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High food and fuel prices

By Eriasa Mukiibi Sserunjogi

Opposition leaders propose ways out as government refuses to act

Despite increasing pressure to cut taxes on fuel and ban export of food, the government has stuck to its standard `no intervention’ policy on prices.

The recent 3% spike in pump price of fuel from Shs3500 per litre to Shs3600 in one week in mid-May has renewed pressure on the government to act.

Prices of food and other essential commodities continue to rise despite opposition politicians and civil society organisations launching the Walk-to-Work protests in which several people have been killed, hundreds injured, and property destroyed.

Most of the demonstrators have since April 11 demanded that the government cuts taxes on fuel and ban export of food. The government has rejected their demands. In turn, the government has been criticised for lacking an economic model and depending mainly on IMF and World Bank generated generic responses to the crisis.

In our story, `Museveni must fix economy by June’ (The Independent Issue 160) we reported that the IMF blames the current economic crisis on profligate government off-budget spending, especially the purchase of fighter jets and high election spending, and the depletion of foreign reserves.

During a visit in March, Thomas Richardson, IMF mission chief and senior resident representative in Uganda met with Finance Minister Syda Bbumba and listed what Museveni needs to do to fix the economy. Top on the list was rebuilding international reserves, increasing domestic revenues through taxation, using oil revenue and external borrowing to finance large infrastructure projects, reduction of government expenditure arrears, and bringing down inflation by tight control over government expenditure and revenue.

In the past, African governments have been challenged to develop their own models and systems, to take command of the technical analysis, negotiate with the IMF and other funders in more pro-active terms.

A leading proponent of macro-economic models is Oduman Okello, the outgoing shadow Finance Minister from the opposition Forum for Democratic Change (FDC) party. He accuses the government of relying on “guesswork” for its macro-economic policy.

But Keith Muhakanizi, the Deputy Secretary to the Treasury, says the mere presence of a model is not the ultimate solution.

“Models are only forecasts and the only person who knows the future with certainty is God,” he says in a tone that suggests fatalism.

He adds, however, that the government is “in advanced stages of developing a macroeconomic model to take into account the changing nature of the economy” and has already contracted consultants for the job.

Quick fixes

DP Says it would;

  • Reduce taxes on fuel
  • Restock fuel reserves
  • Work on leakage of public funds
  • Invest massively in agriculture
FDC Says it would;

  • Stop guess work, develop own macro-economic policy
  • Cut taxes
  • Restrict export of essential foods
  • Revitalise fuel reserves
  • Preserve oil proceeds for electricity generation

But Oduman says if his party president, Dr Kizza Besigye, had won the February election and formed a government on May 12 it would, as a quick measure for desperate times, cut taxes on fuel. He says this would provide ‘immediate relief’ to the poor.

Government collects a specific tax of Shs880 per litre of petrol, 530 per litre of diesel and 200 per litre of paraffin.

He says other ‘quick fixes’ would include restricting the export of essential food products like grain, revitalisation of the fuel reserves and ‘ring fencing’ the proceeds from Uganda’s oil for the development of other energy sources like hydro-electric power. Oduman says insufficient energy supplies exaggerate the need for oil in Uganda’s economy.

This FDC position is similar to that proposed by the opposition Uganda Peoples Congress (UPC) and the Democratic Party (DP). UPC in a statement titled, “A Responsible government is duty bound to aid citizens in times of distress” says as a matter of priority, the government should temporarily ban exports of food (from drought and hunger stricken areas) to neighbouring countries, cut the tax on fuel and “immediately declare a state of emergency and national disaster, to attract international humanitarian and food aid for the starving population”.

The other measures they suggest include rolling out credible measures to tame inflation, punish those implicated in corruption, and impose price ceilings for essential commodities.

They further suggest that government restocks the strategic national fuel reserves to cushion the country from global fuel price fluctuations, stops wasteful and extravagant expenditures and keeps spending within authorised budgetary limits.

Issa Kikungwe, the DP Treasurer, says his party favours cutting taxes on fuel, restocking the oil reserves and work on the ‘leakage of public funds’. He says only about 40 percent of the budgeted resources are used for service provision and the rest is stolen under the current government. In its manifesto, DP also promised ‘massive’ investment in the agricultural sector.

So why is the government not intervening as proposed by its critics?

Part of the problem is that intervention could lead to unintended consequences especially if the intervention package is wrongly premised.

The World Bank Director of Economic Policy and Poverty Reduction Programmes for Africa, Marcelo Giugale, in a widely circulated op-ed column advised governments facing high food and fuel prices to “keep their nerve, let markets work.” He said banning food exports could either fail or backfire.

“Countries that usually purchase food from you may soon enough look for other countries to import their food from and stop buying your other exports too,” Giugale wrote in article re-published in The Independent this month.

Uganda exports food mainly to South Sudan, Kenya, Rwanda, and DR Congo. Most of the trade is informal and unrecorded but Uganda Bureau of Statistics in 2009 put the value at US$15 million for simsim (sesame), US$17 million for beans and other legumes, and US$18 million for maize.

