Consumer Spending Deserved Budget Priority

Kenneth Atugonza

16 June 2011

Last week, the minister of finance presented the 2011/2012 national budget. Many people will rely on the media to highlight the key issues because the general feeling is that the speech is never exciting.

However, as an investor you should take interest and endeavour to listen to or read the entire budget.

Just like how companies report their annual operations, the budget speech is the government’s previous year’s report as well as the following year’s plan.

I would recommend that your financial year (investments and savings) is aligned with the budget so that at this point in time, you are reviewing your investments to determine where to allocate your resources especially after the announcements of government policy and initiatives.

This is also at a time when the companies (private sector) have reported. It therefore provides an opportunity to also read company reports and have a sense of how different sectors have performed and what their future prospects are.

For that reason, it is a perfect moment to reassess your household balance sheet in order to highlight your net-worth (total assets minus total liabilities).

Have you realised the goals you set yourself at the beginning of the past financial year?

Have you done better than the reported GDP rate and the stock market return? What was your household inflation visà-vis the headline inflation reported in the budget?

Looking at the national budget, I am of the view that it was a mixed bag. It is true that investing in infrastructure especially transport and energy is crucial if we are to transform our economy.

However, consumer spending should have been given the same priority because it is what creates private sector jobs in the economy.

The president said in his State of the Nation address that “every Ugandan should always be cautious of the fact that nobody owes them a living.”

We all agree that Uganda is not a benefits state but the government is expected to make taxation fair across the board.

I was disappointed that the tax threshold was not increased for the lowest earners especially with pressures on the household budget due to double digit inflation and high unemployment.

Many households have only one income and this is being squeezed.

The only option left to these households is to lower their standard of living in order to survive. It beggars belief how government can tax income of Shs130, 000 in the present environment.

I think we should remember that domestic consumption is a key driver of economic growth as well as public welfare. I would have thought that the personal tax allowance (amount you earn free of tax) would increase in every budget (at least at the rate of the government’s inflation target) but this has not happened since 1997 when the above figure was set.

One of the government’s macroeconomic objectives is to revert to an inflation target of 5 per cent.

This is very welcome although it is going to be very difficult to realise in the short term because of the widening trade deficit.

Imports have contributed to the high inflation rate and with China and India (major trade partners) struggling to control their inflation, coupled with the instability in the Middle East (oil prices), the economy will continue to experience inflationary pressures.

The shilling is also near record lows despite a weak dollar (due to weak American economic data with unemployment at 9 per cent and spiralling public debt).

With this background, the expectation would be to strategically target foreign currency earning sectors like tourism.

Once again there wasn’t an asserted effort to invest in tourism especially given the demise of Egypt as a hot tourist attraction.

A year back Egypt’s tourism industry attracted 13 million visitors with revenues above $12 billion. Because of the instability in the country, tourists are looking elsewhere.

Unless we strategically position ourselves, we shall not make huge strides despite our unrivalled attractions.

This is what also happened after the Chogm summit and the World Cup (South Africa) where the tourism spin-offs were not something to shout about.

How can the Pearl of Africa attract less than 1 million visitors (900,000) and $600 million in tourism with peace and stability across the country and an economy growing at an average rate of 7 per cent?

In order to encourage job creation, the government is continuing its efforts to attract investors. I guess my view would be to have a balanced approach.

Attract foreign investment as well as offer great support to small domestic businesses. I believe small businesses should be the engine of our economy because they not only create jobs but, there is no repatriation of profits.

The challenges they face like high transport costs due to high fuel prices and the high cost of capital (highest in the region), were not addressed.

As far as youth unemployment is concerned (above 80 per cent), the announcement of a youth entrepreneurship capital fund (Shs25 billion) as well as the business and skills training fund (Shs4.5 billion) was great news.

This is a step in the right direction unlike past gestures of lowering the retirement age in the hope of creating jobs.

The success of both funds will greatly depend on the level of supervision and practicality of access.

Overall, the good news is that the economy is projected to grow at 7 per cent and at the securities market, the majority of companies reported very good earnings.

It is that point in time to sit down and set your financial goals for the next financial year. You will need resources (savings or windfall) to invest in different financial products.

If you do not have sufficient resources, it may be a good idea to leverage your household balance sheet with long term debt given that the economy is projected to expand.

However, only borrow if it strengthens the household balance sheet (investment type assets not consumables) and is affordable.

Kenneth Atugonza MBA, MSc Finance

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