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THE FIGHT AGAINST INFLATION AND THE FUNCTIONING OF ECONOMY IN UGANDA
By Ndinawe Byekwaso
Political economist and a university lecturer since 2007
Author of ‘Poverty in Uganda’ (2010) in Roape, with many other articles published in the press since 1992.
Worked as a Research Officer at the defunct Movement Secretariat while teaching political economy as well as philosophy at the National Leadership Institute, Kyankwanzi.
Contact Address: or C/o Uganda Clays Ltd., P. O. Box 3188, Kampala.
E-mail Address: firstname.lastname@example.org.
Since the late 1980s, the Government of Uganda has taken the policy of controlling inflation as a primary objective (see Tumusiime-Mutebele, 2013 p. 10). As a result, using monetary instruments and fiscal measures, by mopping money out of circulation as well as limiting it in circulation while getting donor support, inflation was brought under control from 1992 to 2010. This is claimed to have laid a foundation for sustained economic growth accompanied by fast poverty rates. However, it started rising sharply in 2011. Although it was again brought down later, it rose up again in 2013.
Although efforts are being made to control inflation using monetary instruments, the country’s own capacity to produce goods for consumption and exportation for imports has not grown sufficiently as agricultural and industrial sectors have been performing poorly (see Table 2). The economy is sick as conceded by Muhumuza (2011), an official from the Ministry of Finance, Planning and Economic Development (MoFPED). Above all, the majority of the people in Uganda are increasingly facing economic hardships. As result, they are fed up (abantu bakowu) as depicted by a popular song of Walukagga that was voted a song of the year.
The above creates a puzzling situation. If fighting inflation has laid a firm foundation for sustained economic growth as well as poverty reduction, why are the majority of the people in Uganda fed up with the situation? The above contradiction needs to be investigated; there is a knowledge gap that the paper attempts to fill. Therefore, the purpose of this paper is to establish the effect of the policy of fighting inflation as a primary objective, using a monetarist approach, on the functioning of Uganda’s economy.
This analytical paper, having in mind the political economy of nationalism, first examines how the measures of mopping money out and limiting it in circulation have affected the lives of ordinary people in Uganda. Then it goes on to discuss how the policy of controlling inflation, using a monetarist approach, has affected the establishment and operation of business as well as the growth and development of indigenous private sector. Further, the paper examines how the obsession of controlling inflation, without minding about the production of goods, has affected the development of agricultural and industrial sectors. Finally, it concludes by having a glance at the overall effect of fighting inflation, under a liberal private sector led strategy of development, on the functioning and health of Uganda’s economy.
Under macroeconomic stabilisation framework, it is argued that in order to promote growth there is a need to create a good business environment for investors by not only liberalising the economy but also controlling inflation. As a result, Ugandans have been made to believe that fighting inflation at all costs (macroeconomic balancing), using monetary and fiscal instruments to mop up and limit money in circulation but not necessarily producing goods physically for consumption and exportation, is good for a health economy. However, according to David C. Colander, a professor of macroeconomics and an author of a widely used textbook in the US and Uganda:
Specifically, inflation does make the nation poorer. True, whenever prices go up, somebody (the person paying the higher price) is worse off, but the person to whom the high price is paid is better off. The two offset each other. So inflation does not make society on average poorer. (Source: Colander, 2004  p. 1962).
Therefore, inflation does not always make the country poorer. Rather the policy of fighting inflation at all costs has negative effects on the development of the national economy by undercutting effective demand. The monetarist approach of fighting inflation in an underdeveloped economy, not integrated and therefore lacks backward and forward linkages, withdraws money from the majority and concentrates it in few hands as discussed below.
The Mopping out and Limiting Money in Circulation
The fight against inflation in Uganda started with a shock-therapy of withdrawing money from circulation started in 1987 at the time of currency reform. The reform struck off two zeroes from the old currency along with 60 percent devaluation, as well as an imposition of a conversion tax of 30 percent (Byaruhanga et al., 2010 p. 53). Under the currency reform, one million Uganda Shillings (UGX) was exchanged for seven thousand only! While the conversion tax physically withdrew 30 per cent of the money from circulation at ago, the devaluation of the Uganda Shilling further withdrew money from circulation gradually. By 1991, Uganda currency had depreciated by over 17-fold (World Bank, 1993 p. xv). Without their income adjusting according to the rate of devaluation, it meant that the people who were not businessmen and women had to pay more money from their pockets and assets than they earned to buy goods from the market.
The shock-therapy mentioned above was the beginning of bad news for the people of Uganda. The currency reform mentioned above wiped out local millionaires – the mafutamingi that had developed during the inflationary period of Amin’s regime (Sembuya, 2009 p. 48) over a night. At the same time, the shock-therapy started a process of killing a national private sector by replacing it with foreign investors, especially the Asians as it was during colonialism. At the same time, the shock-therapy also started the process of killing agricultural development while impoverishing peasants even more and thereby displacing the youth from land. The currency reform and the devaluation that accompanied it caused the terms of trade for farmers, especially those producing food crops and rearing animals, to decline (World Bank, 1993 p. 46) and thereby affecting agriculture badly. To show how the declining terms of trade affected the peasants badly, an example from the village of Kigarama in Kabale District, can throw more light.
