A CASE FOR WIDENING THE TAX BASE

The “Walk to Work” campaign continued to grab headlines last week. The campaign is in protest over the rising cost of living.

Inflation rose to 11.1% in March on the back of higher food and fuel prices. Apart from a poor harvest which stressed food supplies, a depreciating shilling and rising oil prices on the world scene have also fueled the upward trend of prices.

In Kenya last week the government reduced the duties on diesel and kerosene to try and stem the price increases. Interestingly this came barely a week after the government had to raise the cap on fuel prices.

Finance minister Uhuru Kenyatta’s announcement last week may have caused a warm feeling in the Kenyan public but it may soon come back to bite him in the wrong side when he inevitably has to raise taxes on the same items again soon.

President Yoweri Museveni told journalists last week his government would not reduce taxes on fuel because “We are not going to subsidise consumption”. That is the correct economic line to take.

However good economic sense may not stand up to political expediency, but that will be a story for another day.

Plotting the correct government response to this situation is always going to be a tricky one, especially since government scope for tax concessions is so limited. And that is where I see government has boxed itself into a corner.

Revenue collections have risen a thousandfold since 1986 to the current sh5 trillion. That is not an achievement to be laughed at, however as they say the devil is in the detail.

Taxes from international trade and then income tax accounted for the highest collections with consumption taxes lagging behind the two.

Looking at more developed economies the more sustainable model is for income tax to dominate our revenue collections. In the US income tax accounts for nearly half of all revenues collected while in the UK it is about 30% with the next tax head being National Insurance contributions and then VAT.

In the UK corporarion tax accounts for 8.2% while fuel revenues come in at 0.5%. IN Uganda petroleum duty almost doubles our takings from corporation tax.
The reason we are so dependent on international trade taxes is because they are the easiest to collect, for instance VAT from International trade is significantly higher that from local consumption.

It has become cliché but what this points to is an urgent need to widen the tax base, to rope in more tax payers especially domestically.

"As it stands now because of government’s overdependence on fuel taxes, it has no room to maneuver in trying to mitigate current rises in fuel prices....

That being said the tax component on a liter of petrol or diesel is 24% and 18% respectively.

This suggests that government’s capacity to reduce fuel prices would be best applied by improving the rail and water transport systems, which are much cheaper than road transport and speeding up other bureaucratic procedures that would increase the cost of getting fuel to the pump.

But I digress. It would be fair to say that a lot of people go untaxed in our country but because we are comfortable with the easy pickings from international trade taxes, PAYE and corporation taxes, we seem unable to find them out.

The officials at the URA would say it will cost too much in manpower and other resources to further widen the tax base and they would rather concentrate on milking the existing base, but I think it would be a better use of tax payer money beefing up URA to collect from a wider base than opening up new districts whenever someone eats a rat.

New districts are subsidizing consumption but more URA field officers would be an investment.

"As an initial step of ensuring every Ugandan who earns an income pays his just dues, let URA officials fan out into the suburbs of Kampala and not only ferret out tax defaulting landlords but in addition, require evidence of income that allows some of us to build our own homes...

The point is that if we can widen our tax base government would have more room for maneuver in offering relief to Ugandans.

NIP PRICE CONTROL TALK IN THE BUD

Last week opposition leaders took to the street with “the walk to work” campaign to protest against rising prices.

The opposition blame government for mounting inflation and in places talk of introducing price controls.

Economy watchers have attributed current price rises to seasonal factors – this time every year there is an inflationary spike as food stocks are depleted, the depreciating shilling – last month traded at sh2,400 to the dollar, a historical low, and subsequent fuel price increases.

Inflation is too much money chasing too few goods, so to the extent that government is not promoting policies that boost productivity the opposition have a point.

But the issue that would have seen me join “The walk to work” campaign is the reckless talk of instituting price controls on commodities as a way to stem price increases.

In December the Kenyan government bowed to popular pressure and instituted a cap on fuel prices. But now it has been forced to raise the cap by as much 11% in response to rising international oil prices and one wonders whether this is enough.

Price controls attempt to subvert the natural laws of supply and demand. Contravening the natural order of things is never a good idea.

Let us take an example of matooke, say government put a ceiling on the price of matooke at say sh5000. To begin with producers would be unamused that government has cut down their margins.

Many of them, deciding there is no money to be made in matooke any more, would cut down their plantations and shift their efforts to something else, decreasing supply of the matooke. The producers who soldiered on with their plantations may decide to ship the crop off to more lucrative markets --- further stressing local supplies. Or they may create a black market, which would price a bunch at a level that reflects the true market conditions, often times much higher than the prices people complained about in the first place.

