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Economy

We are putting economics above  good common sense

Ministry of Finance Permanent Secretary Ramathan Ggoobi used the first Tumusiime-Mutebile memorial lecture at Makerere University to comment on the most pertinent questions. We reproduce the full text below.  

It is an immense pleasure to return to this intellectual powerhouse to honour one of the greatest economists and reformers of our time, and also to talk about economic recovery efforts.

Until recently, my life’s work (teaching, research, public writing, community work, and even Twitter and Facebook posts) has been all about trying to demonstrate to fellow Ugandans what I learnt while in the gates of Makerere – that economics is not common sense per se.

This Public Lecture is about three related areas: the main challenges we are currently addressing to recover the economy from the impact of Covid-19 pandemic and other shocks; the role that institutions of higher learning may play to catalyse this recovery; and most importantly, the gigantic legacy of the late Emmanuel Tumusiime-Mutebile, arguably the grandfather of the economy we have today.

I will not belabour explaining the extent to which Covid-19 has impacted us. In any case, the entire world has been a laboratory and us all the specimen for its torment. From the anguish of losing our loved ones (a world total of 6.23 million souls and still counting; of whom 3,597 were Ugandans), to a disrupted recovery and higher inflation, the pandemic has plagued the human race at an unprecedented scale.

At the peak of Covid-19, global economic growth declined to -3.1% in 2020, from 2.9% in 2019. In Uganda’s case, economic activity was cut down by more than half. The services sector was most affected, in particular education, transport, hospitality and entertainment activities.

The size of the labour force declined, with many workers moving from modern and semi-modern sectors into subsistence agriculture. The share of working persons in subsistence agriculture increased from 41% to 52% due to the pandemic. As we talk now, 6.8 million people in Uganda (housed in 3.5 million homes) are in the subsistence economy.

We have also experienced revenue shortfalls in the past two years, yet expenditure needs increased to finance the fight against Covid-19, and enforcement of Covid-19 measures that were aimed at keeping Ugandans alive by stemming the further spread of Covid-19.

Commodity prices

Economists know that it takes time for external shocks to manifest themselves. In this case, they have started with prices of essential items, particularly laundry bar soap, fuel, cooking oil, building materials like cement and steel, some food items, and education services. Their prices have significantly increased in recent months.

As a result, inflation has risen to 3.7% in March 2022. I will later elaborate why the current events (with Ugandans feeling that the inflation of 3.7% is unbearable) is perhaps one of the key ingredients in the late Tumusiime-Mutebile’s monumental legacy.

The causes of the spike in prices are largely external and supply-side related, key of which is the effect of Covid-19 restrictions, which disrupted supply chains worldwide, leading to higher transport costs, shortage of shipping containers, shortage of raw materials, and higher fuel prices. This cocktail of factors has curtailed smooth manufacturing/production and movement of goods and services, leading to increased commodity prices.

In addition, the full reopening of economies globally after Covid-19 had subsided has led to a swift rise in aggregate demand for a number of goods and services such as fuel, transport, education etc. This has further increased prices.

Since crises are like taxis – another one is often on the way as one leaves the stage – the Russia-Ukraine conflict emerged as Covid-19 left the stage, and has further disrupted supply of goods such as oil, wheat, maize, and sunflower oil, as well as raw materials. The two countries are major producers and exporters of these commodities.

What is Government doing?

Please note that the causes of the current spike in prices are supply-related, external to our economy and global in reach. Government policy response, therefore, must focus on addressing the supply constraints, most of which are external and are affecting the entire world. Any other measure applied would be a wrong medicine to a known ailment.

Therefore, as Government of Uganda, we are concentrating on the following:

  • a) Ensuring that we maintain a competitive environment to support a continuous supply of the goods and services whose stream is currently constrained – that is, fuel, soap, cooking oil, cement, steel, etc – and avoid creating more shortages. We cannot afford to make demand outstrip supply. Most of the things some people want us to do are good common sense but very bad economics.
  • b) Supporting farmers to grow more food to ensure that we do not suffer food shortages. Food is the main driver of Uganda’s inflation.
  • c) We are also facilitating more exports to take advantage of the shocks, earn more foreign exchange to pay for the now expensive imports.

