Governments need to trim their ambitions and balance short-term needs with long-term projects.
At some point in the distant future, perhaps, the responses by East Africa’s governments to the economic disruption caused by Covid-19 and the deepening of the crisis by Russia’s invasion of Ukraine might form a core subject for discussion by students in a graduate economics class.
As predicted by economists, the region has been hit by a spike in the cost of living, triggered by a rise in the cost of fuel, food and basic consumer goods. As the US tightens monetary policy to tame its own inflation, now running at 7.5 percent, the US dollar will become expensive, offshore capital will flee emerging markets, weakening local currencies, and anti-Russia sanctions will disrupt the global supply chain, driving up prices.
While this progression must have been well known in advance to treasury mandarins, the responses by the different treasury secretaries are a lesson in what not to do in an economic crisis.
To cushion consumers, Rwanda reduced import duty on petrol and diesel to minimise the ripple effect higher energy prices would have across the economy. With a public used to high prices even without a crisis, Uganda left the market to find its own equilibrium. After initially putting off a planned increase in import duty on fuel, Tanzania eventually buckled and allowed prices to go up.
The puzzle of all time is Kenya, where fuel has become a scarce commodity leading to a flourishing black market, even as neighbours such as Uganda continue to see a stable supply. What is happening in Kenya suggests two possibilities — abnormal market behaviour as cartels create an artificial crisis, or the recommended pump price is below the realistic unit cost for fuel.
In that case, Uganda’s approach wins, because expensive but available fuel is better than no fuel all.
What the rhetoric behind the current price crisis hides, however, is that much of it has its roots in domestic economic policy that left little room for manoeuvre in the event of the kind of external shocks we are seeing. East Africa has been on a borrowing spree and is now simply overleveraged, weighed down by huge debt.
Domestic tax measures were already driving up prices and, unless there is a change of direction, consumers should brace for more shocks when the revised common external tariff goes into effect starting July 1.
From last November, the price of cooking oil and laundry soap has been going up in the region.
In Uganda it started rising after the government introduced 10 percent import duty on crude palm oil, a key input in manufacture of the two commodities. Further raises are expected when digital tax stamps are introduced to more goods.
Combined with natural events such as failed rains, all this is pushing the poor beyond the edge of survival.
Governments need to pull back, trim their ambitions and balance short-term needs with long-term projects whose yields will take years to materialise.
Reducing the price of fertiliser as Kenya’s Agriculture minister has done will not have any impact when farmers don’t have money to buy seeds or diesel for tractors.
The rational thing to do is to seek internal efficiencies, reduce leakages through corruption, renegotiate the terms of outstanding debt and pull the brakes on external borrowing for now.