opinion By Dr Moses Khisa
There are two key broad policies that undergird the macroeconomic framework of a country: fiscal and monetary.
The former is about budgeting, that is, revenue collection and expenditure allocations. The latter tackles money circulation: balancing the demand for money with the availability of goods and services. Paper notes, called money, are required only to facilitate exchange of goods and services.
To attain a stable yet performing economy at the macro level, at the general and overall national outlook, fiscal and monetary policy must be harmonized.
There has to be fiscal discipline and monetary prudence. That is balancing between adequate revenue mobilization and rationalization of spending allocations, and striking a delicate balance between adequate supply of money and the demand for money which is a function of economic activity, of production and distribution of goods and services.
If there is too much money, printed by the central bank, and not matched by actual goods and services, you end up with inflation. We had this, quite vividly, in the aftermath of the 2011 elections when the ruling NRM raided the treasury to literary pay its way to clinging onto power.
By contrast, if there is too little supply of money, prices are stable but there is economic squeeze and high cost of doing business. In simple terms, money itself becomes very expensive with high interest rates, which is the cost of borrowing, when monetary-policy is focused on maintaining stable prices through limiting the supply of money.
The long and short of it is that too much money in circulation is bad, too little of it is equally bad. Supply of money is mainly through buying and selling of certain instruments, like treasury bills, by the central bank, and varying the rate at which it lends to commercial banks, which, in turn, informs the rate at which banks lend to a producer or investor.
Monetary policy, there- fore, is almost exclusively under the ambit of the central bank. Fiscal policy, on the other hand, is determined by the executive working through the ministry of finance. The revenue authority is tasked with collecting a certain portion of the projected revenue.
The two other sources of revenue are external donors and internal borrowing, both highly problematic. External sources are highly unreliable. Internal borrowing by government crowds out borrowing by companies and individuals.
If government is competing with individuals and companies to borrow locally, lenders will increase the borrowing rates but also will be more inclined to lend to government than to individuals and companies. It is safer to lend to government; there are better returns and guarantee of repayment.
This sort of excurses can be rather technical and obtuse. Economists remotely do a good job explaining in non-technical prose. Now, I am no economist, so I doubt I can do it better.
The only area I have little claim to specialized knowledge is politics; so, I should exit the economics detour and get into the politics of what I consider to be a defective economic approach in Uganda today.
The central bank has done commendably well in reining in inflation by pursuing a rather conservative monetary policy. Price volatility that leads to high inflation is one of the most politically destabilizing forces any authoritarian regime will be wary of.
So, it is in the best interest of regime survival for General Museveni to allow Bank of Uganda maintain a tight monetary policy since he has another space with unlimited latitude - the budget. He can use the budget to expend on patronage and live lavishly while majority remain trapped in impoverishment.
From the huge presidential motorcade to the big budget that goes towards presidential hand- outs, plus the utterly bloated cabinet and parliament, wastage is a hallmark of the Museveni regime. But it is not in the least an irrational modus operandi. It is a deliberate and forceful political strategy for regime survival.
To transform a poor and backward country is a tough task. The political leadership has to get rugged. It must inconvenience many and even oppress some to lay a firm foundation for economic take-off.
Economic nationalism is critical. Prudent monetary policy is not enough. There has to be a deliberate strategy of channeling resources to productive sectors and propping up companies, whether private or public, in frontline sectors.
The alternative, which we have experimented with under the NRM regime, is to buy into the illusory magic of the market while gifting state companies to regime cronies and handing critical sectors of the economy, like banking, to foreign capital interests.
This alternative approach perforce delivers modest growth and superficial economic change. For example, we have had fairly impressive official growth rates. The crucial question, though, is: in what sectors has the growth been concentrated?
We have a sprawling real estate sector, never mind the disturbing pattern of unplanned and disorderly buildings in and around Kampala. The central market and business part of Kampala is evidently brisk with business.
The traffic lockdown easily leads one to think there could be more cars than people in Kampala. The gripping reality, however, is that more than 30 per cent of Ugandans (more than 12 million people) live on less than two dollars (or less than Shs 8,000) a day.
The author teaches political science at Northwestern University/Evanston, Chicago-USA.