We have had our own experiences with price controls in recent memory. But about two years ago Zimbabwe Robert Mugabe suspecting economic sabotage decreed that the prices of household commodities should return to previous lower levels. His huffing and puffing was met by empty shelves and run away prices.

The Bank of Uganda used to control foreign exchange supply in this country – or so they thought. Right outside its gates a black market in hard currency thrived, ironically off the foreign exchange issued by the central bank. The black market in dollars was such a permanent fixture of our lives it was inconceivable it would ever go.

So against a lot of resistance – probably from the beneficiaries of the Kibanda market, government liberalized forex trading and not only did we not see dollars leaving the country at unprecedented rate, we have seen a stabilization of currencies due to competition in the market.

As a final example, the government’s refusal in the 1980s to employ rent controls has meant that housing rent has found its own level depending on supply and demand, as a result private developers have found the sector lucrative to invest in therefore pushing up the stock of housing and keeping rents manageable.

Examples abound here and abroad and they all point to one thing; that as night follows day price controls serve as a disincentive to new investment, which inevitably leads to shortages and eventually higher prices.

Prices will rise regardless of whether there are price controls or not, but by letting prices find their level the increases will be gradual rather than dramatic and more easier to adjust too.

It’s like the experiment of the frog in a beaker of water. If you heat the beaker gradually over time the frog will stay in the water longer before it leaps out, because it has had time to aclimatise to the gradual increase in temperature. But if you throw the same frog in a beaker of hot water, it will not take long before it has jumped out even though the temperature is lower than the eventual temperature in the first beaker.

Price controls are a politically attractive short term solution but economically and eventually, politically disastrous.

Tribal Warriors - By Robert D. Kaplan | Foreign Policy

Tribal Warriors - By Robert D. Kaplan | Foreign Policy But these men are not horse-trading politicians as such; they have been fighting for something far more age-old, basic, and less susceptible to compromise: territory and honor, at least as they define it.

ECONOMIC CRISIS? UGANDA'S STORM IN A TEA CUP

Analysts have attributed the recent dramatic increase in prices to seasonal factors, a weaker shilling and uncertainty brought on by the recently concluded elections, while officials in the know are confident it’s a temporary situation that will be resolved in a matter of weeks.

Annual inflation came in at 11.1% in March. The dollar hit record highs of sh2,400 last month, although it has since fallen back to a still high sh2,350. Diesel the less pricier of the regular fuels has cracked the sh3000 a liter mark. And there is a looming famine on account of less than adequate rain.

Annual inflation in a given month is a comparison between that month and a similar month a year ago and not a comparison between successive months.

In our case most of the increase in inflation came from a jump in food prices between February and March, which jumped 29.1% in March from 6.9% in February,

“The increase in prices of these food items is attributed to reduced supplies to the market due to prolonged dry season in most parts of the country,” Uganda Bureau of Statistics said in their monthly report at the end of March.

They added that “Prices for petrol, diesel and paraffin went up due to the rising price of oil on the international market.”

Wheareas the depreciation of the shilling against the dollar is a major factor at the heart of the current upward pressure on prices, observers say seasonal factors are at play.

“People are ignoring – intentionally or otherwise the seasonal factors. At this time every year there is a rise in prices as food supplies reduce, this year is no different,” Makerere University Economic Policy Research Center’s (EPRC) Lawrence Bategeka said.

Over the last four years a pattern is emerging. The month of March sees some of the highest inflation rates in the year regardless of bumper harvest or drought.

In 2008 March inflation came in at 8.6% higher than the previous two months. In 2009 it was 14.1% in March last year it was 7.6%, the third highest inflation rate in 2010. And again this year annual inflation in March nearly doubled the February figure of 6%, according to Uganda Bureau of Statistics figures.

In addition the Bategaeka, a senior research fellow, said a combination of low expectations fuelled the inflation.

“The meteorological departments announcement that the rains were not due until May and subsequent announcements for people to keep food in anticipation of drought forced food prices up.”

Election related capital flight was a factor.

“People and companies changed money even repatriated it putting pressure on the shilling and some factories even closed, these things filtered down into the exchange rate. A weaker shilling meant our exports were more expensive and caused price to increase,” Bategeka said.

And finally Bategeka rounded on government monetary policy,

“We have not been paying attention but its clear government has borrowed from the central bank compromising the Bank of Uganda’s ability to mitigate the shilling’s slide,” he said.

Uganda’s reserves have fallen to just under $2.0b from about $2.8b five months ago Bategeka said, in contravention of our targets with the International Monetary Fund (IMF). The target is for Uganda’s reserves to remain at about four times our average monthly imports of $700m.