While the price of a bar of soap rose from UGX 300/= it cost in 1990 to UGX 800 in 1993, the price of an average bunch of matooke declined from UGX 1000/= to UGX 500/= - half of what it used to fetch in 1990. When a peasant could buy three bars of soap in 1990 from one bunch, in 1993 s/he had to part away with almost two bunches of matooke to buy one bar of soap! In 1990, an average cow would be sold at UGX 100,000/= while in 1993 it would be sold at only UGX 70,000/=. In 1990, student in a nearby Kamuronko Senior Secondary School paid UGX 20,000/= as fees per term while in 1993, the same parent of the student had to part away with UGX 70,000/= per term, which meant that in 1990, a peasant required one cow for his child to complete one year in a senior secondary but in 1993 money from a cow would be used to pay fees for only one term (Pocket dairy, 1993).
The life of the masses in Uganda continued to worsen as measures of fiscal policy aimed at reducing public budget deficits through tax increases as well as reduction of public expenditures, and monetary policies of reducing money supply either directly or by interest-rate policy deepened. The shock-therapy already talked about was followed by checking expenditure on wages resulting in the infamous retrenchment of civil servants and soldiers in the army. By laying-off government workers, it meant that the money they earned going into circulation monthly was discontinued. At the same time, there was the privatisation programme that saw the sell and liquidation of government-owned parastatal organisations, which employed approximately 45,000 workers (Nyikirikindi and Opagi, 2010). Although the privatisation programme was undertaken in the name of promoting efficiency and therefore for more job-creation opportunities, 56 per cent of the sold enterprises closed thereafter (Kibikyo, 2005 p. 188). Consequently, money going into the economy from the closed enterprises was also discontinued.
As a way of controlling inflation through public expenditure reduction to the extent of threatening to close some ministries if there is no money from taxes and other sources (Museveni in Byaruhanga et al., 2010 p. 58), the government was refrained from paying the local suppliers on time leading to the accumulation of domestic arrears. In some cases, purchase from domestic suppliers was and is still being discouraged. This limits money going into circulation. Furthermore, in the name of aiming at balancing the government expenditure with revenue collection, the Government was compelled find ways of collecting more money from taxes in a small economy without a large-scale industrial base. As Matovu (2005 p. 163) observes that: With all levels of government under enormous pressure to increase revenue in-take through taxation, visible small businesses in urban areas have come to bear the full brunt of governmental efforts aimed at increasing revenue in-takes”. As a result the Government resorted to overtaxing the people. For instance, fuel that influences the price of most, if not all, commodities in the country was and is still overtaxed. Then there was the introduction of ‘presumptive tax system of “tax deposits” for small businesses (in Cawley and Zake, 2010). The overtaxing of the people squeezed and still continues to squeeze even the little money from the majority people have.
Meanwhile as the restrictive monetary and fiscal policies were being implemented without the development of the local productive capacity (ability to produce goods for consumption and exportation, Uganda increasingly became donor-dependent, especially through budget support. The ‘donors’ or ‘development partners’ were willing and actually increased ‘aid’ to the country but spent it on sectors, such as roads, institutional reform (like privatisation and decentralisation programmes), health and educations (Mugona, 2010 p. 208-209; ), etc, which do not directly lead to the production of goods. Since the donor money did not come from the local production processes, it could not easily be absorbed within the economy. Therefore, there was ‘excessive’ money in circulation. As a result, other measures of withdrawing the money from circulation were added on. As the size of the government budget resource envelope expanded with the rise in aid, the fiscal deficit widened and therefore the mopping of money out of circulation was intensified as Brownbridge, 2010 p. 300) further reveals.
As fiscal deficit before grants widened in the late 1990s and early 2000s, fiscal operations became the main source of the base money creation. Fiscal liquidity creation far exceeded the growth of Bank of Uganda (BoU) base money target. To meet this target, the BoU had to sterilize most of the base money created by fiscal liquidity operations, using a combination of two instruments: the sale of domestic securities, mostly treasury bills, through a weekly securities’ auction; and sell of foreign exchange to the inter-bank foreign exchange market.
Again when inflation rose up sharply to about 30 percent in 2011, more ruthless measures of mopping money from circulation were undertaken. The Bank of Uganda sold high yielding bonds and treasury bills to attract dollars‘(between 15 – 23 percent)’ (Wandera, 2012 p. 22) while it increased interest rates through the increase of Central Bank Rates (CBR) to more than 20 per cent from 16 percent (BoU, October 2011). In addition, the government removed subsidies on electricity and consequently Uganda Electricity Regulatory Authority (UERA) also increased the price of electricity in 2012. Meanwhile, taxation of the people has been intensified with the introduction of taxes on agricultural inputs and water in the 2014/5 budget.
As a result, the continuous and increasing measures of withdrawing out and limiting money in circulation, have reduced effective demand within the economy; money has become ‘scarce’ (esente zabula), to use a common expression in Uganda. The removing of what is said to be excessive money from circulation squeezes the incomes of the majority who are already experiencing economic hardships; the minority rich get what is deemed to be excessive money in circulation but the money is withdrawn from both the poor and the rich. Whereas the majority of the people in the country do not have money, the few rich have it in plenty; the money is concentrated in few hands as illustrated by the fact that the gap between the rich and the poor has been widening (see Uganda, 2010 p. 28; 2004 p.12).