What would Tumusiime-Mutebile have done?

This now brings me to the gigantic legacy of the Late Tumusiime-Mutebile, whom I have often referred to as the grandfather of the economy we have today.

Let me summarise it this way: Tumusiime-Mutebile liberated Uganda from the ‘control model’ – the practice of using administrative controls to keep the prices low and revaluing the Shilling to make imports cheap.

Beginning in 1966, the State of Uganda had assumed the lead in all the major economic activities. The leaders then and the people they led thought this was the best way of making the economy work for everyone.

In 1969, in a bid to enable indigenous Ugandans to “have a say in the economic affairs of their country,” which at the time was dominated by Asians and British immigrants, and “for the realisation of the real meaning of Independence”, President Milton Obote announced his “Move to the Left”, culminating into the infamous 1970 Common Man’s Charter. This was the beginning of the control model in Uganda.

When Idi Amin took power in 1971, Economics was replaced by flawed common sense. As we heard in the numerous eulogies by his contemporaries, Prof. Tumusiime-Mutebile took the risk to remind the brash and unapprised Amin how economics works, and paid a huge price.

Even today, many Ugandans silently support Amin’s expulsion and expropriation of property that was owned by individuals of Asian extraction who had taken up British instead of Ugandan citizenship at Independence in 1962, price and foreign exchange controls, and many other economic distortions.

My students, none of whom was born by 1972 when Amin executed the ‘economic war’, as well as various groups of people I have taught Uganda’s economic history during my practice, often expressed support and silent admiration of Amin’s ‘nationalist’ credentials.

A young Tumusiime-Mutebile was conscious enough to comprehend Amin’s economic distortions and human rights violations, and risked to oppose them. Yet, like many budding economists of the time, Tumusiime-Mutebile started as a socialist. He quickly mutated into a liberal thinker and went on to help Uganda to get rid of economic distortions.

Tumusiime-Mutebile critical interventions  

First, Tumusiime-Mutebile helped this country to get rid of price controls. It had resulted into the emergency of black markets, involving hoarding of basic groceries and other essential commodities.

Secondly, he kicked out smuggling from Uganda. Due to economic mismanagement, the past governments were unable to collect enough tax revenue to finance government expenditures. To deal with this challenge, the governments resorted to levying exorbitant import tariffs to raise revenue. The high tariffs forced traders to engage in smuggling.

Thirdly, Tumusiime-Mutebile helped Uganda to stop printing money to finance budget deficits. The Bank of Uganda had been turned into a printing press for money. Consequently, inflation had jumped to triple-digit at times.

Tumusiime-Mutebile also saved Uganda from money black markets that used to emerge as a result of fixed exchange rates. For example, the official exchange rate in 1986 was fixed at Shs14 and Shs50 per US Dollar for essential and non-essential imports, respectively. Fixing of the exchange rate led to shortage of foreign exchange and emergence of black markets (the Kibanda market) for foreign currencies. International trade was severely affected, leading to a shortage of imported goods and services.

In addition, Tumusiime-Mutebile helped Uganda to restore fiscal discipline. He re-established the discipline of the government maintaining a fiscal position that is consistent with macroeconomic stability and sustained economic growth. The government avoided excessive borrowing and debt accumulation; committed more spending of the national budget to productive activities in the economy.

Ministry of Finance and BoU

Again, it was Tumusiime-Mutebile who masterminded the merger of the Ministry of Finance with Ministry of Planning and Economic Development in March 1992. This improved the coordination of macroeconomic management. Within one fiscal year, inflation reduced from 54.5% in 1992/93 to 5.1% in 1993/94.

As the pioneer Ministry of Finance Permanent Secretary and Secretary to the Treasury (PS/ST), Tumusiime-Mutebile implemented three basic principles:

  1. i) Prudence: Ensuring that expenditure by government was in line with revenue, and limiting borrowing strictly to necessary needs;
  2. ii) Sustainability: Ensuring there were no expenditure commitments that couldn’t be sustained over the medium and long term;

iii) Consistency: Endeavouring to ensure that all expenditures in line with the government’s long term goal of building an independent, integrated and self-sustaining economy.