The latest Bank of Uganda report shows that reserves were down to about $2.66b in January from $2.8b in December or 5.2 months of imported goods and services.

Government has already put out a statement that it drew down on reserves to buy jet fighters and other military hardware so this should not come as a surprise.

Speaking on condition of anonymity officials familiar with the country’s monetary policy have said that a windfall from the taxes from the sale of concesions in the oil field swill be more than adequate to bridge the deficit in our reserves.

“The current issue is being blown out of proportion. We have seen worse times in the last five years. This is a temporary situation which will be corrected when the oil money comes in,” the official said.

Last week energy minister Hilary Onek said government can expect a combined total of $905m ( sh2,126b) from capital gains taxes when the oil fields change hands this year.

Officials point to the Kenyan post election violence at the beginning of 2008 that cut off our fuel supplies, causing lines at the petrol stations and fostered a fuel black market unseen since the mid eighties, as a more trying economic time.

That year food prices leapt as our eastern neighbours sucked up our surpluses to bridge the gap caused by the destroyed crop in the Kenyan rift valley. All this culminated in an inflation rate of 15.9% in August of that year.

RWANDA AND THE CASE FOR THE EAC

Last week I was in Kigali, Rwanda to attend the Commonwealth Secretariat sponsored “Media and Economic Development in a Globalising world”, a media forum in which examined our role as journalists in this fast changing world and region.

Journalism, whose definition is under threat from new media, remains an important tool now more than ever in steering populations through the rapid changes that are upon us. The understanding and application of press freedom varies around the commonwealth and finding that happy medium between journalistic license and responsibility to society will continue to be a challenge.

Around the workshop of course Kigali went on with business as usual.

I have been trying to crystalise my feelings about Kigali with little success, this having been my first time in the country of a thousand hills.

Entebbe Airport is small but Kigali International Airport is smaller, but as I descended to retrieve my luggage I was struck by a Rwanda Development Board billboard highlighting the ease with which you can do business in Rwanda.

The well paved, neat and clean roads of Kigali have become a cliché – which is as it should be, but you have to be there to appreciate it.

And this where my biggest emotional discordance set in.

"Was I impressed because where I come from we have unpaved, port holed and dusty streets? Or was I impressed because here was a country with an economy and budget almost a third the size of my homeland and showing us how things should be done given a little vision, organisation and dedication?

In hindsight it was a bit embarrassing that we had our jaws on the ground about Kigali’s roads, in functioning countries good roads are a given, so what does that say about us in Kampala.

I read somewhere that the efficiency of a government can be detected by the state of its roads. Roads fall apart when governments don’t work. A government in decline starts to show in its roads and conversely a government on the rise improves its roads.

Moving beyond Kampala-bashing the state of Kigali’s roads vis-à-vis Kampala’s or Nairobi’s or Dar es Salaam’s (I have not been to Bujumbura so I can not speak for them) highlights why fast progress towards operationalising the East African Community is important, even critical for the region’s people.

Rwanda’s traumatic history of the last 50 years needs no repeating, but the legacy of this leaves Kigali with no margin for error in delivering goods and services to its people. A continual improvement in the standard of Rwandans across the board, not only by a few urban elite, is crucial if stability is to be maintained.

Ten million people crammed into a space about a tenth the size of Uganda is a situation that does not allow for much pressure build up.

"The challenge for Rwanda is to grow its economy as fast as it can, while spreading the benefits of this growth as equitably as it can. To do this Kigali needs to be strong enough to reign in the corrupt, who frustrate social service delivery while flexible enough to not only attract investment but also encourage local entrepreneurship...

On one count, judging by the roads in the capital (even if as some critics say they are only for show and only in the capital), Kigali has shown itself able to get things done – in Uganda we cant even put up a road for show.

Given its small population, relative lack of industry and landlockedness, Rwanda can not do this alone. It needs unfettered access to a larger market to attract investment. It needs its neighbours’ infrastructure and processes to be in tip top shape to lower the cost of doing business.

The EAC must work for Rwanda to work. Rwanda must work for the EAC to work. This mutually beneficial equation applies to all the five member states. Rwanda just brings these issues into sharp relief because of its turbulent history and the ever present danger of a resurgence in ethnic violence. A World Bank report in 1990s found that countries with less ethnic diversity are more wont to descend into civil war than others.

The colonial borders of East Africa have been shown to be an impediment rather than an advancer of our welfare, the EAC offers us a way to transcend these boundaries and Rwanda serves as a case study for why failure is not an option.