Business Operation and the Local Private Sector in Uganda
The measures of mopping out and limiting money in circulation while concentrating it in few hands affects ordinary business operation in Uganda by undercutting effective demand within the economy. Therefore, there the country is continuously experiencing recession-like economic conditions. The majority do not have money to buy goods in large quantities leading to reduced sales; (abantu bavu, to use a common expression in Uganda by traders). As a result, there are limited business prospects within the economy. For that matter, although Uganda was ranked second most entrepreneurial country in the world by Global Entrepreneurship Monitor Report in 2004, it was found out that also the rate of businesses failure was one of the highest. It was observed that for every business started, the other closed (Bugaari, 2008). From the Minister of Commerce, Hon. Kyambadde, who was taped and aired on Radio One Talk-back programme in the morning of August 22, 2013, ccurrently 80 percent of the businesses established in Uganda collapse within five years. According to a study carried out by Uganda Bureau of Statistics (UBOS), Uganda Investment Authority (UIA) and Ministry of Finance Planning and Economic Development (MoFPED) 1991 – 2012, only 87 percent of the proposed projects to be established in Uganda actually register while only 46 percent survive (in The New Vision, 2013).
Without putting into consideration the negative effects of controlling inflation at all costs on business operations, MoFPED attribute the current high business failure rate in Uganda to other factors. It is attributed to: lack of entrepreneurial skills, information on market opportunities, and high quality business development services, as well as lack of finance, adequate technical and management support (in Bugaari, 2008). However, this is contradicted by the fact that during Amin’s regime, illiterate men and women emerged and acquired entrepreneurial skill as they managed their businesses without most of the above-mentioned attributes. This is because there were profitable trade prospects within the Ugandan economy then.
It appears the excuse of lack of business development skills and finance is to lure the local business people to incur even more expenses to invest in loss-making businesses under the current conditions created by the practice of mopping out and limiting money in circulation. The encouragement of business people to incur even more costs compares appropriately with colonialism in respect to borrowing by agricultural cultivators. During colonialism, borrowing was encouraged in most colonies to ensure that the exporters of cash crops got supplies, importers of Western goods sold more, and the banks got greater profits by entangling the cultivators in debt (Furnivall in Payer, 1982 p. 207). Apparently, the local business people in Uganda are indirectly encouraged to incur more costs by hiring business experts as well as acquiring loans in unprofitable business environment so that they can get entangled in debt.
Regarding lack of skills, the situation can again be compared to the colonial period in Uganda. Initially, colonists like Harry Johnson described the Baganda as the Japanese of Africa while Lugard praised the “superior” skills of Baganda artisanal work. By 1940, the artisanal skills were said to be scarce. Then the colonial academicians started blaming the poor success of African enterprise on the absence of ‘basic commercial attributes’ (in Mamdani, 1976 pp. 33-35). While the mafutamingi businessmen and women of Amin’s era had entrepreneurial skills to manage business, now lack of entrepreneurial skills is said to be the cause of high rate business failure in Uganda. Like during colonialism, when Asians were made to dominate the Ugandan economy, now foreign investors, especially Asians, again are gaining an upper hand in business in the country. The macroeconomic stabilisation of controlling inflation at all costs is recreating the colonial arrangement, with the economy being dominated by foreign capital as well as enterprise.
According to the implied logic of macroeconomic stabilisation, there is a need to promote a private-sector-led strategy of development under a free market enterprise presumably as a way of promoting local enterprise to grow and develop. However, the restrictive measures of controlling inflation has undermined the development of local businessmen and women into a strong indigenous private sector. Not only has the policy reduced the sales of local investors because of reduced effective demand within the economy but also the government has been not paying the local suppliers on time leading to the accumulation of domestic arrears as already mentioned. By failing to pay the domestic suppliers, the government usually disrupts the businesses of local businessmen and women and therefore undermines their capital base.
On the other hand, while the local businessmen and women complain of low sales because of the low purchasing power within the economy, the emergence of supermarkets has complicated matters under the policy of free market enterprise associated with the control of inflation as well as the attraction of foreign investors. ‘Small shops all over the country are currently struggling for survival in the face of the growing number of supermarkets’ (Business Power, 2011 p. 22). ‘In Kampala, where the biggest number of potential purchasers of food are found, there is a trend in which foreign-owned supermarkets are beginning to dominate sales to the emerging Uganda middle class’ (Owaranga, in Daily Monitor, 2005 p. 16) (if it is truly emerging).
Even if under the current circumstances, it may be unwise to borrow money to invest in an economy with limited business prospects, cheap credit is necessary for the establishment and development of economic projects by indigenous private sector, if appropriate policies for national development are formulated and implemented. Unfortunately, even without the policies to promote national development, the selling of government securities to fight inflation competes ‘with private sector credit for resources available for cheap credit. In the past, ‘as the share of government securities in banks’ portfolios rose rapidly, the growth of bank loan stagnated’ (Brownbridge, 2010 p. 302).
On the other hand, in the name of controlling inflation, the Bank of Uganda increased interest rates in 2011 while the Uganda Electricity Regulatory Authority (UERA) also increased the price of electricity in 2012 in the name of reducing government expenditure as has already been mentioned. By raising interest rates, the Bank of Uganda increased the cost of borrowing for investment thereby affecting the businesses of the local private sector; the foreign investors could get loans from their home countries or could easily get credit for goods manufactured in their home countries, which are not affected by the increase in the interest rates in Uganda. Again, the rise of electricity rates also increased the cost of running a business, let alone the establishment of industries in Uganda. According to a calculation made by Mwenda (2012 p. 20), after the increment of rates, electricity bill for Hima Cement Industry would jump from UGX 22billion to 92.4 billion annually, if the company paid full price – enough to wipe out the company’s profits over two times.