Tumusiime-Mutebile jealously defended the independence and authority of the Band of Uganda (BoU) over monetary policy (BoU Act); regulation and supervision of banks (Financial Institutions Act); and performance of its functions without subjecting it to the direction or control of any person or authority (Constitution).

This transformed BoU into a credible institution with the prime objective of maintaining price stability.

Tumusiime-Mutebile also led the crusade of private sector development to reduce government’s hand and its inefficiencies in doing business. 3

 All these reforms enabled Uganda to recover and sustain growth at an impressive average annual rate of over 6.5% per year; maintained single-digit inflation averaging 5% for much of the period Tumusiime-Mutebile was in charge at the Treasury and BoU; and facilitated poverty reduction from 56% in 1992 to 19.7% in 2014. 

The unfinished business Mutebile would want us to address

We are now focused on the unfinished business not only to maintain Tumusiime-Mutebile’s legacy, but to propel Uganda to the level he and all of us want it to get to.

In the medium term, our efforts and resources will be concentrated on addressing the following:

  1. i) A large subsistence economy that has crippled household incomes and the purchasing power of the population.
  2. ii) High unemployment and underemployment of the young people.

iii) High cost of credit, electricity and transport, which lower competitiveness of Uganda’s products in regional and international markets.

  1. iv) Low investment in scientific research and development (R&D) to inform innovation and policy.
  2. v) Low level of industrialisation.
  3. vi) Land ownership and security, land use and land fragmentation.

vii) High levels of corruption in government and private sector.

viii) Limited export markets.

  1. ix) Quality of healthcare and education services.

We may not remember everything I’ve talked about, but let’s remember Tumusiime-Mutebile for one thing: he taught us that through free exchange, difference becomes a blessing and not a curse.

Tumusiime-Mutebile grew up at a time when mercantilism – an economic practice by which governments used their economies to augment state power at the expense of other countries – and protectionism were the norm. He knew that exchange is mutually beneficial.

Nothing symbolizes this better than the “double thank-you” at the marketplace. Often when we conclude an exchange, both parties say “thank you”. That’s symbolic of the mutual benefit, cooperation, and interdependency that markets create. In the market, we are genuinely thanking each other for having made each of us better off.

What role could higher education institutions play then? 

Apart from promoting greater productivity and work efficiency, education is the primary opportunity equaliser.

Probably the key to economic recovery is in the ability of our universities to generate the kind of human resource that will ultimately translate into entrepreneurship and innovations. During the pandemic, Makerere University set up a University Scientific Advisory Committee. That is promising.

Universities need to relax a bit on the requirements – both academic and financial – to take on more students and reduce the dropout rate; one of the effects of the pandemic. Please do everything possible not to leave any student behind, particularly those who come from the most vulnerable socioeconomic backgrounds. Remember, families are going through a very difficult time. So, develop timely, student-centric responses.

Universities should also play a key role in economic and social planning. Enterprise incubators and start-up support should be upscaled to boost local job creation and competitiveness of small businesses.

As hosts for the country’s younger generations, universities should think about practical ways of averting the growing “boomerang generation” – young adults who return to their parents’ homes after studies because they have failed to live on their own.

As government, we commit to continue enhancing funding for universities to support the transformation of higher education in the face of tectonic, long term shifts in demographics, technology and competition. We shall invest more in online, hybrid and competency-based learning, improved infrastructure, student sponsorship, and most importantly, research and innovation.

Conclusion

 In sum, the past two years were a pain to each of us. The current increase in prices of essential goods at a time when we are emerging from a pandemic of unprecedented proportions may be posing a real threat to our survival.

But on the horizon, the future looks bright. These shocks are temporary. The situation will soon normalise. Let’s not listen to alarmists and those who bend the truth to turn flawed common sense into economics.

Support the ongoing reforms to create an economy that works for everyone. Those who here be; Seek ye the Truth. Build for the Future; the Great Makerere that has molded us all into who we are today. May the soul of Prof. Emmanuel Tumusiime-Mutebile continue to rest in eternal peace!

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