The government faced similar demands at the height of famine in 2009 but refused to officially reverse its liberal market policy. There was, however, an informal ban as several trucks ferrying cereals and green bananas (matooke) across borders were blocked.  At the time, President Yoweri Museveni said Uganda’s exports were fetching up to US$2.8 billion. At the time, the national budget was about Shs5 trillion (approx. US$ 2 billion at the May 2011 exchange rates).

The Tanzanian government temporarily banned food exports last year over scarcity of maize. But Tanzania’s minister of Agriculture, Prof. Jumanne Maghembe, in April admitted the ban was ineffective and had spurred smuggling into Uganda and Kenya.

Following the current high commodity prices, Kenya has intervened and cut taxes on kerosene by 30%, diesel by 20%, on maize, and wheat. It also waived school fees in some hard-hit areas, and promised an across the board increase in the minimum wage. The Kenyan government has, however, not waived the taxes completely as promised by Prime Minister Raila Odinga. In fact, on May 14, the country’s Energy Regulatory Authority announced a hike in the price of oil products.

The World Bank official said instead of banning food exports, the government should provide ‘additional transfers of cash’ for those that cannot fend for themselves, especially in urban areas. The UPC proposes “attracting international attention for food and humanitarian assistance.”

Fundamental problems

UPC Says it would;

  • Cut taxes
  • Declare state of emergency
  • Call for international humanitarian aid for starving population
  • Restock national fuel reserves
  • Stop wasteful expenditures
  • Ban exports of food to neighbouring countries
  • Punish the corrupt
  • Tame inflation

Fuelling the current crisis, says Oduman, are the basic problems of the economy’s fundamentals related to production. He says the area to focus on to fix the ‘fundamentals’ is Bank of Uganda. He says the central bank should stop ‘artificial inducement’ by injecting money into the economy which is not backed by production or foreign reserves. This, he says, is a symptom of economic ‘ill health’ which he says has been engendered by many years of ‘economic mismanagement’.

In the medium and long term, he says the FDC government would concentrate on putting the fundamentals right. He says it is key to fix the “problem of the economy being dominated by services other than agriculture or manufacturing” when about 80 percent of Ugandans are engaged in agriculture.

The contribution of agriculture to Uganda’s income has been declining steadily, from 53.9 percent in 1985/86 to 22.8 percent in 2009/10, while industry and services grew from 9.9 percent and 36.1 percent to 23.2% and 47.8 percent respectively over the same period. The government says this does not show that agriculture is declining but that industry is growing at a faster rate.

But Oduman says that the declining contribution of agriculture to national income which has not been matched by the movement of people from agriculture to the other sectors means the people involved in the agricultural sector, who are the majority, have gotten relatively worse off.

By prioritising other sectors and neglecting agriculture, says Oduman, the NRM government wants “the country to run before it is able to walk”. In its 2011 election manifesto, FDC pledged to increase funding for the agricultural sector “from 3.8 percent to 12 percent”.

Oduman says their government would have remedied the situation through providing water for irrigation, streamlining access to land and markets, reviving cooperative societies, pre-fixing prices for agricultural produce and establishing a stabilisation fund.

He adds that his party’s government would focus on cooperative revival based on what he calls demand-driven government structural investments – “people should define what their problem is, what the solution could be and then government comes in to support them,” he says.

Oduman says their team planned to create a macroeconomic model to guide government actions on the economy within three months of taking power.

He says currently, the government uses a financial forecasting model, which he says is only useful in projecting government revenue trends but cannot guide decision making on what measures to take to stimulate the economy. The government urgently needs to develop a macroeconomic programming model for this purpose, he says.

But Dr Isaac Nkote, a consultant and senior lecturer of finance at Makerere University Business School, says the problem is deeper than just creating a model. “There is a lot of work to be done in the direction of understanding how the Ugandan economy works,” he says.

The raw data that is collected by the Uganda Bureau of Statistics, he says, needs to be analysed by experts to arrive at scenarios that would inform economic policy formulation.

He  says in Germany, ‘five wise professors’ under the country’s “Council of Economic Experts” constantly monitor the economic variables independent of one another and  share ideas on what measures may be needed to direct the economy.

Nkote, says whenever there is a crisis, “intervention is the normal practice even in leading capitalist economies like Germany, the US, Japan and the European Union.

He says countries use macroeconomic models to clarify and illustrate basic theoretical principles, test, compare, and quantify different macroeconomic theories, and produce “what if” scenarios (usually to predict the effects of changes in monetary, fiscal, or other macroeconomic policies) and to generate economic forecasts.

Nkote says the best way for the government to benefit from such a model would be to build the capacity of the Economic Policy Research Centre (EPRC) to carry out the complex technical work required to develop scenarios on the basis of which decisions would be taken.

He says such alternative policies proposed by the opposition to deal with the current situation could be limited because they are not privy to vital government data on which decisions are based and therefore cannot make an informed perspective. As is the practice in democracies, he says, the opposition should be granted access to information from Bank of Uganda and other agencies on the basis of which they can suggest alternative policies.

“Failing that, the opposition parties can only speculate on what could be done,” he says.

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