The above measures are cost-push inflationary, ironically when the government claims to be fighting inflation. In an economy with reduced effective demand, the increase in the costs of production or trade emanating from the increase of electricity bills and interest rates is ruinous to industrial establishments and other enterprises. If the increase in the price of goods reduces sales (as is usually the case in Uganda) due to limited effective demand within the economy, then it becomes difficult to establish and operate business and industrial enterprises as is currently the case in Uganda. If the developed economies cyclically suffer from economic stagnations (recessions and depressions), is Uganda the exceptional? Certainly not.
To make matters worse, the increase of interest rates discourages investment in vital sectors of the economy, namely agriculture and industry. ‘Indeed despite robust growth in total bank credit’ in 2011 even if there was an increase of interest later in the year, ‘agriculture and manufacturing (most vital sectors of the economy) accounted just for about 6 percent and 13 percent of total bank credit’ (Wandera, 2012 p. 22). As if this is not bad enough, the Government of Uganda proposed to impose taxes on agricultural inputs in the 2014/5 budget, a move resisted by civil society organisations by presenting a petition to the Speaker of Parliament.
While it is not easy to establish and operate a business in Uganda, especially by local investors when inflation is being controlled as has already been illustrated, the situation sharply contrasts with the one when there is inflation. Whereas inflation is usually decried from the consumption side of the coin, on the supply side, inflation can boost local production as well as promoting exports; inflation makes imports expensive while exports become cheaper. With the cost of an international currency, the US Dollar rising while the local currency is depreciating, the people are encouraged to export for the dollar. On the other hand, because of higher price for a foreign currency, imports bought with it become more expensive while the locally produced goods become cheaper. Therefore, both the people from within and outside prefer to buy the locally produced goods at the expense of imports. An example of face bricks in Kajjansi - Uganda illustrated in Box 1 makes the point clearer.
Because Kampala has greatly expanded, there has been a good business at least for construction materials. In Kajjansi, with the formal industries - namely Uganda Clays Limited, Pan-African Bricks and Lweza Clays, failing to satisfy demand for the local construction materials, the residents in the area became innovative and started making face bricks (commonly known as half-bricks), ventilators, and ridges to fill the gap. The local construction industry sprang up during Amin and Obote two regimes when there was inflation. For some time, the industry became the source of livelihood for many people in the area. However, the situation is gradually changing as inflation is being fought. To make matters worse, the liberalisation of the economy has encouraged Asian traders to import cheaper and finer wall bricks from outside as a substitute for face bricks. As a result, the rich people are increasingly buying the imported wall bricks instead of the locally-made face bricks. Then the local industry has been affected. The residents make the face bricks and get stuck with them without buyers for months. It is only when there was inflation in 2011 that the residents got a breathing space because the imported wall bricks became expensive. The face brick-makers did not only get market in Uganda but also in South Sudan simply because the locally-made face bricks became comparatively cheaper. But after inflation was brought under control again, the face brick-makers face a problem of marketing as has been in the past
The trend was observed from face brick-makers in Kawotto A LC 1, Kajjansi by the author who has been a resident in the area since 1990s to-date.
Effect on Industrial Development
The practice of limiting money in circulation to control inflation under free enterprise orientation apparently is not appropriate for industrial development in Uganda. It squeezes money out of circulation while the government is prohibited from intervening in the market to promote local industrial development. It also destroys the existing industries. For that matter, it is not surprising that Uganda does not have large-scale industries even when country is claimed to have been experiencing impressive economic growth for about two decades (Whitworth and Williamson, 2010 P. 31). After practicing macroeconomic balancing associated with privatisation that was undertaken to reduce government spending in order to fight inflation, there was a decline in the manufacturing sector as Kibikyo (2005 p. 188) observed. He concluded that: ‘This phenomenon does not augur well for manufacturing in particular and industrialisation in general’. ‘Uganda used to have six textile industries but immediately after implementing macroeconomic stabilisation, Pamba and United Garment Industries (UGIL) closed while the remaining were limping (Ahimbisibwe, 2005 p. 99). Like in Nigeria, where one of the biggest textile factories had to close down because of the cheap cotton that is imported from USA (Wibberley, 2008 p. 59), the local industries, like the garment industries above, are out-competed by fine foreign products filling shops in Kampala on one hand, and cheaper second hand clothes, on the other. Local ginners after adding value to raw cotton, using borrowed money from banks, cannot find market for their products ranging from surgical cotton to ear pads (Daily Monitor, 2012 p. 24). Consequently, currently industry is not performing well. As table 2 shows, the growth of industry has not been impressive at all; its contribution to the GDP been on average less than 10 per cent.
Table 2 showing economic growth of various sectors from 2001 to 2012
Whole sale and retail trade
Public & administration & defence
Source: The backgrounds to the budget 2005/6, 2011/12, 2012/13.
Agriculture includes animal husbandry, fisheries and forestry not included in the table. Other items of industrial sector have also not been included in the table because they do not reflect a true picture of industrial development.
Moreover, according to an investigation carried out by Ladu (2012, pp. 6-7), manufacturing is getting slimmer. To make matter worse, it was established that there is no reliable data on manufacturing, which implies it could be performing poorer than depicted. Even then, the type of industries that exist within the manufacturing sector are simple ones, like processed simple food items say pancakes, drinks and tobacco, textiles and clothes (including foot-ware) currently under pressure from cheap imports, sawmilling, chemicals and paint, paper and printer chemical, bricks and cement, and soap and foam products. When industrial development is talked about in Uganda, it also includes mining and quarrying, formal and informal generation and supply of electricity, supply of water, and construction of buildings (Uganda, 2013 p. 47).
