Uganda’s National Social Security Fund defied difficult economic conditions to post a record total income of Ush1.6 trillion ($424.5 million) in the 2017/18 financial year.

In comparison, total income — cash received from interest payments, dividends and rental fees — stood at Ush912 billion ($241.9 million) at the end of 2016/17.

Local interest rates rose between April and June 2018.

Total member contributions rose from Ush917 billion ($243.7) in 2016/17 to Ush1.05 trillion ($278.6 million) in the year under review, attributed to enrolment of new employees in the manufacturing and mining sectors. This is despite job cuts. The Fund’s total membership expanded to 2.2 million, from 1.5 million in 2017.

However, the number of active contributors lies in the range of 800,000-900,000 employees.

The Fund’s total assets increased from Ush7.92 trillion ($2 billion) in 2016/17 to Ush9.98 trillion ($2.65 billion) according to the latest financial data.

Total benefits paid out to members grew from Ush278 billion ($73.8 million) to Ush360 billion ($95.5 million) during the period under review.

The Fund’s cost-to-income ratio — a comparison of costs incurred and total revenues — dropped slightly to 12.6 per cent, from 13.4 per cent, an indicator of diminishing cost- cutting opportunities in Uganda’s largest financial institution.

In 2010, the Fund’s cost-to-income ratio was estimated at more than 20 per cent.

At the time, NSSF had a large branch network of 24 outlets, several motor vehicles, a considerable staff payroll and high administrative costs, most of which have been the target of cost-cutting measures over the past eight years.

Renewed momentum

Whereas interest rates earned on Treasury-bills and bonds fell towards the end of the past financial year, renewed momentum pegged on government securities in the second quarter of this year and projected increases in the first two quarters of 2018/19 have boosted the local interest rate outlook.

Interest rates earned on Treasury-bills and bonds averaged eight to nine per cent in December 2017 but rose to around 10-14 per cent between April and June this year, under pressure from investors worried about rising tax revenue deficits and slow economic growth, analysts said.

A record high tax collection deficit of Ush556 billion ($147.5 million) registered at the end of June this year and rapid depreciation in the value of the shilling against the US dollar last month have put pressure on interest rates earned from government securities. This is despite a monetary policy stance that has yielded a low but stable Central Bank Rate of nine per cent.

The Uganda shilling fell to a record low of Ush4,000 against the dollar before it recovered to around Ush3,760 at the beginning of this month.

Declining liquidity levels in the interbank market — a popular transaction window for commercial banks seeking to trade currencies and obtain short-term credit from peers, have also put pressure on interest rates earned on Treasury-bills and bonds.

“There has been an increase in interest rates in recent times due to depreciation pressures exerted on the shilling but these have eased. Therefore, we see a better future in equities.

“Despite the difficult economic conditions, our member contributions grew mainly because of new players that entered the manufacturing and education sectors plus engineering contractors who won contracts to execute large infrastructure projects,” NSSF Uganda’s managing director, Richard Byarugaba said.

“Though some companies closed last year, many new members signed up for the voluntary contribution scheme while some inactive members have reactivated their accounts,” he added.

Among the companies that cut jobs last year are MTN Uganda. Companies that were forced to close shop include Kenyan retail chain Nakumatt Ltd, Vodafone Uganda, K2 Telecom and beverage shop Good African Coffee Ltd.

Despite hundreds of job losses, NSSF signed up 10,000 new members on its voluntary scheme and collected roughly Ush7 billion($1.86 million) from this segment.

NSSF’s asset allocation ratio stood at 75.3 per cent for fixed income assets which include Treasury-bills and bonds, corporate bonds and fixed deposit accounts, 18.09 per cent for equities which consists of listed and unlisted shares and 6.3 per cent for real estate investments.

“The Fund appears to have benefited from re-investment of maturing securities that were locked in at higher interest rates earlier this year. But expansion of its equities portfolio may prove a tall order because of fairly low trading volumes in the stockmarkets and fears of escalated share prices,” said the investment manager at Sanlam Investments Uganda Ltd, Mubbale-Kabandamawa Mugalya.

“For example, a five per cent portion of its assets would be equivalent to around Ush500 billion ($132.6 million) and such an amount may be hard to absorb in regional stockmarkets in the short term and could also trigger inflated share prices among investors. Thus, NSSF’s equity portfolio is likely to expand by just two per cent this financial year.”

But according to Oscar Ofumbi, a business owner in the transport and education sectors, growth in NSSF’s total collections is a result of tough enforcement measures on employers and not improved economic conditions.

“Tougher enforcement actions in the future could force employers to consider wider automation of their operations so as to cut labour costs,” he added.