intervention Measures
There are immediate measures that government must take to kick start and or stimulate the economy. These includes, addressing the budget. Other measures are simply reliefs to enable business restart. Some are HANDOUTS. Others assistances to businesses to enable them secure either loans or overdrafts with a view to kick starting their businesses. Some issues deal with rent and tax
We must agree that all nations have incurred losses. The losses are a collective aggregation of losses by individuals and organizations. We have to keep that in mind as we decide. Not an orthodox way of decision making, neither orthodox decisions, but they must be made. They include the following.
a) Cut the national budget.
The first and most important is management of its national budget. Before the Coronavirus, there were shortfalls in the tax collections (Possibly this is what may have led to the change in leadership at the URA). The Coronavirus will lead to decline in GDP this financial year 2019/20. It may be up to 30% decline. Our tax collections are about 15% of GDP, if GDP declines, taxes collected will decline. Government therefore must urgently address the budget deficit in 2019/20 through reduction in expenditure. Luckily the lockdown locked some expenditures, but these may not be much. It was assumed that other than salaries all other expenditure has to be frozen.
Government must negotiate loan repayment with the IMF and World Bank. President Museveni has called for cancellation. Still better than rescheduling. There is no choice. Almost 30% of the countries budget is interest and loan repayments. Next year’s budget 2020/21 must also be recast in light of the recession and low growth expected in that year. Austerity measures, discipline is required. This is tough for a country that cannot meet its entire annual budget, how much can we borrow and what is acceptable? But tough times calls for tough decisions. These will be budget cutting.
b) Wave Rent for 3 Months!
Sounds foolish, yes it does. But very rational. A group of people have not worked for the month of April, part of May and didn’t work part of March. As we re-open, businesses will take time to pick. Even those business that have been open, there was decline in business. I will be surprised if Mobile Money transactions did not drop by over 60% so, nothing is wrong in this crazy proposal. The world has made a loss, and so will government and so will organizations and individuals. Let this country forget rent earnings for three months! And even for URA for that period and PAYE. Individuals and organizations have not been working. Of course there are exceptions, many families have had to receive food! In the same vain there should be a waiver for rent! Waive the rent payable otherwise tenants may simply get out of these buildings. This must be seen as part of the national loss. KACITA, the Kampala Traders Association already listed things they feel government should support them in. These include rent. Crazy but crazy enough to ease business start-up. These are not ordinary times.
c) Handouts to business, people, bottom of the pyramid (Very Controversial measures!)
i. Give every boda-boda “proven owner” Shs 10,000 a startup capital. These are less than 1,000,000 Boda-boda is the country. They have associations. This is equivalent to the 5 kilos of maize. Total disbursement may be Shs 10 billion utmost.
ii. Give registered market vendors, estimated at 200,000 from their association, startup capital of Shs 100,000 that is Shs 20billion. Every market has a register of active members.
iii. Give registered shop keeps Shs 50,000 per shop as working capital.
iv. Farmers can be given money to buy seedlings. Money, not actual seedlings.
Mine, a proposal to think about and work out details. Nobody is obliged to accept them. But at least, I have made Ugandans think of weird but pragmatic solutions.
d) Ideological Review
As an immediate measure government needs to address the issue of ideology. Whenever we talk about ideology the feelings many people get is there they go again, they are talking about socialism and communism! We have missed an opportunity to build a national identity because of the scare. Many nations take their young people through a national service. We tried with Kyankwanzi and government was labelled communist. Without a common understanding of our problems as a country, without pride that we are Ugandans and that is what God made us, we cannot build consensus on a development approach. Neither can we build a nation.
Ideology is how we want to manage our society and in summary it is about the role of government in the economy. We have this famous “Government Etuyambe” demanding help from government, but when it does it is suspected for introducing socialism! We blame government for every challenge we get. During the Coronavirus pandemic, we wait for food from government! Different situation give different lessons. Government needs to assert itself. I noted that our different political parties do not differ much on the role of government. But to expect ordinary Ugandans peddling food in markets and manufacturing products on streets to compete with multi-nationals or foreigners with money is to ask Ugandans swim with the sharks. Perpetuation of poverty is imagining that capitaless Ugandans can compete with foreign capital. This has to change.
e) Reduce Taxes
Right now, what the country requires is a reduction in tax rates! This means that government is going to collect less money but government must have confidence that by reducing tax it is actually encouraging more people to pay and you may have a neutral tax stance. So, it is important that the following things are done;
i. Government must revise its budget down both revenue and expenditure. While there was a supplementary budget of about Shs300 billion recently for the coronavirus war. The annual budget for 2019/20 was Shs34.3 trillion. Tax collection in April to June, may drop by 50-80%. The budget must be revised accordingly. Unfortunately, government usually makes quarterly transfers! The money was already sent based on expectation! Very likely we shall borrow externally to meet the deficit. The 2020/21 budget must also be revised down ward. Unless if we can absorb more loans. But having said that, the expenditure burden of government has to increase. We shall need more money for health, but most important money to restart the economy. We shall apply Keynesian logic of giving people salaries for no real work done. Handouts to business people fit in their category. The biggest challenge our policy makers will have in years!
ii. Individual income tax rate must be reduced to 20% including the PAYE
iii. Reduce the corporation tax rate to 20% for formal businesses and 10% for informal. The informal business should be based on a flat figure charged on sales figures.
iv. Reduce on the VAT from the current 18% to 16%. The intention is to have more business coming in to the tax bracket.
v. Reduce taxes on property to 10%.
vi. Small businesses should be specifically targeted for tax holidays and tax waivers for 3 years. They are the worst hit during this period and they should therefore have the biggest benefit in terms of government assistance to enable them restart the businesses. For the next one-year small businesses should not be taxed to enable them restart the businesses.
vii. There is an issue of government vehicles, government collects so much money on vehicles making them so expensive and yet it must find the same money to pay for its vehicles. Remove taxes on government vehicles and make them cheaper for government.
viii. Remove taxes on income from securities.
ix. Increase tax rate for those who earn over Shs 50 million per month to 30% and those who earn over 80 million per month to 35% and those over 100 million to 40%.
The writer, Prof. Waswa Balunywa, is the Principal of Makerere University Business School