The only time in recent memory that consumers got some relief from the high cost of food was nearly seven years ago during the Covid-19 pandemic.
The pandemic coincided with favourable weather. There were no dry spells, droughts, or floods. Conditions were perfect, guaranteeing a bumper harvest, especially at the peak of the lockdown when the economy was largely under lock and key.
Despite numerous challenges, some of which badly slowed business growth to the point of rendering many inactive, there were no major cases of Ugandans dying of hunger due to high commodity prices.
Beyond that anomaly, most crises – whether externally or internally generated – including policy pronouncements and measures, eventually hit the economy hard.
With ever-lurking speculators who cannot wait to start a fire they cannot put out, consumers are left to pay through the roof with their hard-earned income.
Fast forward, the economy is now experiencing a depreciation of the Shilling, hitting the pockets of citizens hard.
Paying the price
The same shillings now buy less in the grocery store than a month ago after being significantly weakened against the U.S. dollar. Trading at slightly over Shs4,000 compared to just above Shs3,600 a month or so ago means that foreign payments, including public debt servicing and imported raw materials, are now much more expensive than just weeks before.
With higher exchange rates, importing goods, machinery, and industrial chemicals, including inputs and raw materials for production that are badly needed in the country, means the economy is spending much more on these items than ever.
Currently, the consumer is paying the price for the Middle East and Russia-Ukraine conflicts. These conflicts have disrupted supply chains, pushing Brent crude oil prices past $100 per barrel and raising the baseline cost of petroleum products worldwide.
Currently, petrol and diesel prices are hovering over Shs7,000 per litre.
Uganda is a dependent net importer; it started dealing with the consequences in no time.
Since Uganda is a net importer of oil, higher international fuel prices directly inflate domestic transport, manufacturing, and distribution costs.
The irony
Further, the recent ad hoc pronouncement banning charcoal immediately drove up the price of cooking energy, with a sack jumping from Shs80,000 to Shs100,000 within days of the decla-ration. Once this chaos is sorted, it is unlikely the price of a sack of charcoal will revert to its previous rate. Already, the cost of doing business in Uganda is one of the highest in the region. Manufacturers and millers face high indus-trial electricity tariffs and costly imported packaging materials. This means retail prices remain high even when raw farm-gate produce prices dip, explaining why the retail prices of goods never revert to the previous bill even after a crisis.
This is in addition to transport and compliance costs. This is even before factoring in taxation and policy adjustments, such as a Shs200-per-litre increase in excise duty on petrol and diesel, which directly spikes pump prices.
The irony is, while the final consumer hopes things will get better after the storm calms down, the fact is that the train has left the station and there is no turning back.
This means the crisis has simply ushered in a new normal-high prices that will remain either static or drop marginally, but overall, the cost of commodities will still be high.
Analogy
Imagine you are driving a car that has a leaky engine. Because of the leak, the car slowly loses power over time. Suddenly, you hit a huge Kampala pothole that jolts the car and causes your speed to drop instantly, say, by 10 km/h.
Once you are past the pothole, the jolting stops and your speed stops dropping rapidly.
However, because the engine is still leaking, the car does not automatically speed back up to where it was before. But you keep cruising forward at that new, slower speed.
That is the kind of ride a consumer has to negotiate after a crisis, major policy shift, or pronouncement.
Experts’ analysis
Dr Adam Mugume, an economist, notes that price movement and the eventual sticking of it northward is an expected economic outcome.
‘Except food crops, prices generally do not revert to their previous levels following a shock.
‘Instead, it is the rate of price increase, or inflation, that declines,’ Dr Mugume, who serves as the director of research and policy at Bank of Uganda, told Business Daily.
He continues: ‘Food crop prices, however, are largely influenced by seasonal factors and may therefore fluctuate accordingly or gradually adjust upward, often with a lag, following increases in the prices of other goods and services.
‘Other commodities, such as fuel, are influenced by global market developments as well as domestic taxes, which tend to be permanent and can therefore sustain higher prices.’
As if addressing speculators, Dr Mugume, says temporary factors, including market noise and transitory shocks, ‘may influence short-term exchange rate movements.’
Researcher’s view
In his analysis, Mr Emmanuel Erem, a research fellow at Economic Policy Research Centre (EPRC), describes the tendency for the upward movement of prices as a common economic pattern. ‘It is described as ‘downward price rigidity’, meaning prices respond quickly to rising costs but are slower to adjust when those costs fall.
