Monday, January 23, 2012


Half a century after independence Uganda has come to another cross roads in its economic history.

The economy is working its way through the worst shock since the Kenyan post-election violence of 2008.

At that time for a few days our lifeline to the sea, the Mombasa road was impassable, patrolled by crazed gangs of ethnic cleansers and opportunistic looters. In Kibera, allegations that Uganda was involved in putting down riots in western Kenya so incensed the mobs that they tore out sections of the railway line to Uganda. Never underestimate the foolishness of people in big numbers, they say.

Subsequent fuel shortages caused inflation to spike to just under 15%. Thankfully the drama was short lived, the Kenyans came to a compromise of sorts, and we went back to business as usual.

But we probably have to look back to the early 1990s when government embraced fiscal discipline, to find a comparable period of personal distress as we are going through now.

Last year inflation hit record highs peaking at 30% before slipping back to 27% by year end. The spike was triggered by higher food prices and a falling shilling against.

And as they say problems rarely come alone, the failure to get Bujagali online at the end of last year caused further gloom as government, unable to continue subsidizing expensive diesel generators, lifted the subsidies pushing up power tariffs by as much as 69% last week.

In recent weeks city traders have threatened strike action in protest against the rising lending rates and power distributor Umeme, who they blame – erroneously, for the persistent load shedding.

The traders want government to prevail on the banks to lower lending rates and to cancel Umeme’s concession. Neither of which is likely to happen.

Earlier last year they had threatened strike action again, this time because the dollar was going through the roof.

The high lending rates are the price we have to pay for lowering inflation and strengthening the shilling.

Traders have been the largest beneficiaries of the country’s adoption of a free market economy. Setting prices, sourcing goods where they please and building up their wealth largely unmolested.

But the market, which they so love, has to be maintained and every so often desperate measures have to be taken to stabilize it. And that is what is happening now.

To continue or not to continue with the market economy, that is the question at the heart of what the traders are asking for.

Government pandering to short term discomfort can very well issue an edict to banks to lower interest rates.

Banks will stop lending to business and start lending money to government by buying better yielding risk free treasury bills and bonds. The lower lending to the private sector will slow production and weaken the shilling, partly because the banks will convert their holdings into hard currency and look to cash in on a weaker shilling or repatriate the money all together to more benign economies.

Of course the government can jump up and forbid them to send their money out of the country. But as always happens in these situations a black market – called a parallel market in polite company, develops with rates reflecting the real market reality. If you think loan shark rates are high, you wait for the black market!

The traders, more than the rest of us, are feeling real pain. Many risk losing their businesses and property. We can wonder whether it is fair for them to pay for the sins of politicians and short sighted planners, but the truth is we find ourselves in this situation and what do we do?

It may bring short term relief for the traders if the government goes back to a price control situation however temporary but the eventual consequence for this will be economic distress leading to failure and business collapse, the very thing the traders are going to forestall.

At the risk of sounding callous in the current crisis there will be some business failures, it’s the brutal reality of the market, with the leaner more efficient operations coming out the other side of this tunnel of despair. But to even contemplate subverting the market using price controls will doom us to a fate worse than death.

But governments do not always operate by logic. Whether we roll back the market is really a function of politics. We can only wait and see.

But as an illustration of how the market knows no strongman.

In 2008 Zimbabwe’s inflation shot beyond 1000%. Zimbabwe’s Robert Mugabe ordered shopkeepers to revert to prices of a few months ago as a way to put the brakes on inflation. Shop shelves soon went empty and good uncle Bob arrested shopkeepers for hoarding and ranted at imperialistic plots to topple him.

He has since had to bow to the authority of the market but at what cost? Most transactions in Zimbabwe today are carried out in dollars —US not Zim dollars, meaning his monetary policy is being dictated from Washignton, a fate he tried to prevent.

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