The poor performance of industrial sector now sharply contrasts with economic development during Amin’s regime. Although it is usually said that industries collapsed during Amin’s regime, inflation and scarcity of foreign exchange encouraged Ugandans to become innovative. With the people having money in their pockets to purchase goods that were scarce then, local artisans started copying and making goods that were formerly imported from abroad in Katwe, a Kampala suburb. Now, with the market flooded with imports while the people do not have money in their pockets to spend (Uganda NGO Forum, 2010 p. 35), the mentioned innovative industry has collapsed.
Effect on Agricultural Development
The programme of macroeconomic stabilisation of mopping out and limiting money in circulation does not only hinder industrial development but is also killing agricultural development. For agriculture to grow sustainably, there should be backward and forward linkages with manufacturing industry (Stein, 2003 p. 169). If agriculture is integrated with industry, there are multiplier effects leading to higher employment levels and generally there are improved household incomes as the Poverty Eradication Action Plan (PEAP) argued below, but unfortunately without putting into consideration the current unprofitable conditions in Uganda.
In addition to its role as an employer, there are two other reasons why agriculture is critical focus of the PEAP. First, the non-agricultural goods and services produced in rural areas are mostly sold locally. Their production cannot expand sustainably unless their demand generated by agricultural incomes also expands. …Growth of agriculture thus generates spillover benefits to the non-agricultural sector in rural areas and even beyond, through the consumption of non-farm products. Linkages with manufacturing and service sectors then spread the benefits of growth in agricultural incomes to the rest of the economy.
Source: Uganda, 2004 p. 5.
So long as the individuals keep on making profits in farming, correspondingly, they also keep on investing in it, increasing the production levels, improving both the means and organisation of production. The profitability encourages the farmers to move from small-scale to large-scale production and from simple tools of production to efficient technology, like the use of tractors and fertilisers. They can also buy irrigation equipments or devise irrigation mechanisms to keep on farming even during the time of draught to avoid their profit-making process being disrupted. In addition, capital from other sectors is also invested in farming business, attracted by the existing profits. Consequently, there is high demand for land and peasants with small portions are tempted by high prices to sell or are forced to sell. Customary land tenure systems and subsistence farming are eroded by the market forces and eventually die a natural death, a trend that is not taking place in Uganda because there is a tendency for the number of people subsisting on agriculture to enlarge as service sector dominates the economy (NGO Forum, 2009). Currently, peasants do not carry out farming as a business, because it is not profitable as elaborated below.
Under the current practice of macroeconomic stabilisation the majority people in urban areas, without gainful employment in manufacturing industry, do not have enough money to buy foodstuff in large quantities as the money is ‘scarce’. On the other hand, because Uganda does not have a large-scale industrial base, farmers do not produce on large scale to supply in urban centres due to narrow market. To make matters worse, the practice of avoiding fiscal deficits at costs in the name of controlling inflation, which has made it impossible for the government to intervene in the economy to stop agricultural prices from fluctuating to a level that does not make economic sense to farmers, is ruining agriculture. As a result, farmers, especially in rural areas, have been getting disappointing low prices for their foodstuff thereby making farming unprofitable business as real life stories recorded in the press illustrate. For instance, a one Okello, a farmer from Masindi borrowed money from the bank in 2001 and used it to grow maize for the market expecting to sell his produce at UGX 200/= per kilo. At the time of and after harvesting, the price fell to UGX 50/= while the cost of production was UGX 100/= (in The New Vision, 2001 p. 10). He made a loss of UGX 50/- per kilo. In 2010, Erias Mukasa of Kasanda, Mubende District, got a loan from a microfinance and grew maize expecting the price to rise to UGX 700/= per kilo but he sold it at UGX 300/= (in The New Vision, 2010 p. 27). He was lucky because the price of maize fell to UGX 150/= that year while the input costs were rising (Ssali, 2010 p. 23).
However, without considering the losses incurred by the farmers, when the prices of the above-mentioned crop fell, Muhakanizi (2004 p. 20), a bureaucrat from (MFPED), advised the farmers to shift to what he termed as high value crops, like vanilla. But the so-called high value crops (cash crops are also affected by price fluctuations as will be shortly illustrated. Instead of addressing the problem of price fluctuations, farmers are not only misadvised to grow the so-called high crops (cash crops) but are also deceived to incur more costs by adding value to their produce. When the price of maize went as low as Shs150 per kilo (not even a tenth of a dollar) in 2010 in some parts of the country while the farmer’s overhead costs were rising (Ssali, 2010 p. 23), the government encouraged them to add value to the agricultural produce before it is sold. But one wonders: if the policy of creating a favourable business environment for investors truly works, why didn’t the investors, with their capital, knowledge and skills, buy the raw produce from farmers and add value to it in order to make profits? According to the logic of free market economics, the private investors, responding to market incentives should have added the value to the raw materials without being told or advised, if the value addition advocated for created room for more profits.
At the time the government advised farmers to add value on their produce, it appeared as if there was a big price difference between selling unprocessed dry maize and milled maize flour. However, it was not the case. The average price of maize flour was around UGX 1000/= a kilo in the city compared to the UGX 150/= the farmers were selling their maize at in rural areas. However, the seemingly big difference would be cancelled by the cost of milling it considering the high fuel or electricity charges, and above all the reduction in quantity as a result of grinding the maize. Since the private investors did not compete to buy it at a higher price in order to make profits, then the value addition advocated did or does not pay; the money derived from value addition could be far less if the value addition were carried out in rural areas with a narrow market (few buyers).
