Difficulties faced by the private sector in Uganda

by Business Times
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By Dr. Ian Clarke

Uganda’s private sector is rather small, but the government is now turning to the private sector more than ever to meet its budget for the bloated public administration. Tax collection faces two problems: the first is the narrow tax base because most of the 44 million people in Uganda are poor and don’t pay taxes. The other is that businesses are struggling.

One big obstacle to business development is the high cost of finance. The Uganda Development Bank (UDB) was put in place to bring down the cost of borrowing but has strict regulations to mitigate risk, including not lending to start-ups. This means that any new business must turn to other more expensive sources of financing. The fact that the development bank, put in place to help grow business, cannot lend to new businesses seems self-defeating.

Banks consider start-ups (businesses within the first three years of establishment) as high risk because statistically most businesses fail within this period. Those that make it through the start-up period can congratulate themselves, but they are burdened by expensive financing. At this point they should be putting their hard-earned cash into further development and not just working for the banks. Therefore, one would think they could turn to UDB for cheaper finance, but UDB has another rule which bars re-financing. The rationale behind this is that if the business was able to obtain finance in the first place, UDB should keep its resources for other businesses. It is a circular contradictory argument.

If a business is not able to service a loan at high interest rates, the debt will grow quickly. If a business were to borrow $100,000 at a 20% interest rate per year, the loan will have doubled in just a four-year period, and an interest rate of 20% is not uncommon. The result is either that the company uses all its profits to pay the loan, or it goes bust. Lack of capital at a low interest rate is not the only reason for business failures; another reason is failure of customers to pay on time. Since many businesses sell to government entities, they get into cash flow problems when government fails to pay – especially when they must finance the gap at high interest rates from commercial banks.

Uganda sells to regional markets such as DRC, South Sudan and Kenya, but many traders have also been burned through slow payment, or when the goods were rejected as sub-standard (as happened in South Sudan), or when protectionism places obstacles in the way – as has happened with exports to Kenya.

When one adds intense pressure from the URA to these commercial difficulties, businesses are being squeezed at both ends. URA has now made companies withholding tax collecting agents, but most of their small suppliers refuse to give their TIN number or pay the extra 6%. So URA makes the registered company pay tax it has never received. Taxes from government for transfers and registrations are now high, and certifications from statutory bodies are increasingly expensive. Taking all these costs into account, it is not surprising that many businesses are finding it hard to survive, while other business owners have decided the struggle is not worth it.

The fact that we have low inflation should be cause for celebration, but this low inflation could also be attributed to a low level of commercial activity. If there is a decrease in the amount of business being done, then there is less demand for foreign currency and less pressure on inflation. The USA also seems to have decided that Uganda is a bad place to do business and is not only withdrawing AGOA, but has issued an adverse business advisory. I fail to see the logic of punishing the private sector in order to send a message to government. Imposing travel restrictions on the large delegation of government officials who travelled to the UN meeting in New York would have made more sense (and would have saved the Ugandan taxpayer money).

Uganda is now failing to collect sufficient tax to meet its own wage bill and is therefore borrowing from commercial banks at a high rate of interest. The result is banks have no incentive to take risks on the private sector, and so government itself is perpetuating the cycle. With high interest rates and the government’s increasing desperation to squeeze out more taxes, the private sector is being slowly strangled.

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