The economic pain is real, please help Stella find her groove back

Thursday May 14 2020

 

By DANIEL K. KALINAKI

Stella runs a hotel in Kampala and earns Shs10 million per month. She pays Shs2.9 million in income tax every month and after pension and local service tax deductions, takes home about Shs6.5 million.
By local job market standards, Stella has a good groove going.
But Stella’s hotel has been closed since mid-March. After receiving half-pay for April, employees are now on unpaid leave, pending some return to normalcy. Stella, who is required to chase down debtors and placate creditors, is on half-pay for three months.

In April, she received Shs5 million and paid tax of Shs1.4 million. Her take-home was Shs3.3 million. Although her income has halved, her expenditure hasn’t. In fact, the water, power and food bills have gone up since her kids now spend a lot more time at home. As soon as schools are given the signal to reopen, Stella will receive an invoice for tuition, most likely adjusted upwards to pay for the cost of hand sanitiser and thermometers.

This column and many other commentators have shouted themselves hoarse asking the government to provide a stimulus to jump-start demand in the economy. More than two months in, there is little clarity and no movement. Worse, it looks likely that any tax breaks or liquidity injections will go to those in the “real economy” producing food and goods, not to people like Stella.
This is morally wrong and economically unsound. It is not unreasonable for people who pay taxes to expect relief from the taxman when they find themselves high and dry.

The government directly takes money from Stella’s pocket every month but does not take money from Badiru, a coffee and banana farmer, or Muzoora, a cattle keeper.
There is a moral argument to be made about not taking from those who already give, to give to those who don’t already give.
But for now let us argue the economics, and particularly liquidity and the multiplier effect.
With her income cut in half, Stella has radically cut back on the money she normally sends to relatives, spends on luxuries or everyday goods. Out with the meat, in with the beans. Out with pay TV, in with Akawuungenzi. There will be no wedding contributions, no new clothes and no car upgrade. In fact, when normalcy returns Stella will probably cut back her purchase of fuel and tyres by using a taxi or a boda boda.

That is at the individual level and we are not even saying anything about Stella’s employees who, unlike her, have no income, no savings and, therefore, no effective demand.
But there’s more at the institutional level.
Without customers, Stella’s hotel no longer buys bread, milk, eggs or other foodstuffs.
As a result, the price of eggs has dropped, without a commensurate drop in the price of chickenfeed.

Chicken farmers will soon have to sell off their birds, or go into debt trying to feed them. Turning eggs into mayonnaise is not an overnight or even short-term wave of the hand. And then what? Let them eat mayonnaise?
The hotel isn’t paying power bills, and it isn’t using water. Even before you consider whether the hotel owner is servicing a loan or not, it is clear that dead or dying enterprises pull down aggregate demand.
In other words, the economy isn’t split into two halves, one ‘real’, one ‘of leisure’.
The market is one whole. Money from the beer consumer pays the waitress’ rent, cement for the bar owner to build apartments, and school fees for the builder’s children.
The beer company uses its revenue to buy cars, pay farmers for inputs and advertise its products. What goes around comes around.

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You can support the productive side to manufacture goods locally, but you need to trigger the demand side for people to buy them. This demand and supply curve is usually taught in the first weeks of A-Level economics.
There are many Stellas around us whose revenues or incomes have either disappeared or fallen significantly. They need to be given a helping hand up and we know what needs to be done; after taxing people without giving much back in return, this is the time to breathe life back into the economy, not time for too much English.
Getting Stella her groove back is the moral thing to do; it is even the correct thing to do economically.

Mr Kalinaki is a journalist and a poor man’s freedom fight.

write2kalinaki@gmail.com
@Kalinaki

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