The Effects of Double Digit Inflation on Telecom Sector Performance in Uganda

Reduced consumer spending, double digit inflation and the instability in the foreign exchange market are the big concerns for telecom operators in the proposals for the 2012/2013 budget.

Industry captains say depressed consumption has led to declining uptake of products.

Telecommunication is an enabler of business; an increase in the num­ber of people using phones results in an increase in Gross Domestic Product. But increasing competition and the unfavourable, contracted economy has hurt both consumers and investors.

Even with lower call tariffs averag­ing sh4 per second, the average revenue per user for Bharti’s Africa operations, including Uganda, has recently fallen to $7.10 a month, from $7.30. This means uptake of products, especially airtime, is on the decline despite lower tariffs.

Inflation, currently at 20.3%, is considered a great risk to inves­tors because it wipes off value and makes everyday consumer goods expensive.

“You look at the market and the underlying fundamentals are unfa­vourable, we are going to see more of the same,” said an analyst.

Focus then should be on initia­tives that can increase consumer spending.

Donald Nyakairu, the Uganda Telecom chief has repeated his calls for the reduction of excise duty on airtime from the current 12% to about 6% which is the region’s average.

“This is something we would pass onto consumers,” said Nyakairu commenting on his budget expecta­tions.

Telecom operators are also looking forward to the approval of the proposal by the private sector for Value Added Tax (VAT) to be reduced from the current 18% to 16% which would be a major fiscal policy shift.

Operators are waiting with bated breath to see whether the recent discussions on reducing VAT will come to pass in the 2012/2013 bud­get. Uganda charges 18% VAT while its biggest trading partner Kenya charges 16%.

“’That (reducing VAT) might help; it means the price consumers pay will reduce,” said a senior official in one of the telecoms.

Last year operators said the country’s tax law has not evolved to reflect the change in the use of the mobile phone. As a result, airtime used for data transfer services is still subjected to excise duty.

Yet when excise duty was first introduced on airtime in 2002, the objective was to tax airtime used for voice and talk time. However, over the years technology has changed and the mobile phone is now used to access to the internet and data transfer. They continue to recom­mend that the airtime used for data should not be subjected to excise duty.

Reducing VAT on goods would mean handsets would become cheaper thus creating the potential for increased uptake and deeper mobile penetration

Operators have, for years, lobbied the Government to reduce taxation or scrap taxes on handsets. Kenya scrapped VAT on handsets about two years ago, a move which, ana­lysts say, spurred the uptake of new phones and checked black market activities like smuggling, which hurt the economy.

But the Government has always argued that mobile handsets are a matter of choice and therefore taxes on the handsets would not be scrapped.

But telecom operators have commended efforts in scaling up electricity production. Some 100 megawatts are currently being generated from the 250-megawatt Bujagali hydropower station. Power from diesel generators have been one of the highest costs for opera­tions for the industry.

Nyakairu, however, wants the Government to waive tax on fuel. He estimates that the entire telecom industry consumes about sh2.5 to sh3b worth of fuel, which is way too high an expense.

“Most of the sites are on 24-hour generator because there is no Umeme in those places, so Bujagali coming really won’t change our position,” said Nyakairu.

By David Mugabe
The New Vision Newspaper
10-May-2012