Economy overheating as cost of fuel, commodities increase

When an explosion rocked Vivo Energy’s depot in the Kampala suburb of Namuwongo early last month, leaving scores injured, the richness of the metaphor was yet to crystallise into something tangible. 

Whereas a pandemic-induced supply shock had pushed pump prices well past the Shs5,000 mark, state actors were quick to insist that the squeeze was only transitory.

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Much like the fire from the explosion—which Vivo Energy later said it put out after “activat[ing]…stringent emergency procedures”—things were supposed to return to a semblance of normality. 

At least once the logjam that stalled fuel tankers at the Uganda-Kenya border was snapped. The smouldering embers of the high energy prices were, however, rekindled when a litre of petrol normalised at Shs5,080 or thereabouts.

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This past week—amid soaring global crude prices—petrol retailed at an all-time high of Shs5,160. Only last July petrol pump prices were just under Shs4,000 even as the government brought in a new tax of Shs100 per litre. 

Needless to say, the existing state of affairs has put monetary policymakers in a bind as they look to ease the pain Ugandans are feeling at the gas pump and in different shopping areas.

“The rise in these prices is a temporary shock and more so an external shock having been caused by disruptions in the global supply chain by Covid-19 as well as the geopolitics we are seeing in different parts of the world,” Mr Ramathan Ggoobi, the Secretary to the Treasury, said at an event on Wednesday. 

He added: “This situation will normalise and very soon we shall see some of these spikes peak and get down.”

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More reassurances came from Mr Michael Atingi-Ego, the Bank of Uganda (BoU) deputy governor. He said: “There are some supply side shocks [that have meant] we cannot get enough raw materials for [say soap production]. That’s why some prices are going up, but we believe these are short-term things.”

A fortnight ago, the Uganda Bureau of Statistics (Ubos) revealed that core inflation, which excludes energy and food prices, jumped from 2.3 percent in January to 3.1 percent in February. The spike was principally attributed to “annual other goods inflation that increased to 5.1 percent for the 12 months to February 2022 up from 4.3 percent in January 2022.” The “other goods” in question, which are squeezing household budgets, include soap and education services to mention but two.

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More than anything, the rise in these commodity prices must be what is perplexing BoU. As inflation-weary consumers pare back their spending, the central bank has been advised to ignore soaring energy prices and interest itself more in home-grown inflation.

Speaking at the fifth Economic Growth Forum in January, Mr Atingi-Ego acknowledged that “shocks can result in considerable macroeconomic and output volatility, which in turn increases risks and uncertainty for the private sector and the government.” 

He then proffered “concessional financing” (i.e. borrowing) as one of the cures to the ailment, reasoning that it “helps smooth the adjustment process as it limits the need for policies that compress demand and aggravate the shock-induced decline in output.”

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Fears about the sustainability of Uganda’s debt will, however, doubtless resurface as growth is squeezed by high energy prices. The BoU’s monetary report in August of 2021 put Uganda’s debt at $19 billion at the start of Financial Year 2021/2022. It further proffered a GDP of $37.6 billion (about Shs136 trillion) in 2020 and a projection of $62 billion (Shs224 trillion) in 2025. 

While the latest Auditor General’s report put Uganda’s debt-to-GDP ratio at 47 percent (for the Financial Year 2020/2021), it is forecast to soon—if not already—edge into the red zone by breaching 50.

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All said, the BoU is not expected to keep policy loose by creating too much stimulus in response to supply shocks. The shocks have been labelled as transitory. 

Back in January, Mr Atingi-Ego talked up the need for “a robust financial system to fully propagate to the private sector.” He also made clear his dislike for “depreciation of the exchange rate” as it “feed[s] through to domestic consumer prices.”

Evidently, the fire that he is expected to put out is not in the same orbit with what Vivo Energy faced last month. The former could leave a trail of destruction.

Issue
BoU is not expected to keep policy loose by creating too much stimulus in response to supply shocks. The shocks have been labelled as transitory.