Economy on right track- IMF

By Haggai Matsiko

Thomas Richardson, the Senior Resident Representative for the International Monetary Fund who is leaving Uganda for a new posting in India in July, tells The Independent’s Haggai Matsiko about macro-economic management, managing oil money, and the need for a new generation of leaders.

How has your tenure in Uganda been; what are some of the highlights?

I arrived in August 2009, replacing Abe Selasse, and it’s a three year term, so I’m moving on with great reluctance in a month or so. My family and I have loved living here, and we will miss it. We are definitely going to be good ambassadors for Uganda.

There are many highlights, but one would have to start with the warm and easy-going character of Ugandans themselves. I often think of this when stuck in traffic in Kampala: no one is honking or yelling; everyone just gets on with the commute with good grace. No “road rage” in Kampala! I’m not sure I could say the same thing would happen in my own country, the United States.

How do you see Uganda’s current economic situation, with growth slowing and economists it is likely to get worse?

In our view the sources of slower growth are both domestic and external. At home, the need to address high inflation has meant that both the budget and monetary policy have had to be tight, and that has led to somewhat slower growth. But even more importantly, the global environment has been unstable, with events in the Euro area generating a lot of volatility and reducing demand for Ugandan exports. Uganda is not the only country that is seeing slower growth as a result. My next posting is India, and they are also feeling the effects of the global slowdown.

We do feel that growth will recover next fiscal year and even more so over the coming 2-3 years, returning to something like what we estimate as “potential” real GDP growth of around 7 percent per year. Uganda’s fundamentals are strong, macroeconomic policy-makers are well-trained and very capable. Uganda was one of the world’s fastest growing economies over the past 10 years, and there is no reason it couldn’t once again reach those levels.

The inflation targeting policy, its critics say, is getting in the way of growth. Is the IMF convinced that that policy can deliver a recovery?

Inflation targeting is not the issue here. I think many observers in Uganda have got confused about this point. Every central bank has an inflation objective, including the Bank of Uganda for many years. The distinction is between central banks that have as an operational target either the level of inflation, or some quantitative measure of the money supply, or the exchange rate. I am simplifying a little, but to put it in perspective, compare Uganda to Hong Kong, as the latter focuses very heavily on the exchange rate. Uganda traditionally targeted a money supply figure, by contrast. Ghana for the past 7-8 years has been targeting inflation.

The Bank of Uganda has recently decided that it believes a move toward an inflation targeting framework would enhance transparency and make monetary policy more effective. We support that move.

People think that Ugandans need to borrow, invest and produce. The critics also say that banks are ripping off people because of the high interest rates that come with the policy?

But it would be a mistake to think that the BoU has recently adopted a policy that focuses on inflation and that that is why interest rates are high. Interest rates would be high if the BoU was still mainly targeting money supply. The reason interest rates are high is because inflation is high.

High inflation is a problem, and it needs to be brought down. That’s what is happening. It has some pain, no doubt about that. In fact, one reason why we try to persuade countries to avoid high inflation in the first place is because to reverse it is costly. But keeping inflation high is even more costly: it undermines investment, and therefore damages long term growth. And it acts like a tax that is paid disproportionately by the poor and middle class. The rich can protect themselves.

Economists continue to point to a situation where public expenditure is not devoted to areas that will grow the economy-agriculture, industry? What needs to be done?

The composition of spending by the budget is a fundamentally political issue. Our mandate is more on the macroeconomic side, and this is almost a microeconomic question. However, it is clear that Uganda needs a lot of public investment in infrastructure: roads, railway, electricity, water, sanitation, etc. These have got to be high priorities over the coming decade.

How does a country deal with a situation where public funds still end up in corruption?

If I understand your question, you are asking how a country can deal with corruption. There is a lot of debate about this in the literature, but clearly one way is to demonstrate that it won’t be tolerated by putting convicted corrupt officials in jail. There has been some progress in Uganda with public officials losing their jobs, but in most parts of the world, someone who steals from the public purse and gets caught loses his freedom.

