Mutebile fighting half-hearted war against speculators [part II]

In this second and last part of his response to Bank of Uganda’s intervention measures in the financial markets, TEDDY SSEEZI-CHEEYE says why the central banks’ monetary policies are futile. The first part was published last week:

Bank of Uganda has spent millions of dollars in the last ten years in interventions to stem appreciation of the shilling against the United States of America dollar ostensibly to help exporters.

Unfortunately, despite the fact that the Shilling has lost value in dollar terms, from Shs 60 (May 1987), Shs150 (July 1988), Shs 165 (July 1989), Shs 200 (March 1989), Shs 510 (1990), Shs 925 (January 1995) to Shs 1,750 as of (Sept 2007), Bank of Uganda still continues to throw away good money after bad money.


Is Bank of Uganda throwing away good shillings after bad money?
In economics, it is a cardinal mistake to intervene directly in an economic trend, which is not reversible.
Uganda like many African countries cannot subsidise deficit in trade without addressing distortions in the global economy such as the $300 billion annual subsidies to farmers in Western Europe and USA.

For example, USA spends more than $3 billion annually to subsidise 25,000 cotton farmers, whose cotton suppresses global textile prices. There are two major economic problems: external and internal.

External

There are formidable external economic obstacles, which make Bank of Uganda interventions ridiculous. The external causes for unfavorable trade terms for Uganda and the increasing imbalances that stands at $1 billion in exports against $2 billion in imports are beyond Bank of Uganda simplistic methods of selling dollars, or buying shillings.

imilarly the internal factors that undermine Uganda’s competitiveness in exports are also beyond Bank of Uganda’s foreign exchange interventions.

World Trade has gone up from $ 1,000 billion in 1970 to the current $50,000 billion. Global GDP has grown from $4,000 billion to $32,000 billion during the same period. (Fortune Magazine July 23, 2007. Pg.68).

The daily global cross border trade transactions are worth about $2,000 billion. China’s Reserves alone are worth $1 billion. In the last ten years, Foreign Reserves by Asian countries have increased from $250 billion (1997) to $2,500 billion (2007).

It is therefore, practically impossible as of now for Uganda to meaningfully correct trade deficits in a situation where the dollar is globally weakening and where the global growth is leading to efficient and cheap production of goods and provision of services.

Internal

Uganda’s leading export commodities are of very low value. There are no sound financial policies or actions to help improve value addition at affordable prices. There are no sound commercial laws to curb out dirty money crowding out honest savers, borrowers and investors. Therefore, no economist with sound knowledge of economics would throw more good money after bad money the way Bank of Uganda is doing.

Indeed, Mr Daudi Balali, Governor, Bank of Tanzania has refused to intervene, in order to help the Tanzania shilling gain value against the dollar. He correctly urges that only efficient and competitive exports can help correct the imbalance, and not subsidising exporters. He correctly prefers the problem to be handled by the market forces of demand and supply (The EastAfrican, July 16-22, 2007). Why can’t Bank of Uganda also leave the burden to market forces of demand and supply?

The Weekly Observer of July 12, published findings of a recent report (December 2006) by the Ministry of Finance, Planning and Economic Development titled “Competitiveness and Investment Climate (CICS), 2006-2010”, which emphatically points out the problems besieging Uganda’s economy: Although GDP grew by 5.3% (2005/2006) it was actually lower compared to growth rate above 6% prior to 2000.

The 2006 East African Development Bank (EADB) annual report says Uganda’s GDP growth at 5.4% lagged behind Tanzania (5.9%) and Kenya (6%). The report also shows that our GDP at $ 9.2 billion is lower than Tanzania ($11.7bn) and less than half that of Kenya $23.3 billion (East African, August 6-12, 2007). Similarly, although private investments contributed 17% of the GDP, it is actually lower than the more than 20% contribution to the GDP by the private sectors in the region.

Further more the CICS report says that Uganda’s overall global ranking in competitiveness has worsened from number 80 out of 100 countries in 2003/04 to number 113 out of 120 countries in 2006/07.
The rating of Uganda’s public institutions fell from 84 out of 102 to 100 out of 125 countries. In technology it fell from 77 out of 102 to 94 out of 125.

In overall ranking Uganda, at 113 lagged behind Tanzania (104) Nigeria (101) Kenya (94) and South Africa at number 45. In Business sophistication (which depends largely on sound commercial laws) Uganda at number 90 out of 120 countries paled behind Tanzania (81) Kenya (68) and South Africa at 32.

According to the CICS report, the productivity of Uganda’s workforce trails far behind the productivity levels of both regional and international competitors. At only $1,085 (as measure of productivity a year), Uganda lags far behind Tanzania ($2,061), Zambia ($2,680), India ($3,432) Kenya ($3,457) and China ($4,397).

There is another catch: Bank of Uganda is obsessed with controlling inflation without appearing to note that a weak shilling leads to inflation since imported commodities increasingly become expensive.
Probably the most telling indicator in the CICS Report is on getting credit, where Uganda is at the tail (159) Tanzania (117) while Kenya and South Africa are both at number 33! This is really the crux of the matter.

If it is hardest in Uganda to obtain working credit capital, then it is clear that our economy is not based on the best practices of a free market. That explains why our economy is not competitive. A recent report (March 2006) done jointly by Bank of Uganda, Uganda Investment Authority and Uganda Bureau of Statistics, shows that private sector indebtedness to foreign banks is much more than government indebtedness to foreign banks.

It is therefore illusionary for Bank of Uganda to throw away hundreds of million of dollars chasing a mirage in the name of supporting an uncompetitive export sector. Not bad advice for Bank of Uganda, which after all believes in the efficiency of free market forces.

The author is the Director of Economic Affairs & Monitoring,
Internal Security Organisation and PhD Student (Econ),
TRIUM Global Executive EMBA


SOURCE: UG OBSERVER