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Good statistics, bad life; Why falling inflation is not reflected in people’s lives

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Good statistics, bad life; Why falling inflation is not reflected in people’s lives

Authorities have told us that inflation, which peaked at 30.5% in October 2011, has now reduced to 18% and the project further reductions, back to single digits by the end of this year. We should applaud this achievement, because in the last couple of months life had become unbearable to many Ugandans because of high and rising inflation.

In fact if one goes back into history, you will realise that we haven’t been appreciative enough to the current government as far as fighting and containing high inflation is concerned. By the time the NRM Government came to power in 1986, inflation had reached 358.4%. This government has kept a track record of keeping inflation under check. Between fiscal years 1992/93 and 2006/07, inflation averaged 5% per annum. No sub-Saharan African country can match such a record.

Mr. President, what average Ugandans are asking is: It is good inflation is falling, and has been low under your government relative to past governments of 1980s, but when will prices for goods and services reduce?

To ask this question, people keep on comparing the prices they used to pay for particular commodities back in early 1990s (when actually high inflation rates were being recorded) and those they pay today (when lower inflation rates are recorded). For example, after your government’s currency reform in the 1987, where two zeroes were knocked off the currency, a litre of fuel used to cost the people of Uganda Shs.70 (Petro), Shs.50 (diesel), and Shs.45 (kerosene) in 1989. These have since increased to Shs. 3700, Shs. 3450 and Shs.2800 respectively today.

The price of a kilo of sugar has also increased from Shs.230 in 1989 to Shs.3500 today, while a bar of soap that used to cost us Shs. 200 now goes for Shs.3000. A bottle of soda that used to cost Shs. 115 now goes for a minimum of Shs.1000. Mr. President, I picked these figures from the Background to the Budget of 1988/89, and are also contained in that year’s budget speech read by Dr. C. Kiyonga, the then Finance Minister, on Friday July 1, 1988.

These increases in prices for essential commodities are by all standards abnormal. They are not in agreement with the official statistics on inflation rate and real growth rates that Uganda Bureau of Statistics (UBOS) usually gives us.

A $ used to cost us Ush.60 in 1987

To make matters worse, salaries and wages of workers have not kept pace with rising cost of living. This explains the social uprisings, riots, demonstrations and the general state of resentment prevailing in our country today. People can no longer afford to sustain their lives.

The story does not end there. We know that Uganda is a net importer. We import literally everything we use in our daily lives. To buy these foreign goods we need foreign exchange, notably the dollar. But over the years, our shilling has depreciated in relation with the dollar and other foreign currencies. A dollar used to fetch only Ush.60 in 1987. Now it costs us Ush.2400 to purchase the dollar.

Mr. President, although quite a number of economic indicators suggest that your government has made laudable steps in getting Uganda out of the sorry state it had been dumped by post independence governments, the rate at which the overall cost of living has increased and loss of the value of our wealth, cautions one to be careful when they applaud NRM for rebuilding the economy.

It is understandable that sometimes many Ugandans find themselves saying, wait a minute, what really makes us believe that the current government has done a great job to rebuild our economy, considering the statistics above and the ailing state of the economy right now?

The question we should ask is: why has the cost of living increased so much? Why has the shilling lost value so rapidly? And why has the exchange rate overshot?

We need negative inflation to reduce prices!

Those who took elementary classes of economic theory know that low inflation does not necessarily mean low prices. We also know that prices are habitually sticky downward. Once they increase, bringing them down to their original levels is difficult. For the benefit of those who may not know this; low inflation simply means that prices are increasing at a slower pace. But this does not mean that prices are reducing! Prices can only fall if inflation is negative.

I usually enjoy teasing my students of macroeconomic theory with quizzes that would show me whether they comprehended the fact that a country may experience low inflation yet price levels of commodities are high in the same country. So whenever I see our technocrats at BOU, Finance and UBOS celebrating “low inflation” in Uganda, without elucidating the true challenge of high commodity prices, I wonder whether these guys really benefited from their economics classes beyond the good grades they attained.

The major challenge of this country right now is not inflation per se. It is high commodity prices and deteriorating value of the shilling. Like I have been writing in these pages, we are paying the price for free unfettered market economics that we want to use to manage an economy with distorted markets. The oligarchic mentality of our economic managers has driven prices up.

These guys at BOU and Finance are focusing too much on economic stability (inflation and exchange rates) and forgetting all about what matters most — productivity growth. They seem to have lost the brainstorming battle of the “chicken and an egg”. What comes first? Can we keep inflation under check in the midst of supply shortages? When prices finally increase, do we have capacity to bring them down without increasing production? Can we increase production under tight macroeconomic policies?

Mr. President, economic theory teaches us that the health of an economy and its currency primarily depends of the productivity levels of tradable goods and services (goods and services which can be exported such as coffee, fish, tea, maize, tourism, etc) and non-tradables (those which do not cross the country’s borders, either because transport costs prohibit the export or import of such goods, or due to their virtually non-tradable nature. Examples include; public services, land, housing and construction, local specialties which are non-tradable on the world market such as grasshoppers, ants, local brew etc.).

Consumers need protections from cheaters

The question I usually ask is how are we faring as far as production of both tradable and non-tradable goods is concerned? What tangible or observable efforts has government put in, beyond rhetoric and good (budget) speeches, to facilitate the production of such goods, especially exportables?

Mr. President, as I have written in these pages before, our economic problems have everything to do with our mistake of abandoning a winning model of pro-poor growth strategy in favour of “casino economics” in pursuit for overnight transformation. We are paying the price now, and perchance our children and grand children will pay a heavier one until we go back to investing in the real sectors that employ and feed Ugandans — agriculture, agro-processing industries, and agribusiness. Investing in these sectors won’t mean that we don’t industrialise or develop service sector.

Another important requirement, to fully recover our economy, is the need to regulate our markets. Mr. President, markets are imperfect, not perfect, just like governments are. We don’t live in a ‘first best’ world. There is always need to have general edicts which prohibit ‘cheating’ among market players for the markets to properly work. Society, for the most part, requires that consumers are adequately protected from the combination of inappropriate conduct of suppliers or sellers who love to distort the transactions in their favour.

I understand your textbook economists convinced you that businesses have the ability to self-regulate their activities. This market fundamentalism was proven wrong several decades ago. Economic research has conclusively shown that the State has a bigger role to play where information asymmetries favour the sellers, and where the industry has difficulties in self-regulating its players. Undoubtedly Uganda is a laboratory to those in doubt.

Matatu operators will not reduce fares they hiked courtesy of rising fuel prices even when the prices return to the original levels. Food vendors won’t return prices to original levels even when their suppliers reduce the wholesale prices. Kiosk owners will continue to vend merchandise at higher prices even if their suppliers and manufacturers reduce the prices.

It’s good that Bank of Uganda (BOU) has invited Prof. Joseph Stiglitz, a top agitator for market regulation, to tell them what I am surprised they seem not to know — that in the world where we live, contrary to the abstract world we imagine in economic models, markets cannot work on their own. Stiglitz will give a lecture on market failures in the financial system on Monday July 16, during BOU’s annual Joseph Mubiru Memorial Lecture.

In the last seven years I been writing this this column, I have quoted Stiglitz’s works for countless times, trying to draw the attention of our economists at BOU and Finance Ministry to the economics that works. Good that they have finally listened. Mr. President, you too should spare time and attend this lecture which I presume might give you an idea why we have found ourselves in the state we are in today.

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