The recent takeover of Crane Bank Ltd- by Bank of Uganda (BoU) continues to generate buzz in mainstream media, social media, and other various social and community platforms. One particular thread cutting through this buzz is that the economy is hurting and Crane Bank is only a symptom.
Those who mostly view the world through political lenses have worked hard to link Crane Bank woes to turbulent politics and failed neoliberal capitalism. This particular variant of analysts continue to headline doom and gloom. But this country has been deeply resilient in face of headwinds over the years. Optimism is therefore not farfetched. Yet clearly, there is a problem with our economy.
Beyond the structural challenges – accelerated by our mostly nature based means of production (supply chains) – we are currently faced with contraction of demand (besides, it is demand that mostly stimulates supply).
This problem is causing short-term economic shocks – not just in the financial system but also in the economy as a whole. To figure out the roots of this problem, it is important to look beyond the monetary side and examine our fiscal health. My own ongoing qualitative inquiry points to a major tactical challenge that managers of the economy must address with immediacy.
The challenge is negative consequences of fiscal administrative engineering. Few years ago, Ministry of Finance Planning and Economic Development (MFPED) introduced reforms aimed at improving efficiency in managing public expenditure and accountability.
These reforms were two fold; removing loopholes in the system that allowed hemorrhage of money through ghost public workers – here, the Ministry aimed to sanitize the payroll and this saved taxpayers over 300 billion shillings.
This was a technical triumph. Secondly, reforms were aimed at removing expenditure redundancies at cost centers (ministries, agencies, local governments e.t.c)- as such the Ministry introduced electronic financial systems to facilitate birds’ eye view surveillance of financial flows and reporting – and the systems worked really fine – but partly; and herein lies the challenge.
All of a sudden, mostly districts were not spending and money was and continues to return to the national treasury (diminishing absorption capability). There could be many factors that led to this, but clearly the reform shocked the system; there was no sufficient technical capacity at most cost centers to seamlessly adapt to the electronic system.
Perhaps the Ministry should have gone the long route of capacity assessment and technical retooling in especially local governments – to get folks ready to ride on the tech road get things done.
Recently, World Bank informed President Museveni that out of $1.8 billion loan approved for Uganda; only $400m was being used, putting a balance of $1.4 billion at the risk of cancellation. The President was deeply concerned and quizzed government ministries and agencies on failure to spend money.
Recently, due to mentioned systemic failure, Uganda paid 90billion shillings in fees (fines) for failure to spend. Failure to spend presents a problem for the economy. The critical ones are two; Service Delivery suffers (health, schools, agricultural extension etc.). The second problem is collapse of aggregate demand because of reducing purchasing power. This has negative consequences for jobs, tax revenue, productivity, national output, trade balance etc.
The above may not be sufficient to explain why ministries, agencies and local governments are not spending. For example, districts have no capacity to spend because of staffing gaps- now at 40% in most districts. What are district service commissions doing? What happened to human resources planning? Besides staffing gaps, officials in government have been less responsive.
An MOFPED April 2015 report on effectiveness of integrated financial management system point to human element as a major impediment. Simply, people mandated to update the system with real time expenditure and accountability reports are not doing so in a timely and efficient manner. These are perhaps traces of sheer incompetence in our public service among other things. But someone must take responsibility.
So here is the difficult choice that government must face. How to deliver sound systems without hurting the economy? What are technical and adaptive preparations required in order not to shock the system? How can government protect well-intentioned fiscal management reforms without paining the economy?
The current pain in our pockets and entire economy will heal and when it does, its probable that the economy will be much stronger, less corrupt, efficient and inclusive. Now government will need to do much more to prepare the system before it goes under water.
CEO- Agency for Transformation; Kampala based think and do tank on agricultural and environmental policy.