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Opinion | Uganda’s much-discussed bailout – By Andrew Mwenda

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Posted August 15, 2016 by Ugandan Diaspora News Team in Business ~ 2,836 views

     

kampala

If Uganda has to intervene to help distressed companies, it must be driven by the desire to avoid contagion. The failure of some of the distressed companies can lead to the failure of banks with worse consequences than the costs of a bailout.

Secondly, an economy is a circular flow of income: one person’s expenditure is another person’s income. Distressed companies must have suppliers who depend on them for business. If they go under, this may impact the ability of their suppliers to service their own loans as well.

Bailout graphic 1

In Uganda’s case, it may be advisable to work with the central bank to relax prudential rules, based on a government guarantee. The aim would be to help commercial banks and their customers to restructure loans in a more comprehensive way than is right now allowed by the Financial Institutions Act. The loan maturity period could be lengthened and interest costs reduced. This will keep commercial banks’ balance sheets healthy without taking away the responsibility and pressure on them to collect the debt and the risk of failing to do so.

Companies that are facing a short-term liquidity squeeze due to factors such as conflict in South Sudan, delayed payment from government, price volatility, customers who have failed to pay, low sales, termination of business contracts, breakdown of key equipment, fraud and poor management can restructure, improve themselves and pay back. Those that are uncompetitive or undisciplined will go under. That is why government should not cherry pick whom to help and whom not to. Any government committee mandated to set criteria for a bailout will become a theatre of influence peddling and corruption leading to acrimony and political contestation.

Bailout graphic 2

The problem facing banks right now, as stated by Uganda’s leading tycoon and owner of Crane Bank, Sudir Ruparelia, is that half of Kampala is on sale. If banks offload all collateral on the market, there will be a collapse of the real estate market. This is in large part because those in the best position to buy real estate are also the ones who are distressed. Those that are not distressed are still hedging their bets and are unlikely to put their money into brick and motor given the prevailing economic uncertainty.

I agree real estate prices in (especially) Kampala have been overpriced and there is need to let them come down to reflect actual fundamentals of the economy.

But it would be disastrous to let the housing market collapse totally. This could easily infect practically everyone because real estate is the main collateral banks use to lend. Its collapse will force banks to revalue their collateral and ask borrowers to find more security or recall the loans, a factor that will cause many more loans to go bad.

Relaxing a strict enforcement of prudential rules by the central bank means that government will not spend any taxpayer money on the bailout. It also means that neither the lenders nor the borrowers have been let off the hook – they will only have been given a short (one to two years) breather. But it has potential to help healthy companies restructure and survive while the weak ones collapse and go out of business. It will also help the central bank dissuade commercial banks from their exaggerated interest rates. The ball is in the central bank’s court.

Source — The Independent Magazine.


About the Author

Ugandan Diaspora News Team

Ugandan Diaspora News Online is an independent, non political news portal primarily aimed at serving Ugandans who work and reside outside Uganda. Our aim is to be a one stop shop for everything Ugandan and the celebration of our Ugandan heritage.

3 Comments


  1.  
    Obbo

    Mwned’a useless economics. How did we get where we are? Let everything collapse and we start over –let the chips fall.




  2.  
    Kd

    Yap, what goes up must come down. Perhaps it’s time for all reaping our country and its citizens off to wake up and remember how not to exploit us. How does one wealthy individual own universities, schools, banks, resorts and real estate and not feel the need to reach out to and give back to the country’s old and valued institutions like makerere and Mulago! I say yes it’s an economy built on sand & short sighted greed even I can see that. Not unlike Zimbabwe in the making. Sorry to be so scenical.




  3.  
    Kd

    Could this explain why there were sooo many Ug banks at Unaa trying to convince the diaspora to open bank accounts. Or am I being cynical?





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