Furthermore, it was argued that adding value does not only mean milling it into flour but also stocking it until a favourable price comes up (Uganda, 2010). Imagine! If farming is a sole source of income to peasant farmers for them to procure the necessaries of life, how can they survive while stocking the produce? Can the bureaucrats who advise the farmers to stock the produce suspend getting their salaries for months until it accumulates into a lump sum?
Not only food crop farmers incur losses as a result of price fluctuations as we are made to believe by government officials, like Muhakanizi mentioned above, but also cash crop growers are affected as well. Between 2002 and 2003, the price of vanilla was very attractive selling at UGX 150,000/= a kilo and as a result, a number of people rushed to grow it. However, within a short period the high price it was fetching then nosedived, forcing farmers to abandon the growing of the crop (Muzaale, 2009 p. 27). By 2009, the price of vanilla had dropped to UGX 3000/= a kilo. Farmers abandoned the growing of the crop in Mukono District where it had long been cultivated.
The above also applied to coffee farmers in Mpigi District when the price of coffee plummeted to the lowest levels in 2002; the farmers stopped picking the ripe coffee beans from the gardens (Oxfam, 2002b p. 11). The decline in prices seriously affected household incomes. For instance, ‘the nearly 40% decline in coffee production between 2002 and 2006 amounted to an annual loss in incomes of about US$ 100 million based on the average coffee price in 2006 of US$ 1.31, with other factors remaining constant’ (Journal of Agricultural Change, 2011 p. 12). Astonishingly, the government did not intervene in the market to prevent the price of coffee from falling to the record low level in 2002, compared when the government imposed a Coffee Stabilisation Tax in 1994 following a sharp rise of price in the international market (see Cawley and Zake (2010 p. 105).
The declining coffee prices did not only affect negatively the household incomes but also national income as Oxfam (2002 p. 152 observed below.
In “1994/195, when coffee prices were high, the country’s revenue export revenues from this crop amounted to some $433m. In 2001/01, Uganda exported roughly the same volume, but it earned the country just $100. To put this in context, the revenue gap was equivalent to more than three times the amount that Uganda received in HIPIC debt relief in 2001.
However, without addressing the price instabilities illustrated above, severe macroeconomic stabilisation is proposed by some government officials to compel peasants produce tradeables instead of food crops consumed locally (see Muhumuza, 2011a&b).
Farming business is not only affected negatively by poor and fluctuating prices but also by drought, which is common in Uganda. In 1998 and 1999, drought occurred and affected 700, 000 people as well as killing 115. In 2002, it affected 655, 000 people killing 79 while in 2005 and 2008 it affected 600,000 750,000 respectively (Uganda, 2010 p. x). According to Tumusiime-Mutebile (2013 p. 10), Uganda has suffered many food price shocks as a result of drought since 2006, blaming farmers for depending on weather and lack of good storage system. However, the continued reliance on weather and lack of good storage system is largely as a result of the policy of controlling inflation aimed at avoiding fiscal deficits at all costs under the general framework of free market economics. For instance, as has already been elaborated, the policy and framework has made farming a loss-making business because the government cannot intervene in the market to stabilise the price the farmers get for their produce at an attractive high level. As a result, farmers fail to accumulate profits to invest in irrigation equipments.
As a result, today, there are few rich ordinary farmers. The few are the ones with still enough land and make money by growing and owning banana plantations together with other food crops, like Tukahigwa reported in the press (Mugasha, 2012). However, with banana wilt, the rich owning banana plantations have been reduced to a number. The other remaining profitable opportunities in agriculture exist in planting trees, a venture suited for the few rich who have enough land and other resources to survive on as the trees mature. Other profitable agricultural include flower and tea growing for export as well as sugar plantations. The latter ventures are undertaken by big companies, usually multinational corporations who exploit workers (Miti, 2009 p.18) while sugarcane out-growers are exposed to famine in Busoga (Mufumba, 2013 p. 13).
Whereas as the newspapers in Uganda publish profiles of people who have made it in Agriculture, the profiles are either exaggerated or are selectively picked from individuals who are involved in multiple activities but not getting money from farming as a business. For example, The New Vision (2012 pp. 16& 33) magazine gave profiles of two prominent politicians, who use irrigation to carry out farming. These individuals use their farms for political purposes but may not be concerned with how cost-effective is their farming business. No wonder, as case of the former Vice-President who sold his Temangalo farm after he was dropped from government illustrates the point (The New Vision, 2012 p. 38). Other farming success stories are of people involved in multiple activities, like Ponsiano Ssenyonyi who has four rented houses; owns a maize mill; and is a trader in coffee and produce (Ssali, 2009 p. 25).
Whereas price fluctuations already elaborated make farming unprofitable business in Uganda and other Third World countries, the farmers in developed countries do not only get subsidies to make their farming business profitable but are also compensated for loss emanating from natural hazards. For instance, the ‘USA and EU account for around about half of all wheat exports’ in the world at prices ‘respectively 46 percent and 34 percent’ below the cost price. While the USA, ‘accounts for more than one-half of maize exports’ in the world ‘at prices one-fifth below the costs of production’ (Oxfam, 2002 p. 15), the farmers in Uganda sell theirs at a loss as has already been illustrated. Unlike Ugandan farmers who starve, sometimes to death when rains fail, their counterparts in the USA are ‘compensated for losses resulting from weather damage’ (Oxfam, 2002 p. 114). In Uganda, for example, over 2,000 households in Bukwo lost crops to drought amounting to UGX 14billion (The New Vision, 2009 p. 34) without the government bothering to cater for their loss.
