Is Uganda in an economic crisis?

A lot of water has flowed under the bridge but let me begin by explaining important economic terms before we derive into this complex situations in which we have all found ourselves.

Economic growth
In very simple terms, we measure this by quantifying the changes in amount of goods and services produced in a country in a given period.

It is important to note that Uganda is one of the countries in the world with high rates of economic growth.

Uganda has actually been ranked the 3rd among countries with the highest growth rate following China and Peru. The country has been growing at an average of 6.7 per cent for the last 20 years.

Economic development
In its simplest terms, it constitutes balanced and equitable growth with high quality of life for everyone.

Economic development is technically referred to as a qualitative positive change in an economy.

Economic development includes growth but goes beyond to address inequalities, exclusion and improved welfare to everyone. In other words, it focuses on inclusive growth.

Recession
This refers to significant decline in economic activity across the economy, lasting longer than a few months. It embodies sustained slow down in businesses, low productivity and low incomes.

Depression
Is a severe downturn that lasts several years? It is a sustained recession. Examples include the 1930 depression that hit North America and Europe.

Inflation
A persistent, substantial rise in the general level of prices largely related to an increase in the volume of money in an economy.
Inflation “eats” away real wages. It depletes peoples’ savings and negatively affects investment and economic activities.

Stagflation
Is a situation in which the inflation rate is high and the economic growth rate is low. It raises a dilemma for economic policy since action designed to lower inflation may worsen economic growth and vice versa.

Economic crisis
A long term economic state characterised by unemployment and low prices. It is usually characterised by social unrest emanating from the severely deprived groups of people as they groan in poverty while they look at the wealthy.

Notwithstanding any political – fine print, the people of Uganda are currently experiencing a harsh economic situation occasioned by sky rocketing prices of goods and services, amidst high rates of unemployment.

Other problems include: low levels of productivity (every job done by six Ugandans can be done by one Kenyan); low export performance ($2.4 billion worth of exports in the 2009/10 financial year) high import levels ($4.5 billion) in the 2009/10 financial year.

Technically, Uganda has low domestic absorption (high consumption with low investment). Of recent, we have experienced unprecedented rise in the price of commodities and drastic depreciation of the Shilling, which have combined to make life almost impossible even for the hitherto high income earners.

It is important to note that an economy is like a person. It can get sick (flu, malaria or cancer). An economy can also be on drip. If it receives good treatment, it can be healed but if it not well treated, it may not recover and die.

The good thing is that there are critical preventive medicines (primary health care) that can ensure that the economy stays healthy. These are known as economic fundamentals. I will dwell on just two:

Monetary Policy
This is defined in simple terms as the management of money supply in an economy. This is the role of the Central Bank and it is crucial that any such institution ensures that the money circulating in an economy balances with the available goods and services, lest, any imbalance will create serious disharmony which will affect the price of goods and services.
In Uganda’s case, the Central Bank controls money supply through administering repos and reverse repos (using various instruments such as treasury bills and bonds).

The aim is to create equilibrium between available money in circulation and the price of goods and services.

Fiscal Policy
This refers to the raising of government revenue and management of public expenditure. This is the role of government and it is more fundamental than monetary policy because even if the Monitory Policy is excellent, Fiscal Policy can easily discount all Monetary Policy gains of an economy.

What is the current problem in the Ugandan Economy?
The Ugandan economy suffers from what I will call flaws in aggregate demand. Most people are heavy consumers of goods that are essentially imported; hence, the country spends more in foreign exchange.

Secondly, the Ugandan economy is not an export-led-economy. The country’s export performance is limited, thus, low export earnings.

This relationship between low export receipts and high import invoices creates what we refer to as deteriorating Balance of Payments.

This creates a deficit on our Current Account because we spend more than we earn. Just like in every ones’ household, if you spend more than you earn, you will have problems. You will have to borrow and in extreme cases, people steal.
It is largely high imports amidst low export earnings that has led to the ‘torture’ of the Uganda Shilling with serious depreciation.

Dr Louis Kasekende, the deputy governor of the Central Bank argued in New Vision (Tuesday August 9, 2011) that it is good for the Shilling to depreciate.

He further argued that this will make Ugandan products cheap in foreign markets while making imports very expensive and that this will therefore enhance export performance and reduces imports, hence, improving the BoP. This argument does not hold water for two reasons.

Uganda is not an export led economy
The county is largely import based and moreover, the demand for our exports is price elastic as it depends on the healthy economic environment obtained in countries where we export our products.

Indeed, because of the global financial meltdown since 2008, our exports (tourism, remittances from Nkuba Kyeyo and flowers) declined because they are not essentials in these economies where we export.

It is easy for these commodities and services to be deleted from the household needs of countries where we export, hence, cutting our earning of foreign exchange.

On the other hand, an analysis of imports by Ugandans reveals an inelastic demand to price.

The reason is that those who import flashy cars, wines and other high priced consumables have sufficient money (most of which has been unscrupulously acquired through corruption).

As a result, their demand for such commodities is inelastic and actually sometimes ostentatious’ instead! This means that any increase in price of their coveted imported commodities will not affect their willingness to purchase the same volume and quantity of items.

On the other hand, increase in the price of such commodities may increase their demand. Look for example at the growing importation of hardware materials.

Similarly, there is increasing “classy” importation of household items ranging from cutlery to furniture. Yet, we have our boys from Bwaise and Ndeeba who make wonderful furniture! But who wants to buy furniture from there?
People will say these are “low class” furniture. They would rather import from United Kingdom, Germany, Malaysia or South Korea.

Yet, remember that South Korea transformed their economy through import restriction. There was a moratorium against imports until the country was able to produce these items domestically.

But paradoxically, South Korea enhanced their export promotion and competitiveness. It is this policy that enhanced export sector performance and South Korea now is almost a developed country.

In the circumstance, high dependency on imports (consumables) will not help our BoP and current account deficit, which will further hurt the Uganda Shilling.

Dr Kasekende also argues that the demand for imports in Uganda reflects a robust economy.

But wait a minute, what are the characteristics of these imports. I have already re-iterated that most of these imports are consumer tradables.

If they were to reflect a robust economy, they should have comprised factory equipment, agricultural machinery for creating jobs and boosting productivity and economic activity.

The fact that most of the imports are consumables; they do not generate economic activity; hence; only worsen the BoP and depreciation of the Shilling. Without being overly pedantic, one critical issue that has exacerbated the Uganda Shilling to “nose dive” resulting in sky rocketing of prices remains lack of prudence in government expenditure.

Since early 1990 to mid 2000s, the Uganda government had been lauded for practicing prudent fiscal management.
This resulted in sustained macro- economic stability (low inflation, sustained high growth rate) but these achievements are at risk if the economy slides into fiscal indiscipline. There is also too much leakage of would-be funds for development projects.

Instead of investing public funds in productive ventures, significant resource outlays have been embezzled through corruption and what the culprits are doing is putting up mind-boggling residential houses, flashy cars etc.
Now, the question is: How many jobs have been created by these residential mansions or the fuel guzzler 4WD vehicles?
From the foregoing explanation, it is now clear to know what Uganda is suffering from.

The writer is currently Team Leader of an International Project on Economic Management as a Driver to Transformation in Sub- Saharan Africa. Can be reached at: [email protected]