Looming diesel crisis fuels fears in Uganda

A woman boards a taxi in Kampala on Thursday. It is feared that diesel shortages will push up fuel and transportation costs since most public service vehicles run on diesel. PHOTO/MICHAEL KAKUMIRIZI. 

What you need to know:

  • With refiners struggling to keep pace with rapid post-pandemic demand recovery, an acute global energy shortage—which has already sent the prices of gas, coal and crude oil soaring—has worsened. 

Five months ago, there was cause for optimism when the Tororo Persons Living with Disabilities Cooperative received a tractor from the Ministry of Agriculture, Animal Industry and Fisheries (MAAIF). 

But instead of thriving in an oasis of hope, the cooperative has found itself grappling with a perfect storm.
Mr Osinde Aluka, one of the cooperative’s leaders, told Saturday Monitor that the tractor was originally grounded “because it lacked some equipment when we got it.” When the cooperative got a breakthrough as regards to equipment, it immediately faced another setback—the retail price for a litre of diesel had soared from Shs4,000, when the tractor was received, to Shs6,000.

“At the current prices of diesel, you need seven litres to till an acre of land,” Mr Aluka says, adding, “That means going back to our oxen ploughing, which is cheaper,” he said.  
The steep increase in pump prices has also grounded another tractor the MAAIF gave to the Nsituriraku Cooperative Union in the eastern district of Buyende.
“We shall have to charge our members more money because of the prices of diesel,” Mr Eriya Erimirwa, the head of the cooperative, told Saturday Monitor, adding, “This means few members will be able to use this tractor.”

Mr Boniface Okanya, the commissioner of engineering and mechanisation at MAAIF, said the tractors were meant “to increase…productivity” but fuel inflation had other ideas. 
He added that since it is apparent now that “farmers won’t be able to use these tractors”, government interventions in the form of subsidies for “diesel used for agricultural purposes” will be a step in the right direction.

Chain reaction
Diesel is indispensable to Uganda’s economy not least because it powers generators that provide critical electrical power, farm tractors that increase agricultural productivity, construction machines and equipment that build and maintain the crucial transportation and utility infrastructure, as well as trucks that transport food from the countryside to the market.

Warnings of a looming global diesel shortage have become increasingly strident in recent weeks. 
With refiners struggling to keep pace with rapid post-pandemic demand recovery, an acute global energy shortage—which has already sent the prices of gas, coal and crude oil soaring—has worsened. It is feared that diesel shortages will push up fuel and transportation costs (most public service vehicles or PSVs run on diesel), further tanking the Ugandan economy.

“It goes without saying that if the diesel shortage is long-termed, then some factories will have to close,” Mr Corti Paul Lakuma, a research fellow at the Economic Policy Research Centre (EPRC), grimly acknowledges. 
“It’s not easy to adjust from one fuel to another. And of course, prices of goods will go up to cover up the expenses that are being encountered,” he said.

Mr Lakuma forecasts that any switch to, say, bio-fuels will be met with “severe consequences.”
He adds: “Factories can turn food such as corn or sugarcane into fuel, but that would mean people might lack what to eat as they would be competing with factories. So still food prices will go up further.”
Besides being a majorly agrarian economy, most of Uganda’s population resides in rural areas. 
Mr Richard Ssempala, an economist, says these two factors hold out frightening prospects in the event that there’s an undersupply of diesel.

“For instance…matooke, one of the staple foods in Uganda, is grown in the central, western and southwestern parts of the country. Transportation of the [matooke] from farms to urban centres requires diesel fuel. An increase in the price of fuel has an impact on the cost of the final price of the products,” 
Mr Ssempala, who is the coordinator of finance and development at Oxfam Uganda, says, adding, “It should be noted that most Ugandan factories use a significant amount of imported raw materials. This is supplemented with the costs incurred to transport the finished commodities to the market.”

Mr Ssempala further noted that since “all profit maximising firms aim to minimise production costs, including transport”, they will need little invitation to incorporate any additional costs of production “into the prices of the commodities.”
Following the near-collapse of what many observers called a promising industrial sector in the 1970s and early 1980s, Uganda embarked on a broad range of policy and institutional reforms. 

The pro-markets policies and macroeconomic industrialisation has, however, had limited successes.
“Most of the factories we have are small and they need diesel. Actually, Uganda needs more diesel than we are importing at the moment if it’s to fully industrialise,” Mr Lakuma says. “If we get a diesel shortage now when the prices are already high, the economy will contract further, leading to loss of jobs,” he adds.  

Genesis of the problem
In January, Uganda was hit by a fuel supply shock after Covid-19 pandemic curbs triggered a logjam of fuel tankers at the Malaba border snaking nearly 130km. In the aftermath of the shock, Ms Ruth Nankabirwa, the Energy minister, described the spike in pump prices from Shs4,000 to Shs12,000 as “cheating.” 

She also warned that the culprits “would be arrested and prosecuted.” With no arrests in sight, and fuel prices still soaring, Prime Minister Robinah Nabbanja tried to allay fears by setting a price ceiling of Shs5,000.
Pump prices normalised at that price ceiling and soon started shooting up when the impact of the Russia-Ukraine war started to become pronounced. 
In May, President Museveni was forced to address himself to the soaring fuel and commodity prices. 
He ruled out any fuel subsidies.

“If we subsidise or even just remove the taxes on imported commodities, the level of consumption will either remain the same, but this time each litre takes more dollars… The dollar drain will now increase per litre and also, worse, people may buy more of this expensive commodity,” the President said in a national address, adding, “In the Great Lakes area, there is another problem – smuggling. When an item is cheaper in one country…there is a powerful incentive for smugglers to buy cheap in Uganda and sell expensively in the neighbouring country. Therefore, cheaper petrol in Uganda, would be cheaper for the region.”

Mr Museveni also warned that any state interventions would “seriously encroach on our reserves.” 
He further revealed that any removal of taxes on diesel would cost the treasury Shs1.15 trillion. 
He said since this—and other proposed interventions—would impact negatively on funding the Budget, “removing taxes or subsidising many of the imports is suicidal and a blunder.” 
This was in tandem with what Mr Ramathan Ggoobi, the Secretary to the Treasury, proffered when he said “tax cuts to address exogenous shocks” is “economics that doesn’t work.”

If there’s a prolonged scarcity of diesel, analysts believe the government’s resolve not to intervene will be tested.  
“We will most likely see a government policy shift from non-intervention to direct intervention, especially for diesel prices that are major cost drivers for domestic industry and manufacturing,”  Mr Silver Kayondo, a lawyer who specialises in oil and taxation issues, says, adding, “Gains made in local dairy, sugar, tiles, paints and coatings, etc., face the risk of reversal.”
 

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