Moreover, the practice of increasing interest rates in the name of controlling inflation has disadvantaged agriculture even further. When inflation rose up again in late 2013 as a result of food shortages, the governor Bank of Uganda raised interest rates. Under normal circumstances, when inflation occurs as a result of food scarcity, a rational economic policy would be to reduce the cost of borrowing, especially for investment in agricultural sector so that output of food items can increase in the long-run. Since the food scarcity routinely occurs as a result of drought, a prudent economic policy would not only reduce the cost of borrowing for investment in agricultural sector but also to subsidize irrigation equipments as well as constructing public storage facilities so that farmers cannot depend on vagaries of weather anymore. Instead the governor opted to starve the patient by raising the interest rates.
Generally under the mechanism of macroeconomic stabilisation associated with control of inflation at all costs, the people who engage in agriculture are disadvantaged. The system of relying on market forces without government intervention for the determination of prices and wages, rewards more people doing easy petty work in towns, like washing vehicles than the people doing the vital but laborious work of growing food crops in rural areas (Kasita, 2010 p.43). For instance, according to the rates of 2010, it was not difficult for a car washer in Kampala to make UGX 5000/= in a day, totalling to UG Shs150,000/= a month. On the other hand, a peasant farmer growing maize that entailed had work for six months sold a bag of maize at UGX15,000/= going by the price of 2010 (Ssali, 2010 p. 23). By Ugandan standards, there are not many peasant farmers who harvest more than five bags a season. Assuming they sold all the maize harvested, a farmer made only UGX 75,000/= in six months, half of what the car washer earned in the city in only one month!
Since it is the avowed policy by the government to kill what is termed as subsistence farming (Museveni, 2012), it seems the stringent measures of controlling inflation are meant to reduce the price the farmers get to discourage the peasants from growing their own food for consumption. For instance, in Plan for Modernisation of Agriculture (PMA) it is unambiguously stated that maintaining “downward pressure on food” is good for ‘net food buyers, especially the urban poor who spend a large share of their incomes on food’, and that ‘subsistence farmers must absorb lower sale prices for their produce’(Uganda, 2000 p. 6). According to IMF (2011), 60 percent of Uganda headline inflation is as result of food prices. Since food prices play a big role in influencing inflation rates in the country, it can be safely concluded that the government manages to keep inflation low at the expense of the peasants’ income in rural areas. For that matter, the government and other international forces associated with macroeconomic stabilisation are interested in ensuring that the peasant farmers continue getting low sale price for their produce so that they can abandon self-provisioning farming but sadly with giving them better alternative sources of livelihood.
As a result, agriculture is gradually being abandoned. There is mass migration from rural areas to urban areas, especially to Kampala City. The Weekly Message succinctly put it in its headline, “poverty is chasing many people out of villages” (Weekly Message, 2006 pp.1-2). For that matter, as observed by Professor Nuwagaba ‘many young people are quitting agriculture for petty jobs in urban centres like riding boda boda (motor cycle taxis)’ (in Lirri, 2009 p. 28) because ‘There no money at all in our villages’ as one of the slum dwellers in Kampala was quoted saying (Nuwagaba and Mpuga, 2005 pp.241-2). The money has been squeezed out of farming by the policy of controlling inflation at all costs, which has made peasant farmers to wallow in poverty’ and thereby compelled to sell their produce to ‘middlemen offering paltry prices’, often times ‘selling maize, cotton, and rice prematurely in the garden (Were, 2010 p. 9).
Like elsewhere in Third World countries, the macroeconomic stabilisation system of controlling inflation is displacing peasant farmers from the land to urban areas (Wibberley, 2008 p. 56). Is it surprising that the agricultural sector is performing poorly as Tables 2 shows? Its growth has been generally very low (averaging less than two per cent between 2004 and 2008), erratic and sometimes declining while its contribution to the GDP has greatly declined. Food crop production grew negatively for three consecutive years from 2004 to 2007.
The situation above sharply contrasts with the agricultural performance before the practice of controlling inflation at all costs was undertaken. While inflation during the pre-macroeconomic stabilisation is blamed for having affected agricultural production, only export crops had been affected. Rather during inflationary period of Amin’s era, the growing of food crops to sell in the national market expanded greatly at the expense of export crops (Kato 2012 p. 36). Coffee shambas in Western Uganda were cut down and replaced with banana plantations and dairy farms. This was a result of having liquidity within the economy then, coupled with a growing urban population (Sembuya, 2009 p. 48), which provided a market for local products, particularly foodstuffs. Food crop terms of trade were good and improved steadily between 1981 and 1987’ (World Bank, 1993 p. 46), the time when Uganda was experiencing hyperinflation) but declined started declining in 1989 when inflation was being brought down. In the early 1970s and 1980s, because there was a booming market in local foodstuffs, a number of peasant farmers increased their prosperity by partly undertaking trade. Although, currently there is an influx of migrants into urban areas in search of jobs, the majority people in towns and the city are poor and therefore lack effective demand to buy foodstuff from peasant farmers at a higher price. Further, imported rice is proving to be cheaper than local foodstuffs and affordable by many urban poor families and therefore it is gradually out-competing local food crops like matooke. Furthermore, while the poor in urban areas lack sufficient effective demand to boost the price of food crops locally produced, the emergence of supermarkets, which some imported to the rich, has complicated matters as has already cited.
