Double-Digit inflation: The way forward for the economy

When the Bank of Uganda raised the Central Bank Rate for September to 10 per cent from 9 per cent for August, this came as no surprise to many Ugandans because Uganda had September registered its first double-digit inflation in more than 10 years, according to the Uganda Bureau of Statistics (UBOS).

Since the start of the year, the country has been experiencing a rapid rise in prices of basic commodities starting with fuel, food, soap and others.

According to UBOS’ latest Annual Gross Domestic Product (GDP) statistics, Uganda registered economic growth of 4.6 per cent in the Financial Year 2021/22, which is lower than the pre-Covid-19 target of 6.5 per cent. The country also registered shortfalls in revenue collection of Shs1.4 trillion. Consequently, per-capita output growth in 2021 remained negative for a second year.

The developments mean businesses and Ugandans, who are already feeling the pinch, with many families struggling to put on the table, will have to continue to contend with the situation.

For instance, Kampala City Traders Association (KACITA) in September petitioned Deputy Speaker of Parliament Thomas Tayebwa, citing the unsustainability of their businesses due to the high cost of living.

The chairman of KACITA, Mr Thadeus Nagenda Musoke, said that the rising inflation level has increased their operational costs.

 “The rise in inflation affects the purchasing power of the general public. When the prices of goods and services are high, they (people) reduce the purchase of different commodities that are in the market,” Mr Musoke said. 

Prof Augustus Nuwagaba, an economics don at Makerere University, acknowledges that inflationary pressures suffocate economic growth.

 “Consumers’ purchasing power – the real value of money – is reduced. If prices are increasing faster than people’s nominal incomes, they will be able to afford fewer goods and services over time. The rise in inflation affects the purchasing power of people which results in a slowdown in economic activities and may translate in slower economic growth,” he says.

The rise in the Central Bank Rate has a larger implication on commercial lending.  Already, according to the Bank of Uganda, more than half of the commercial banks have indicated they will increase interest rates due to the increase in the Central Bank Rate.

This means businesses will be borrowing expensively, moreover at a time consumer demand is dipping. A jump in loan default rates could be witnessed in the future as commercial banks recall loans.

But some analysts say the government’s hands are tied.

Dr Adam Mugume, the executive director in charge of research at the Central Bank, acknowledges that managing inflation in this period has become difficult.

Adam Mugume Executive Director For Research Bank Of Uganda
Adam Mugume Executive Director For Research Bank Of Uganda

“But as we take monetary policy action, the global side is not helping us either because it is also not remaining constant. That complicates the whole scenario,” he says.

BoU Deputy Governor, Michael Atingi Ego, says they will do whatever it takes to bring down inflation.

Speaking at last month’s post-budget dialogue, Mr Patrick Ocailap, the Deputy Secretary to the Treasury, explained that Uganda’s inflationary tendencies originate from foreign factors.

He explained that when the US Federal Reserve took measures to cool inflationary pressure, this had wide-ranging implications on smaller economies.

“The holders of US assets globally are likely to move their assets back to the US because the interest rates are attractive and they will be able to deal with their inflation levels from there,” Mr Ocailap said.

“If those who have been participating offshore by bringing their dollar-denominated assets to our treasury bond and bill markets get [them] out, it means then that the exchange rate kicks in. Pressure upwards kicks in,” he added.

Dr Nuwagaba adds: “I would like to put it to Ugandans that the current inflation we are experiencing is a global phenomenon. It is largely imported inflation, caused by Disruption in supply chains of oil products, leading to rising prices of fuel (petrol, diesel) and gas. There is no way the government can subsidise energy costs, simultaneously with huge tax cuts, in a situation of high inflationary pressures, bordering on a recession.”

But what is the way forward?

According to Dr Fred Muhumuza, a development-oriented policy researcher who also teaches Economics at Makerere University, the government must be resolute in decision-making.

“Uganda’s economy is now on a downward spiral. But the country’s decision-making lapses are exposing the economy to external factors. Some decisions must be taken now to create solutions to the rising cost of living in the medium to long term,” he says.

He adds that the government’s debt constraints are not doing us a favour, urging the government to first halt major capital-intensive projects for now.

“The root cause is the fragility within the structure of the economy. We have reached a level where Structural Adjustment programmes must intervene. Budget cuts alone won’t help. If money for a service is not available, think about the existence of the service,” Dr Muhumuza says.

To Julius Mukunda, the Executive Director of CSBAG, the Government should put the money where it will help the country grow.

“Are we doing enough to address the current economic challenges? I believe that this country doesn’t lack money, the challenge is how we utilise it. Where should we put money and ensure that there’s growth,” he says.

Dr Joseph Muvawala, the Executive Director of the National Planning Authority, wants the Government to support large-scale farmers to increase food production.

“Government should buy food and hire silos (for adequate space to cushion the country for about 2 months) from the private sector to stock them with food supplies to act as buffers during periods of scarcity. Leveraging the Parish Development Model resources for food production (Pillar 1),” he says.

 “Government should prioritise water for production and fertiliser used to increase production and productivity of agriculture enterprises,” he adds.

Dr Muvawala further tasks government to reduce Government administrative costs by capping the creation of new administrative units, curtailing the growth of the legislature, and implementing the rationalisation of Agencies including Ministries, and Local Governments. This will facilitate the switching of resources into productive areas such as manufacturing, agroindustry, and light and heavy industry.

“There is a need for better coordination of the monetary and fiscal policies. With the fiscal expansion witnessed in the last three years, the implementation of monetary policy is likely to become ineffective. Supplementary budgets and domestic borrowing are a serious concern and depict a lack of coordination between fiscal and monetary policy management,” he says. 

Mr Dickson Kateshumba, the MP for Sheema municipality, says: “How far can you go in fighting imported inflation? You know that you aren’t going to stop the demand for fuel yet you don’t have control over prices and, in such instances, people are the ones suffering.”

“The Government needs to do more investment in productive activities, revenue performance comes from increased economic activity. As much as we try to control inflation, we shouldn’t lose focus, we should release the money to production,” Kateshumba adds.

On the other hand, Dr Muhumuza urges people to adjust their lifestyles and focus on priorities.

The Central Bank projects that in the medium term, the economy will grow at 6 – 7 per cent supported by public and private investments in the oil sector.

This comes as CNOOC and Total Energies ferry in their oil drilling rigs ahead of commercial oil production.

But Dr Nuwagaba calls for instituting import substitution and export promotion policies by basing on already developed value addition in agro-processing.

“Adopting a strong industrialisation policy with sufficient investment in policies to attract foreign direct investment, working on tax regime to make it attractive to investors, creating market infrastructure, including negotiating for favourable international trade architecture including guarantees,” he says.

Business Times Uganda

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