Prime
Dead capital and why Africa’s debt burden will get heavier
Julius Musiimenta Bakeine
What you need to know:
- There is a new term I would like to introduce called the graduate peasant. This is a person who has emerged out of poverty or having had access to resources, lacks financial literacy. The number of graduate peasants are the biggest agents of dead capital.
When one traverses the countryside, lots of savings in buildings and farms which I classify as dead capital can be seen and are regarded by many as symbols of success. Uganda’s debt burden stands at more than Shs79 trillion ($21b), of which the domestic debt component stands at Shs31 trillion. The domestic debt component is what I call the economic growth death pill because government outcompetes the private sector for financing. No sane bank finds it necessary to lend to the private sector with 20 year bonds going for 18.5 percent, which are used to meet government recurrent expenditure (high administrative costs).
There is a new term I would like to introduce called the graduate peasant. This is a person who has emerged out of poverty or having had access to resources, lacks financial literacy. The number of graduate peasants are the biggest agents of dead capital. They build mansions upcountry, buy large farms and take their children to very expensive schools, all of which do not contribute to production. The mansions are seldom visited , while the farms barely support their activities. Most of this money is either hard earned or is part of the debt government borrows and ends up dead.
Most graduate peasants have historical issues to sort out and these force them into the dead capital trap. They end up investing in the best house in the district, drive the best car, having most cows or most land, hosting the biggest party to win bragging rights.
Government increases the dead capital burden by borrowing to build offices, create cities and districts, new political constituencies, new agencies and new poverty alleviation programmes. When government uses funds borrowed or collected from taxes to build office blocks, unnecessary debt is created with future investments in operation and maintenance or rehabilitation waiting.
When all these expenditure taps are added onto the top-heavy administrative units you create an inverted pyramid that lacks production to support its weight at the bottom.
We need a huge mindset and policy change at various levels.
We need to educate the graduate peasants about money and how to use it in a sustainable manner. Those that join politics normally lose all their wealth in campaigns and they represent the worst case of graduate peasants. Politicians therefore may not be the best agents of financial education. Schools have to be targeted by teaching principles of accounts and commerce and also promote role models in society that can demonstrate how they have grown their wealth.
The taxation policies in the country do not support the growth of local businesses. More startups and SMEs create new tax agents that are needed to widen the tax base. Every company collects a minimum of two percent of its gross income which it pays as tax irrespective of its performance. This makes URA the biggest and most privileged shareholder of companies.
Value addition to minerals and agricultural produce is at its lowest in my view. Cotton that used to be ginned, spun and weaved locally has gone lower both in production and value addition. Deliberate efforts to restart and introduce modern equipment to add incorporate polyester into the finished product are necessary. The Kigezi region is rich in iron ore and peat, all located a few kilometres apart. This means that Kigezi could export steel to factories located in Kampala and beyond after processing.
There should be an effort to set up district-level industrial estates with the aim of adding value to all locally sourced minerals, agricultural produce, and also the fabrication of machine tools. There has got to be deliberate capacity building in these areas.
We were promised more than 35 years ago, that we would make machines that make machines. That was a good opening statement that was never followed through. We need more CNC equipment and skills to operate them, which will help in component manufacture and later assembly using our job and opportunity-seeking mechanical and electrical engineers.
An environment that supports meritocracy rather than nepotism and mediocrity is very important for any meaningful initiative to succeed. At the moment, corruption is seen as a shortcut to success. A corrupt environment should be denied space to flourish and the rule of law should be seen to exist and work in a timely manner. To lighten the debt burden, we need the government to wake up and make positive moves that grow the economy sustainably. The death of capital will reduce with more financial education and a serious tax authority that taxes citizens fairly.
