SRI LANKA, A CAUTIONARY TALE FOR UGANDA

A week or two ago I was shocked to find that diesel was selling at a higher price than petrol at the pump. This reversal I have never witnessed in all my years of driving.

That diesel is more expensive than petrol is cause for worry, as all our major transporters run on diesel. The knock on effect on prices is probably just beginning.

I have seen debate around the subject. A suggestion that is coming through is that government reduce or eliminate taxes on fuel all together, as a way to bring prices down. There are many reasons why this logic shouldn’t pass go but the best thing is to look to Sri Lanka to see what happens when governments bow to populism and forget basic economics.

"Following the elections in 2019 the Sri Lankan government set itself up for the current crisis by stopping the use of fertilizer, probably playing to the environmental gallery, instituted major tax cuts, which included the abolishment of Pay As You Earn (PAYE) and when the error of their ways became apparent went on a money printing spree and as a day follows night, inflation is now around 40 percent, digging them further into the hole they had already dug for themselves....

You can imagine the jubiliation in the streets of Colombo, as there would be in Kampala, at the announcement that government had abolished PAYE! The short lived cheap popularity has led to the collapse of the government, whose collapse was accompanied by the most riveting footage of angry protestors last week, rolling ministers’ cars into the river.

The repercussions of the ferterliser ban led to low food production, which has not helped the inflation situation. It also means the exports of their main crop, tea, have fallen off the cliff, leading to a collapse in foreign exchange reserves. This situation was so bad that last week the government announced on Wednesday they had only one day of fuel left, this despite the fact there was an oil tanker off the coast ready to offload its load but Colombo had no money.

What Ugandan populists ignore in calling for tax cuts, is that tax cuts will have to be matched by expenditure cuts. Already painful expenditure cuts are being effected as the economy tries to get back on its feet, to cut taxes further would cause more harm than good. And in fact like in Sri Lanka can lead to the collapse of the government, as frustrated Ugandans look to focus their anger. It would be foolhardy to believe what is happening in Sri Lanka cannot happen here. Which raises the question about the motives of these arm chair economists!

Thankfully the Ugandan government seems steadfast in its resolve to not to succumb to populism.

This is particularly important because the rising prices we are experiencing now are not as a result of runaway government spending but due to external factors, most especially the rising world oil prices and supply chain problems triggered by the two year Covid lockdown.

That means that the factors driving price increases are not in government’s control as it would be if the price rises were because of increased government spending...

If that were the case the quick fix would be for government to cut back on spending and for Bank of Uganda to put the brakes on banking lending. In this case those two remedies would send the economy into recession and more problems than we want.

It would be nice if government could give us some relief, maybe dish out a few shillings all around, that would only be digging our graves further but thankfully strapped for cash Kampala cannot afford that luxury.

There is pain all around, a liter of petrol barely gets us around, our waistlines are in danger as food prices soar and even – horror of horrors, we are getting less beer for our shilling.

The one thing government should, no, must do, is to continue to be disciplined its expenditure so as not to fan the flames of an already bad situation. It is called tough love.

If this can be maintained we will look back one day – a year or two from now and thank god we made the necessary, but hard decisions to stay the course of fiscal discipline.

That being said it’s a good time to take a long hard look at what we are spending cut out the excess, maintain the productive expenses – those that produce income. Because even this will pass.