Some of the prices of some consumer goods in a retail shop in Namuwongo, Kampala, on March 4, 2022. A change in the price of oil and gas products such as petrol has a trickle-down effect on the prices of all other goods. PHOTO/FRANK BAGUMA
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How Russia-Ukraine conflict affects you
What you need to know:
- Then there is also the small matter of finding a viable replacement of the wheat that is imported from Russia.
- From the French Revolution of 1789 to the Arab Spring in the early 2010s, conventional wisdom has always suggested that bread riots are not to be underestimated.
It is now the 10th day since Russia attacked Ukraine along multiple axes. Heavy shelling has continued, with varying accounts of casualties. This past week, Ukraine put the death toll of Russian troops at nearly 7,000.
Humanitarian Impact Situation Reports of the United Nations Office for the Coordination of Humanitarian Affairs (OCHA)—their strict methodologies and verification procedures notwithstanding—indicate that Ukraine too has incurred significant losses.
A million refugees have also fled their homes, with the UN fearing that the number could eventually increase fourfold.
Is the conflict principally responsible for the soaring cost of oil?
The conflict, unsurprisingly, has wide public import.
Russia is one of the biggest oil and gas producers in the world.
There are fears that the ongoing conflict will precipitate an energy shock. Measures tailored at calming the market—specifically the International Energy Agency’s members releasing nearly 60 million barrels of oil from their strategic reserves—have proven tenuous.
SEE HERE: Russia-Ukraine conflict in pictures
Opec, an oil cartel, met on Wednesday to discuss production plans, and it opted to remain committed to the Opec+ deal with Russia and other oil producers.
In a terse statement after Wednesday’s virtual meeting, Opec “noted that current oil market fundamentals and the consensus on its outlook pointed to a well-balanced market.”
It went on to add that “current volatility is not caused by changes in market fundamentals but by current geopolitical developments.”
Against this backdrop, Brent crude—the international benchmark for oil prices—hit its highest level since June of 2014 when it blasted past $119 (about Shs421,00) a barrel on Thursday.
Should Ugandans expect another increment in pump prices?
Petrol pump prices in Uganda have continued to hold steady at just under or slightly above the Shs5,000 mark.
They were pushed to that all-time high after the Covid-19 pandemic curbs fashioned a logjam of fuel tankers at border points in Malaba and Busia in January.
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Uganda is a landlocked country with a daily consumption rate for petroleum products that averages at 6.5 million litres.
With most of the fuel hauled in daily, an oil shock is always a heartbeat away.
To compound matters, bulk fuel suppliers such as Vivo Energy and Total Energies have little legroom since their emergency stockpiles are located within the Central Business District in Kampala. They, therefore, cannot be filled to the brim.
Will the soaring oil price and that of other commodities produce a ‘stagflationary shock’?
Fuel price hikes at the start of the year following the pandemic-enforced oil shock are umbilically linked to the rising commodity prices.
There are fears that the spillover effects from the Russia-Ukraine conflict will make a bad situation worse.
Speaking this past week during the release of the Consumer Price Index for February, Mr Edgar Niyimpa—the Uganda Bureau of Statistics’ principal statistician—said Ugandans have to be alive to the fact that “80 percent [of crude oil] is imported.”
He added that “a new tax on crude pump oil of 10 percent” will most likely offer consumers no respite. A recent increment in the price of household commodities such as soap, detergents and sugar, has been met with exasperation from all corners of the country.
The link to a marked decline in petroleum imports is already being drawn.
Ms Sarah Opendi, the Tororo District Woman legislator, said thus on the floor of Parliament: “The manufacturers are actually blaming government for imposing an import duty on the raw materials that they add to produce soap and other detergents. The import duties are 10 percent and previously, these raw materials were zero rated…if the problem is import duty, then we can actually do away with [it].”
Mostly importantly, how will the central bank react? Will it hike its key interest rate? It sure faces a set of hard choices.
What about food price inflation?
In January of 2022, the Food and Agriculture Organisation Food Price Index raked its highest points tally—136.
Russia’s incursions into Ukraine could take it over the precipice. For Uganda—which is a net importer of wheat, sunflower oil (both of which are used to prepare rolexes (a Ugandan omelette), kikomando and the like) and fertilisers from the Black Sea region—concerns abound.
ALSO READ: Five things to know about Ukraine
The disruption of supply chains in Ukraine could, for one, shrink the supply of NPK—a crucial agricultural input—and exacerbate food price inflation (for now, it is negligible as per the Uganda Bureau of Statistics’ latest empirical evidence).
Then there is also the small matter of finding a viable replacement of the wheat that is imported from Russia.
From the French Revolution of 1789 to the Arab Spring in the early 2010s, conventional wisdom has always suggested that bread riots are not to be underestimated.
Oil prices...Impact of the conflict
Fuel price hikes at the start of the year following the pandemic-enforced oil shock are umbilically linked to the rising commodity prices.
There are fears that the spillover effects from the Russia-Ukraine conflict will make a bad situation worse. w
What experts say about the conflict and impact on Uganda...
Lawrence Bategeka (veteran economist): When the source of imports is frustrated, it may influence scarcity of some commodities, which can raise prices even higher. The immediate response from the central bank is to tighten monetary policy, and make sure interest rates are at a level that lowers production cost. Then as you deal with that, you must control inflation, which is a macro concept but with impact on micro level by way of high prices of commodities. The Western powers that are sanctioning Russia are watching who are on their side and who are on the fence. This could degenerate to some diplomatic tensions and all that have a bearing on trade and investment.
Dr Madina Guloba (senior research fellow, Economic Policy Research Centre): In the long term, our economy at all levels—micro and macro—will be affected. Speculation resulting from the Russia-Ukraine situation is already problematic to the way we operate our economy. As long as the situation remains volatile, cost of fuel, stock market trading and foreign investment, remittances will be impacted because Russia is a big player in a sense that it has relationships with the big economies that we deal with in many ways.
Fred Muhumuza (lecturer, Makerere School of Economics): Already, we are seeing an increase in fuel prices long after the border incident was cleared. Even though the oil doesn’t come from Russia or Ukraine, we must understand that oil prices are determined globally. And Europe is a major consumer of oil and gas. With what is happening there, it is almost natural that oil prices will go up globally as Europe tries to find a solution and alternatives.
Then we also have inflation in other countries that is creeping into our terrain. Remember, there has already been global inflation even before the standoff started. Part of it was the anticipation of this Russian-Ukraine situation. And then we started seeing rise in some costs of raw materials coming from Europe. Sanctions being imposed on Russian business people might actually affect us because some of them might be funding investments here or even potential investors.
Stephen Kaboyo (Financial markets consultant)
The fallout has shaken the financial markets and the increased geopolitical tensions are set to exacerbate high inflation and supply chain disruptions. In the same vein, the crisis has dampened investors appetite for riskier assets, which in turn is undermining currencies such as the Uganda shilling as investors shift to safe havens. The more immediate concern is the impact on oil and gas prices.
Some models are suggesting that in worst case scenario, oil prices could rise to $120 (Shs425,00) - $140 (Shs495,000) per barrel in the next couple of months. If this is sustained through the rest of the year, we could see a corresponding increase in inflation and a cumulative effect on the current account deficit- Additional reporting by Ismail Musa Ladu
