Prime
Bailouts are an opportunity for economic structural reforms
There has been public uproar ever since the story broke that 65 private firms approached government with a request to be bailed out of their financial distress worth Shs1.3 trillion.
This tune is said to have arisen from their bank loans at high interest rates, governments’ arrears related to non-payment of goods and services (both in Uganda and South Sudan), coupled with the loss of market opportunities due to the war in South Sudan, among others.
The above seems to raise broader macro-economic issues that perhaps pose questions on how best the Ugandan economy policies and programmes can be restructured to invigorate sustainable private sector growth and expansion of equitable and fairly-oriented economic opportunities.
Issues of Concern
Bailout, why not? That government is in principle trying to help out indigenous enterprises keep afloat or even broadly deal with the adverse economic implication of their foreclosure, is welcome. The challenge, albeit, is that the nature in which the said bailout process is being discussed in the public arena, seems to raise several questions about the authenticity and justification of this government action.
Legitimate debt or not? It has been said that some companies actually supplied goods and services to South Sudan but may not have been paid. The circumstances or policy conditions that the Uganda has to settle debt obligations of another sovereign State need to be explored.
Towards improved selection criterion and process: There is so far a rather questionable mechanism of identification and selection of the 65 companies against many others that may be deserving.
Where is the place of prudent public sector finance management? If the Public Finance Management Act 2015 is anything to go by, it raises issues whether the 65 companies have so far been identified through a process that reflects transparency, given that use of public resources in Uganda in involved.
Bailout as government equity, debt or gift? Learning from other economies, the US government under Troubled Assets Relief Program had by beginning of 2014 achieved both the bailout and investment earnings worth at least $11 billion. It saved/ or created more than 1 million jobs, stabilised banks and restored credit availability for private sector firms and individuals. So, when government of Uganda forks out the said Shs1.3 trillion of public funds to private enterprises, we need to see clear benefits.
Lessons from previous bailouts: Government has in the past bailed out or handled cases similar to the proposed Shs1.3 trillion. We need to support government in disseminating feedback that such funds were refunded and accounted for by the private companies.
Increasing public debt and bailout junction: The continued increase in public debt and, specifically, domestic debt should be a concern. For example, while the budget for FY 2016/17 was Shs26.3 trillion, a sizeable portion of Shs7.9 trillion or 30 per cent of the national budget was due to debt repayment and restructuring. This is to the detriment of direct service delivery.
Declining economic growth and implication for private sector firms: While the debt is increasing very rapidly the rate of economic growth has been reducing, implying that service delivery is likely to suffer. For example, recent statistics from UBOS indicate that the economy shrunk by 1.3 per cent in the third quarter of FY 2015/16.
More significantly, the shrinkage was greater in critical sub-sectors such as food crops (-8.6%), agricultural support services (-13.2%) and transport and storage (-17%) and taxes on products (-4.2%). The above should raise concerns that the state of the economy will lead to more stress on companies.
Beyond bailouts to stimulating the economy to greater equitable and sustainable development: The distress of private sector firms is related to the slowdown in the Ugandan economy that faces both domestic and external challenges e.g. a) slower Chinese economic performance b) 2015 behaviour at US federal level on interests c) slump in global prices on oil d) suppressed global economic performance.
So, there is every possibility that the problem is more widespread than mere bailout.
Recommendations
Even in the presence of the public-private- partnership (PPP) law in Uganda, government bailout of private sector firms should have a clear policy and associated legal framework for handling selected companies that are distressed but strategic to the economy.
A clear criterion should be instituted in cases where government has to intervene through bail-outs and such clear recovery measures of public resources, to avoid conflict of interest, unfair play and political patronage.
Existing laws regarding insolvency and liquidation should be used as a guide in order to provide equitable and accountable use of public funds and benefit all companies regardless of size or political connotation.
Much as it is the global trend to bail out struggling entities, there should be clear consideration of individual country context. Uganda does not meet some of the critical conditions related to reserves and fiscal reserve.
The economic model where interest rates continue to be determined by the market need to be revisited, with a view for government intervention up to some point.
Broadly restructure the economy and attendant policies against volatile macro-economic situation and the serious balance account deficit in Uganda.
The writer is executive director Uganda Debt Network