‘In fuel markets, this is sometimes called the ‘rockets and feathers’ effect; prices rise like rockets and fall like feathers,’ researcher Erem explains to Business Daily.
Kill in profit
There are several explanations to that, first, he says: ‘Businesses usually pass on cost increases quickly to protect their margins and ensure they can afford their next supplies.
‘When costs decline, the adjustment may take longer because some businesses still hold stock bought at higher prices or have supply contracts negotiated during the crisis.
‘They may also wait to see whether the improvement will last before reducing prices. These factors can explain a temporary delay, but they become less convincing if costs remain lower for a sustained period.’
He continues: ‘Second, the easing of one cost does not mean that all costs have returned to their previous levels.
‘In Uganda, for example, international oil prices may fall while the shilling remains weaker against the dollar.
‘Because imported fuel is paid for in foreign currency, that depreciation can partly or fully offset the benefit of cheaper oil.
‘Pump prices also include taxes, freight, storage and distribution costs, which do not necessarily fall alongside crude oil prices.
Consequently, a 10 percent decline in international oil prices should not automatically be expected to produce a 10 percent reduction at the pump.’
The same, he says, applies to transport fares and other commodities. Fuel is only one component of the cost of operating a taxi, bus or truck.
Spare parts, tyres, vehicle purchases, repairs, insurance and loan repayments also matter. If these costs remain high, fares may decline only marginally even when fuel becomes cheaper.
‘Similarly, the price of food reflects production, packaging, storage and transport costs, as well as the availability of supplies. A reduction in one input may therefore provide only partial relief,’ says Mr Erem.
Competition effect
He further argues in his analysis that that competition determines how much of that relief reaches consumers. Where customers can easily compare prices and switch suppliers, businesses face greater pressure to pass on savings. Where consumers have few alternatives or prices are difficult to compare, businesses have more room to maintain higher margins.
Some may also use falling costs to recover losses incurred during the crisis. However, prices remaining high does not, by itself, prove profiteering or collusion; that requires evidence about actual costs and margins.
Another important distinction is between falling inflation and falling prices. If inflation falls from 10 percent to 4 percent, prices are generally still rising, just more slowly.
‘For example, a basket that rises from Shs100,000 to Shs110,000 after 10 percent inflation would rise further to Shs114,400 with another year of 4 percent inflation.
‘This explains why official reports can show improving inflation while households still feel that life is expensive.
‘Economic stability often means that rapid price increases have stopped, rather than that earlier increases have been reversed,’ he says.
Foreign exchange
The exchange rate requires a slightly different explanation. It is the price of foreign currency, and there is no guarantee that it will return to where it was before a shock.
The shilling can recover when temporary pressures ease, but the extent of recovery depends on export earnings, remittances, investment inflows, import demand and external debt payments, among other factors.
‘If the underlying demand for dollars remains higher relative to supply, the currency may stabilise at a weaker level. Stability should therefore not be confused with a return to the previous exchange rate,’ says researcher Erem.
He concludes: ‘The practical test of recovery is not simply whether inflation has slowed, but whether household incomes and purchasing power are recovering.’
Government’s take
In an interview with Business Daily, the deputy secretary to the Treasury, Finance Ministry, Mr Patrick Ocailap, says it is a normal occurrence for prices never to stay static as the economy grows.
He explains that price movement, especially that which goes up and remains there, could be as a result of separate but disturbing shocks.
For example, he says after the global financial crisis, there was an Ebola shock, then the Covid pandemic, then the Russia-Ukraine conflict, then the Middle East crisis that keeps unraveling, then another Ebola scare, then some dry spells affecting production. So several factors are responsible for price movements.
‘You must never forget that the exchange rate is never meant to be fixed, and so are the prices. Not that you want prices to be going up abnormally, but there will always be normal geometric progression.
‘This is the case for economies worldwide,’ says Mr Ocailap.
Pain killers
Mr Ocailap noted that the Bank of Uganda is managing the situation that could see prices escalate out of hand.
This, he says, is done by raising the Central Bank Rate (CBR), currently set at 12 percent.
The intention is to increase borrowing costs for commercial banks, which discourages private sector and household borrowing and slows spending.
This tool also, as a consequence, reduces excess liquidity or cash in the economy. For the government, Mr Ocailap says they are careful not to overborrow domestically, and operate prudently with what they have in store.