Expert: This is why prices are sky-high in Uganda

No-holds-barred economist George Ayittey has been jailed, tortured, banned from television appearances, and had his USA offices broken into and firebombed; because of his criticism of African governments’ policies.

Relatably, Harvard economist Barack Obama Sr. was blackballed, reduced to a beggar, and assured by President Jomo Kenyatta that he wouldn’t work again until he had no shoes on his feet because he couldn’t keep his mouth shut: Obama Sr. was a critic of Mzee Kenyatta’s favouritism of the Kikuyu tribe.

African governments have always loathed stellar economists, and have squared off with them in the most crass ways; well knowing that it’s impossible for the economy to be dissected without touching on issues of governance.

That’s why even the most well-informed economists stay away from touchy economic subjects that are entwined with politics and governance; at their own peril, I must say (because they have become dormant and passé). Their inertness has trickled down to the country’s economy, making it inoperative.

But we are not those economists here; so, let’s get right to it!

At the moment, Uganda is grappling with high prices of commodities from fuel, foodstuffs, to basic necessities. However, the government has failed to satisfactorily explain this trend to the nationals, choosing to blame the inflationary pressures on, among other things, the war in Ukraine, Covid-19; everything else but the truth.

On occasion, high-ranking government officials have played the jester. For instance, at the just-concluded Harvest Money Expo, while addressing the issue of soaring prices, the minister of Finance Matia Kasaija openly declared: “I am not the one who increases prices, I also see them increasing.

I have never increased fuel prices. What should I do?”

On the other hand, the technocrat, Permanent Secretary and Secretary to the Treasury — Ramathan Ggoobi, has placed the blame on the disruptions in the supply and value chain due to Covid-19, and the war in Ukraine on his official Twitter handle.

As convincing as Ggoobi’s submission may sound, it’s erroneous; because the inflation in Uganda right now is a result of the 2021 elections and was prevalent well before the war in Ukraine began.

In the run-up to the January 2021 elections, the volume of money was ramped up in the economy because it’s common knowledge that elections here (in Uganda) are heavily financed. The chairman Electoral Commission Simon Byabakama requested over Shs 868 billion ($244 million) to organise the elections (The Independent, February 10, 2020).

A Kampala-based non-profit organisation, Alliance for Finance Monitoring, reports that during the 2021 pre-election campaign, parliamentary participants spent close to Shs 500 billion ($140 million) in a period of two months. The money they spent on ‘buying votes’.

No figure can be placed on the actual amount spent on presidential elections, but the sum procured by the Electoral Commission, and that spent by campaigning parliamentarians amounts to over Shs 1.386 trillion ($384 million).

Economist Dr Fred Muhumuza had foreseen the manoeuvre a couple of years before the elections. In an interview with the Independent magazine, on June 10, 2019, Dr Muhumuza predicted that the ruling party (NRM) was going to inflate their classified budgets (Defense, State House) and divert the funds to bankroll the then-upcoming elections.

The sums generated were huge and classified, and if edged into the economy, would bring about severe consequences. When this money was pumped into the economy through financial electioneering, it automatically debased the value of the shilling because there was a lot of it in circulation.

An identical scenario came to pass in 2011 after (the) elections when inflation spiralled to 30%, with food prices hitting 45% as a result of the central bank’s governor Tumusiime Mutebile creating money for the government by issuing treasury bills as he intimated at the 10th Annual Meeting of African Academies in 2014 (Daily Monitor, November 12, 2014).

The current situation is unique in occurrence being as it’s manifesting over a year after the elections; considering, immediately after the conclusion of the 2021 elections, the country was placed under lockdown only to be fully opened a couple of months ago. That’s why the inflationary pressures are manifesting now!

Abominably, the government has resorted to duplicity; first, by untruthfully reporting that inflation is within the targeted confines of 3.2%. To contest this figure, let’s create a basket of household items and energy, to recreate a headline inflation scenario and later a consumer price index (CPI) with real-time price changes since December 2021 to date.

In this basket, let’s include fuel, sugar, soap, cooking oil, and wheat flour. Since December, fuel prices have risen from Shs 3,700 to Shs 5,160 (a 39% change), sugar has risen from Shs 2,800 to Shs 3,400 (21.4% increase), cooking oil (1 litre) has gained 42.8% from Shs 7,000 to Shs 10,000.

Wheat flour, two kilogrammes have seen an 18% price increase jumping from Shs 5,500 to Shs 6,500 and the price of a bar of soap has shot up by 100% moving from Shs 3,500 to Shs 7,000; with reports of it going for Shs 11,000 in some places.

This basket of goods we have created based on actual prices has seen a weighted average price change of 44.24%. That is called the CPI, and would generally be recognised as the inflation rate.

Even though the sample size is small, it mirrors the reality on the ground — double-digit inflation.

Where then does the government derive the 3.2% rate from? And if indeed inflation was at 3.2%, well below the government’s target of 5%, why are nationals up in arms and why is the government releasing dossiers explaining the soaring prices of commodities? Sadly, this is just the beginning as this inflationary spiral is bound to continue for more than a year (economies take time to cool off).

To illustrate, in 2011, the elections were held in February, but eight months after prices peaked with inflation at 30%, and foodstuffs were up by 45% (BBC News, 31 October, 2011). The current situation is not going to be different.

Even more importantly, the situation is going to get worse before it gets better because the government is going to swing in full force with monetary policy by increasing the lending rate to banks (bank rate) while borrowing heavily from them (banks) and corporations through issuing treasury bills and bonds in an effort to reduce the volume of money in circulation.

This will result in interest rates going up because the government through the central bank (BoU) will be competing with the private sector for loans; this is known as crowding-out. In addition, taxes will increase because they generally increase with price. This tax burden will then be shifted to the consumer.

Because loans are going to be expensive amid these price highs, many businesses are going to close owing to high costs of operation and restricted bailouts, and a multitude is going to lose jobs in effect.

The only upside to this is: the government is going to increase its revenue from taxes imposed on goods and services. Also, the ‘Haves,’ are going to circumvent the tax system in Uganda because it’s regressive by design.

It (tax system) emphasizes taxing the value of goods rather than the ability of the individual to pay. Not to mention, the opulent enjoy tax exemptions and incentives, or duck taxes altogether, as the unaffluent bear the bulk of the tax burden — 64% of the tax burden in Uganda is borne by the poor (Fair Tax Monitor report 2018, Oxfam and SEATINI).

Moreover, the active enforcement of monetary and fiscal policy in a political setting like Uganda’s at a time such as this, gives the government enormous power to control wealth and redistribute it as it deems fit. Tightening its grip on power in the process. To put it briefly, this will be a good time for those who stood with the government during elections to enjoy ‘the spoils of war’.

As we bite down our teeth while we brace ourselves for the turbulence ahead, I call out economist, secretary to the Treasury of Uganda and guarantor of ‘Economics that works’ Ramathan Ggoobi:

I beg you, if you feel something like love for the country, wait until you have conquered inflation until our heartbeats have settled, and then you can barrack us with patronizing responses on the current inflationary situation with jabbers like, ‘...fuel prices will yield to market prices,’ and the classic, ‘We are sorting out the issues. We shall update you.’

Deliver the change you preached, and be truthful with your economic submissions under the current climate. That would be a good start. 

The author is an independent financial and investment analyst

Twitter: @ m_kidamba

LinkedIn: Mark Kidamba