Even though it is said that agricultural performance has recovered weakly from negative to positive growth as indicated by Table 2, the situation is worrying considering the fact that farming in Uganda is largely still dependent on nature while many people are abandoning it. To make matters worse, the statistics given may not be reliable because the majority peasant farmers largely depend on food they produce for own consumption. Even if food production for own consumption could have declined more, it might not have been captured by the official figures, derived from market transactions and possibly estimates based on projections.
While currently it is difficult to operate a business in Uganda as has already been cited, the investors find it more convenient to invest in short-term trade and services rather than long-term industrial and agricultural development. Therefore, it is not surprising that the economy is currently dominated by the non-vital service sector. Trade still dominates business establishments at 61.1 percent (Uganda, 2012) and telecommunication is continuing to grow very fast (Uganda, 2010 pp. 15 – 16), while gambling has taken root in Uganda. According to the minister of Finance, Planning and Economic Development, ‘There has been unprecedented development of lotteries and gaming industry in the country’ (Uganda, 2013 article 142). ‘Though just about five years old in Uganda, sports betting has spread like wild fire and sucking millions of shillings out of Ugandan youth’s pockets daily’. It is established that ‘some gamblers are known to have taken short term loans to invest’ in it ‘while others have sold their property with the hope of winning from the game’ (The New Vision, 2013 p. 13). Furthermore, speculation in the buying of plots, especially in areas surrounding the city and expanding towns, to sell later at a higher price, without engaging in any productive work, as well as starting schools for business in the name of providing services are dominating business in Uganda, reflected by advertisements on the radios and TVs. For that matter, the private sector in Uganda is predatory because it is not organising factors of production to bring about industrial and agricultural revolutions like it happened in the West. The dominating service diverts capital from vital sectors of the economy to parasitic activities, like gambling, and the consumption of luxuries (posh vehicles contributing to the inconveniencing traffic jam in the city). These economic activities lead to capital flight and therefore the economy cannot perform well under circumstances to create prosperity for fighting inflation from the supply side.
Meanwhile, the whole of Ugandan economy is in shambles and is far from being diversified and therefore does not create employment in the formal sector. In spite of attracting foreign investors and giving them favourable conditions, Uganda still imports simple items to make (like matchboxes and cotton socks for both men and women). As a result, there is problem of unemployment. Every year, 400, 000 youths join the labour market searching for employment and only 90, 000 of them get absorbed while the rest ‘find themselves on the proverbial streets without jobs’, there is an ‘outcry of lack of jobs for both educated and uneducated’ (Uganda NGO Forum, 2010 p. 22).
Therefore, currently, it is very difficult to fight inflation in Uganda from the supply side without abandoning the macroeconomic stabilisation framework of fighting inflation using a monetarist approach. Even within the context of developed economies, the approach disarms the government of the weapon usually used to fight economic stagnations (recessions and depressions. It ‘blocks any use of classic Keynesian deficit spending to achieve full employment goals’ (Rowden, 2010 p. 511), which policy currently is being used by the US to recover the economy from downturn as the following quotation illustrates.
Since the economy began to falter in 2007, Congress has passed what amounts to three stimulus bills – a bipartisan $158 billion package of tax cuts signed by President George W. Bush in early 2008, a $ 787 billion pushed by President Obama as he took office in 2009 in the wake of the financial systems collapse and a tax cut and unemployment agreement reached by Mr Obama in December 2010. ……But with economic growth stalling in late summer of 2011, unemployment still stubbornly high and the risk of a “double dip” recession rising, Mr Obama went before Congress in September to push for a $ 477 billion package of tax cuts and new government spending. ……In the broadest terms, an economic stimulus is an effort by the government to pump money into an ailing economy, whether through spending, tax cuts or interest reductions. Source: (New York Times, 26 October 2011)
Instead of learning from the above experiences, the Government of Uganda is exactly doing the opposite by restricting money in circulation (including raising interest rates).
From the example of the US where the government uses stimulant packages, likewise, in Uganda where the majority make a living from agriculture, with the extremely low prices having affected the income of peasant farmers for a long time, it would have been a sound policy for the government to buy the farmer’s produce at good prices. To make farming a good business in the country, the government would have borrowed from the central bank to buy farmers’ produce when the prices were extremely low, especially foodstuffs, at a fair price and then donate the food to areas affected by famine, schools and hospitals. Instead, when the peasants were suffering with un-bought maize in their homes, the economy was said to have been robust and resilient against shocks because of having foreign currency reserves (Muhumuza, 2011a) for supporting imports in case of eventualities.
With the vital sectors of the economy undermined - like agriculture and industry as already discussed, the country is prone to vicious circles of inflation because there not are enough goods produced for consumption and exportation. Therefore, under the above circumstances, inflation occurring in Uganda is not a normal one. It can be likened to stagflation but not exactly the same thing. While stagflation is ‘a condition of slow economic growth and relatively high unemployment – a time of stagnation www.investopedia.com/terms/s/stagflation,, in Uganda not only are the prices rising when the majority do not have effective demand but also the local productive capacity to produce goods for consumption and exportation for imports has been undermined. Therefore the people are increasingly exposed not only to source income risk but also source of livelihood because self-provisioning farming is being increasingly being destroyed.
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