About me.

Andrew M. Mwenda is the founding Managing Editor of The Independent, Uganda’s premier current affairs newsmagazine. One of Foreign Policy magazine 's top 100 Global Thinkers, TED Speaker and Foreign aid Critic

Thursday, August 23, 2012

Museveni’s rupture with traders

Is the standoff between government and traders the tip of an irreparable breakdown of their relationship?

Last week, striking traders paralysed business in Kampala. Negotiations between their association, KASITA, and the government did not yield much. As with all previous strikes and demonstrations in Uganda over the last one year, the traders’ strike was a welcome development. It shows that political contests in Uganda are increasingly about public policy as opposed to emotive issues of clan, tribe and religion. We are beginning to see organised groups in the public policy market (as teachers, medical workers, consumers, traders, vendors, boda boda riders etc) eliciting concessions from the state through healthy confrontations.

Yet the strike by traders may signal a shift in the post-1990s political alliances. Traders have been strong allies of President Yoweri Museveni and the NRM government, acting as a major source of finance for his campaigns. This is largely because a stable macro-economic framework, a liberal exchange rate policy, openness to trade, absence of regulation, a weak tax administration system etc have made traders boom. The system has given traders opportunities to make money. In return, Ugandan traders have been selfish, keeping silent about the collapse of public goods and services that benefit all other groups collectively.

Although it is too early to tell, the honeymoon between traders and the NRM may be moving towards rupture. Indeed many of the alliances that made it possible for Museveni to consolidate his position are coming under strain. For instance, in its early years, the NRM needed foreign donors to finance its political survival. In exchange for their financial support, the NRM allowed international donors to significantly influence economy policies. The resultant policies were favourable to traders. So the alliance between traders and the NRM was by default.

However, as Museveni has sought to remain in power indefinitely, he has been forced to expand official patronage and unofficial opportunities for his clients to profit through corruption.  This has strained the relations between the NRM and donors. It is now the open policy of government to reduce its dependence of foreign aid. This has reduced the influence donors have over government. Many donors are tempted to reduce their funding to the government of Uganda although their internal divisions are making it difficult to realise this goal.

However, government has to find alternative sources of financing away from donors before oil begins to flow. Consequently, there is pressure to improve tax administration. This is likely to lead to a major clash with traders who for long have profited from tax evasion. Therefore, although the current strike by traders has been sparked by a tactical disagreement over bank interest rates, the underlying structural tensions between the two are likely to cause an even bigger rupture. When or if this happens, are we likely to see traders join other social forces in Uganda, especially the political opposition, in the struggle to remove Museveni from power?

It is difficult to tell. For now, the opposition in Uganda is highly disorganised, incoherent and dominated by fanatical factions that are only interested in listening to their own echoes rather than to the concerns of other constituent groups that have a vested interest in change. Therefore, holding many other factors constant, the current opposition is least likely to take advantage of the growing rift between the NRM and traders. Instead, traders will find themselves hemmed between an increasingly hostile government and an equally mindless opposition. Whether this will force them to support a third force outside of the current opposition is also difficult to foretell.

But as traders and NRM lock horns in the battle for interest rates, both of them have a point. Government is right strategically, the traders are right tactically. Traders are asking government to intervene in financial markets to reduce interest rates. Government is saying that its policy is to allow free markets to work. Yet to control inflation, the central bank has increased the rate at which commercial banks can borrow from it. Therefore, interest rates are being set indirectly by the central bank. Of course the central bank is right since this is the best way it can regain control over inflation and stabilise the value of the shilling against major currencies.

Yet this crisis was created by the government, not the market. During the last election campaigns, government spent tonnes of money to buy votes. For the first time in Museveni’s campaign history, his cash bribes reached the lowest voter. Whether this was due to increased efficiency of its delivery or there was too much money that in spite of the theft that often takes place at higher levels, a significant chunk tricked down to the masses is irrelevant. What is important is that campaign funding led to massive growth in money supply which in turn led to inflation.

To curb inflation, the central bank has caused extremely high interest rates on loans that are now threatening to send many traders out of business. I have met many businesspersons who are on the verge of bankruptcy due to these interest rates. To be fair to these traders, their failure has not been caused by poor management of their businesses but by government’s disastrous and reckless election spending. If you are a businessman, you ask yourself why you should pay such a high price for the actions of politicians. Therefore, traders are right to insist that government should reduce the interest rates because it is the cause of the problem in the first place.

However, the worst decision for the government will be to follow one stupid mistake with yet another disastrous one. It has already caused high inflation by reckless campaign spending. Let it not sustain this inflation to appease traders by adopting loose monetary policy. This may appease traders in the short term – but at the price of sustaining inflation or causing the shilling to depreciate further. The worst would be for government to subsidise interest rates (like it has been doing with electricity) by paying the difference between the rate at which they borrowed and the rate which commercial banks are charging now. Let the traders suffer in the short term in order to save the economy in the long term.

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