By Richard Bard Byamukama
As a country (government), the outstanding economists, the intellectuals in particular think tankers and journalists; we should give hope to the citizens facing the financial difficulties resulting from the soaring economic conditions through policies that should focus responses along blunting the Oil price volatility, or helping consumers who are the citizens to cope up with the consequences that remain.
Some volatility is natural and quite tolerable but rapidly rising commodity prices drains consumers’ wallet to those affording, and creates a hopeless situation to a section of the population that can’t afford the prices and this calls for immediate and direct interventions.
These frequent changes also make long term investments more difficult.
The financial and economic instability threatens the welfare state leading to the rising power of trade Unions and finance capitalists who are threatened by rising inflation.
Because the costs of living are higher and the salaries are fixed, many trade unions will emerge amongst the different categories of the working population and industrial actions will be inevitable, though trade unions are also political tools because at certain points issues of crisis and equity will question democracy, that’s why they have been limited in many states.
We have seen a series of trade union voices in the past months by government workers especially scientists, and there are still voices of clamour and dissatisfaction within the remaining sectors and the general labour industry both in the private and public sector.
The world is in a grip of an oil price shock. In just a few months, prices have risen from US$65 a barrel to over $130, causing fuel costs to surge, inflationary pressure to rise and consumer tempers to flare.
Even before Russia’s invasion of Ukraine, prices were climbing rapidly because of roaring demand and limited supply growth.
Price shocks aren’t new. Viewed historically, they are an integral part of oil market dynamics, not anomalies. They have occurred since the birth of the industry.
Between mid-1979 and mid-1980, oil rose from $13 per barrel to $34. The next major shock came in 1990 when Iraq invaded Kuwait. The United Nations imposed an embargo on trade with Iraq and Kuwait, which raised oil prices from $15 per barrel in July 1990 to $42 in October. U.S. and coalition troops moved into Kuwait and defeated the Iraqi army in just a few months
Oil and energy markets, essential as they are to any functioning economy, but also prove to be extremely volatile. In fact, prices for crude oil, refined petroleum, and natural gas are more volatile than prices of 95% of other commodities.
Currently there is no way, or formula to ascertain how long the factors driving the oil shock will last, or whether prices will go higher. However, this is not much comfort to consumers (citizens) facing higher fuel costs and financial troubles.
Although there could be no policy or regulatory framework that can or should aim at reducing the probability of crisis to zero, there should be mitigation measures in motion to reduce the vulnerability of citizens (consumers) to high costs of living.
The economic disorganization by the economic conditions could spike irreparable effects where a great number of the population may be left surging in absolute poverty, nursing unemployment, business closures where a number of capital owners will run bankrupt or be encircled in heavy debts due to high interest rates etc.
The homeless people who miserably lived in huts and shanty villages in the USA during the great depression were nicknamed ‘hoovervilles’ an name that was used to mock the then President Herbert Hoover for not initiating policies to protect the suffering citizens.
We shouldn’t be a government that will be proud of being nicknamed or mocked by such names and terms by a suffering person due to the complications of the economic conditions in my remote village of Kyenzige in Kagadi district or Hoima or wherever the boundaries of Uganda reach because the economic burden is felt the same amongst the majority of the citizens, with only a few class amongst ourselves who posses fuel cards and insurance, let’s give hope to the citizens.
Homelessness was present before the Great Depression, and was a common sight before 1929, but the Depression exponentially increased demand. The homeless clustered in shanty towns close to free soup kitchens. These settlements were often trespassing on private lands, but they were frequently tolerated or ignored out of necessity.
In the1932 elections, President Herbert Hoover was voted out and replaced by Franklin Roosevelt who initiated the ‘New Deal’ which enacted special relief programs aimed at the homeless under the Federal Transient Service (FTS), which operated from 1933 to 1939.
Government as a must, not by choice, in a bid to control price increases and volatility, embrace subsidies and tax reductions. These tactics have been substantial in recent years with many countries spending billions per year on subsidies or tax reductions. Indonesia, for example, committed $6.7 billion to energy subsidies in May 2018.
Another example is Tanzania our brother in the East African Community which has reduced the cost of fuel effective 1st June 2022 following the Tsh100 billion ($43 million) fuel subsidy.
According to the Energy and Water Utilities Regulatory Authority (EWURA) effective 1st June 2022, the retail price for petrol is to be maintained at Tsh2,994 ($1.28) from 3,303 ($1.42) per liter, diesel at Tsh3,126 ($1.34) down from Tsh3452 ($1.48) per liter, while kerosene prices remain unchanged.
Zahura Yunus Tanzania’s Director of Presidential Communications also confirmed that following fuel price accelerations and the high costs of living, Tanzania requested for a soft loan of Tsh1.1 billion ($473,000) from the International Monetary Fund (IMF) to help ease the high costs of living, because this is what makes people clamour.
I am talking about people who Kabushenga talked about, the population that is broke and can’t afford school fees and the children are seated in their homes because such a population will clamour.
Government may also target specific industries with subsidies and tax reductions to reduce costs. These industries often include agriculture, public and goods transport, and fisheries, to avoid consumers receiving substantial price shocks to essential purchases. Well, this has worked previously with sugar, when the sugar prices had escalated.
Bread is is not an essential commodity and therefore may not be subject to such subsidies but cooking oil proves to be very essential commodity whose prices must be targeted.
Longer-term dynamics should be set right away that will help government (or ministry of energy as a government parastatal) to become more resilient to oil price shocks and instabilities, including better conservation and efficiency.
Some serious fiscal reforms should be instituted forexample taxes on gasoline and diesel should be gradually reduced while compensating for those reductions by identifying and hiking other tax bases.
More so, we should also think of substitution into other sources of energy, and new hydrocarbon extraction technologies, nuclear etc that may transform the energy balance of the economy.
Government must build an efficient and proper regulatory framework to address and support these dynamics, maximizing the benefits and minimizing the costs. We must continue to modernize the fuel economy standards, and invest in alternative fuels, electric vehicles, and public transportation.
These measures would lessen our oil dependence and vulnerability to future price hikes.
The government should also not shy away from proceeding unilaterally when the situation merits it, the government must also engage with the oil market’s leading producer countries, including newly emerging ones such as China, India, Brazil, and Australia to increase their oil export amounts to Uganda. This can be done by discussions and agreements with the Oil producing and exporting countries.
The most final strategy that countries employ is the buildup of strategic oil reserves. The United States, for example, had 665.1 million barrels of oil in its Strategic Petroleum Reserve in February 2018.
These reserves make it possible for countries to supply the market in the case of sharp price spikes that typically result from physical disruptions to supply. When used correctly, strategic reserves can be incredibly valuable, but critics have chided politicians for attempting to use the reserves for political purposes. This implies that there must be public scrutiny on the entire process and venture.
Finally, as part of the agenda to mitigate the effect of future financial crises, governments through Bank of Uganda should always be prepared to provide appropriate liquidity support to prevent major systemic crises. This, however, must be done in such a manner as to limit the dangers of moral hazards on the part of financial institutions.