Studies show that many Ugandans are getting out of poverty but they are vulnerable to falling back, where do you see the problem and how can it be addressed?

It’s not really an IMF question, but I do recognise that per capita growth figures have fluctuated a lot, even when overall GDP growth has been rapid. Clearly, the denominator i.e. population growth, is important. It’s hard to give everyone the sense that living standards are rising when the number of Ugandans grows by 3% every year.

The IMF focuses on macro-economic policy but public sector management directly affects the later, how do you deal with this?

The IMF places a lot of emphasis on good budget management, and this is a challenge in Uganda. The government runs expenditure arrears every year, some agencies, like State House, Parliament, Defense, get supplementary budgets as a matter of course. For a ruling party which has its roots in a military liberation struggle, this lack of discipline is surprising. You may want to ask the accounting officers in these agencies why, year-in and year-out, they are unable to accurately project their spending needs. One reason there are potholes on the roads is because road maintenance funds are diverted to these agencies at the last minute of the fiscal year.

The issue of tax exemptions-how would you want it resolved?

The other reason why there are a lot of potholes on the roads is because there are a lot of loopholes in the tax system. Tax law in Uganda is chock-a-block with statutory tax exemptions and investment incentives. As you know, our experience from around the world is that investment incentives generally don’t work. The investors tell you they won’t invest without tax breaks, but when it really comes down to it, they vote with their investment dollars by going to countries where there are good roads, reliable power, clean water, and a healthy, well-educated workforce.

All of those things take tax revenues for government to provide. So in the Budget 2012/13, it will be important to see which tax incentives and exemptions are eliminated, and new ones should be resisted. Uganda’s tax to GDP ratio is the lowest in the region, well below the average for sub-Saharan Africa. If you don’t like potholes on the roads, you should eliminate these loopholes in the tax regime.

How can oil money be managed to avoid destabilizing the macro-economic framework? How is Uganda supposed to ready itself for the petrol dollars?

The oil sector has not moved very far forward in my three years in Uganda, and I’m not entirely sure why. I do think, however, that the Ministry of Finance and the Bank of Uganda have made real progress in establishing the building blocks for an appropriate oil revenue management framework. These elements, which are meant to be converted into law in the draft Public Finance Bill now in Parliament, are: only one agency – the URA – collecting oil revenues, integrity of the budget process being preserved, so there will not be “two budgets” as you see in some countries – an “oil” budget and a nonoil budget. That approach leads to corruption and waste of money.  Three, government spending mainly on infrastructure though clearly there will be some years when there is more revenue than can effectively be absorbed, and then the extra will be saved to invest in infrastructure in future years. Four, investing savings in a Petroleum Fund which belongs to all Ugandans, and the monies in it will only be used through the budget, as approved by Parliament. The savings will be invested by professional, nonpolitical investment managers, like the reserves of the Bank of Uganda, in safe assets abroad. Any investment of government oil money inside Uganda should take place only through the budget.

What are the prospects for Uganda’s private sector and would you say that the country is on the right track?

Uganda has a very bright future. In many ways it is on the right track. The key things which need to be addressed are the infrastructure deficit, low revenues (as taxes are needed if you want to build infrastructure), and export competitiveness (for which you need infrastructure). If Uganda gets these things, and the oil revenue management framework, right, it will continue to be one of the success cases in Africa that the IMF likes to highlight.

What important insights do you take from Uganda to India?

Most of my professional career has been spent working in middle income or more advanced economies, mainly in Europe  – though I did work for a couple of years on China. I have found the challenges of economic development in Africa to be eye-opening, and both a cause for optimism and discouragement.

I am optimistic because there is so much potential and so many well-intentioned Ugandans trying to make their country a stronger better place.

But I am also discouraged by what sometimes seems like a sense that the debate has become a bit stale, that people who were very idealistic and ambitious early on in the post-war period have become somewhat disillusioned. Maybe it’s because I have so much grey hair on my head, but I wonder if we shouldn’t be thinking about making room for a new generation of smart and young leaders who have a renewed sense of idealism and a sense of mission to take Uganda to the next level.