Cutting taxes on fuel, increasing subsidies and imposing price controls on food and energy products are costly and ineffective methods of tackling the current global economic crisis the World Bank has noted. According to the group’s global financial group, many developing countries across the globe have resorted to these measures to curb rising commodity prices, which they say will only prolong the situation and prove difficult to remove in the future.
The World Bank Group earlier this month released their flagship report, the June 2022 Global Economic Prospects report, placing in perspective the general outlook of the global economy as it takes hits from the two years of COVID-19 and the high inflation and slow economic recovery that has been exacerbated by the Russia-Ukraine war.
According to the report the world is facing the deepest global recession since World War II, and just as countries thought of mitigation measures, they have been hit by high inflation and slow growth which will lead into stagflation for several years— “unless major supply increases are set in motion.”
Research carried out by the World Bank indicates that food and energy subsidies are placing considerable strain on the budgets of households, public utilities, and some governments. “To mitigate the impact of sharp increases in commodity prices on households, numerous EMDEs (emerging market and developing economies) have cut fuel taxes, increased subsidies, and imposed price controls on food and energy products. These measures are, in general, costly and ineffective at delivering benefits to low-income households, and can be challenging to dismantle,” the report notes.
Instead, the global institution has recommended that policy makers “deploy targeted support rather than distortionary price controls, which are already widespread.” They further recommend that policy makers reprioritise existing spending especially on imports as a matter of urgency. “Balancing the need to ensure fiscal sustainability against that of mitigating the war’s adverse effects on vulnerable populations may require reprioritizing existing spending, especially in commodity importers. Recent global developments underscore the urgency for EMDEs,” the World Bank notes.
In his address to the nation on May 22, Uganda’s President Yoweri Kaguta Museveni outlined measures that his government was taking to address the rising commodity prices and ruled out cutting taxes or subsidising commodity prices. His argument then augments that of the World Bank when he stated that the country’s long-term achievements should not be overlapped by rush actions to curb what he called a temporary problem.
Mr Museveni instead called on Ugandans to concentrate in increasing production of essential commodities and reduce spending on imports. The President is an ardent advocate for import substitution and has numerously called on countries that trade with Uganda to increase their imports from Uganda. The country is a large global exporter of coffee and a regional food basket. Recently, the government launched an export promotion strategy, identifying seven commodities that will boost the export value of Uganda. Working with the private sector, the government under the Presidential Adviser on Special Duties, Odrek Rwabwogo are promoting the export of beef, coffee, fruits and vegetables, fish, dairy, steel, cement as the seven commodities.
In its recently released budget, the government of Uganda has set priorities to include mitigation of the Covid-19 impact on business and economic activity, agro-industrialisation and for this Shs1.05 trillion has been allocated for the Parish Development Model, a local initiative to foster growth from the parish level upwards. This the government believes will help integrate over three million households currently in the subsistence economy into the money economy. The government has also set aside Shs1.5 trillion to fund agro-industrialisation and this will include adding value and branding Ugandan products to be identifiable on the foreign market.
The World Bank’s June 2022 report also points at war and violence as possible causes of prolonged recovery. The Government of Uganda in its budget has allocated Shs3.98 trillion for improvement of security and security infrastructure.
