On Uganda's current inflaton situation
The recent developments have seen a surge in inflation from 3.4 percent in April to 7.3 percent in August 2013. The surge in inflation has come on the backdrop of a prolonged drought that affected food production and resulted in poor harvests across the country. This food supply shock has been exacerbated by the seasonal demand for seeds as the planting season starts. Thus food and cereal prices have started to increase and this has fed into higher inflation. For example the average price for a kilogram of beans is now Ushs 2,500 compared to Ushs 1,500 two months ago. However, food inflation can feed into core inflation (that excludes food, energy and utilities prices) directly through its effect on the prices of processed food, cost push effects and inflation expectations for example through hoarding and speculative tendencies.
Indeed increases in food inflation from -7.5 (minus 7.5) percent in April 2013 to 13 percent in August 2013 have been followed by increases in core inflation from 5.8 percent to 6.6 during the same time period. The Bank of Uganda has responded by raising the Central Bank Rate (CBR) by one percentage point from 11 percent to 12 percent signifying a tight monetary stance. This is likely to result into slower private sector credit growth and reduced real economic activity in the short term. It is clear that the Central Bank has limited options for controlling inflation. However, when the primary cause of inflation is a shock to the agricultural sector, tightening of monetary policy alone may not provide the desired results. In such circumstances, the fiscal side (budgetary expenditure) must respond by providing the appropriate budgetary allocations to boost production and productivity.
What is required therefore is Government’s commitment to pursue long term strategies that will focus on improving the productivity of the agricultural sector and ensuring food security. We should remember that Uganda’s agricultural policies are market led, yet the majority of the farmers do not produce for the market and mainly engage in subsistence agriculture. Therefore it is important to focus on boosting production and productivity in the agricultural sector through interventions that would reduce post-harvest losses and prioritize commodity exchange programs, value addition, land reforms and strengthen farmer organizations. In addition, a total rethink of macroeconomic policies for Uganda is required to improve the effectiveness of monetary policy, especially in the face of an underdeveloped financial sector.
Having reviewed the inflation trends over the past twelve months, our prediction is that inflation may hit double digits by October 2013 as the full effects of the drought and resultant shocks to agriculture are realized.
Indeed increases in food inflation from -7.5 (minus 7.5) percent in April 2013 to 13 percent in August 2013 have been followed by increases in core inflation from 5.8 percent to 6.6 during the same time period. The Bank of Uganda has responded by raising the Central Bank Rate (CBR) by one percentage point from 11 percent to 12 percent signifying a tight monetary stance. This is likely to result into slower private sector credit growth and reduced real economic activity in the short term. It is clear that the Central Bank has limited options for controlling inflation. However, when the primary cause of inflation is a shock to the agricultural sector, tightening of monetary policy alone may not provide the desired results. In such circumstances, the fiscal side (budgetary expenditure) must respond by providing the appropriate budgetary allocations to boost production and productivity.
What is required therefore is Government’s commitment to pursue long term strategies that will focus on improving the productivity of the agricultural sector and ensuring food security. We should remember that Uganda’s agricultural policies are market led, yet the majority of the farmers do not produce for the market and mainly engage in subsistence agriculture. Therefore it is important to focus on boosting production and productivity in the agricultural sector through interventions that would reduce post-harvest losses and prioritize commodity exchange programs, value addition, land reforms and strengthen farmer organizations. In addition, a total rethink of macroeconomic policies for Uganda is required to improve the effectiveness of monetary policy, especially in the face of an underdeveloped financial sector.
Having reviewed the inflation trends over the past twelve months, our prediction is that inflation may hit double digits by October 2013 as the full effects of the drought and resultant shocks to agriculture are realized.
It is a pity that with all the water bodies we have, the wind we have, the bio-gas we have, the heavy rainy seasons we have, we hardly have any meaningful irrigation scheme to boost our agriculture.
ReplyDeleteSurely we should feel ashamed to talk about drought in Uganda, Has Egypt ever cried over drought?!
Very informative article this. when u say - we predict ( you mean who?). In other aspects- it would be good to show us the level of private sector growth and money growth in last few months( since core inflation has also increased. am waiting for an article on business surveys and what they mean for lay man. An article on the energy demand and supply dynamics, the tagging of prices on macro variables and its likely impact.
ReplyDeleteMany thanks Enoq. You have tasked me with even more analysis. I will deliver as requested via this very blog. Cheers.
DeleteCan I borrow a few ideas for my article?
ReplyDeleteFx, you may borrow as you please.
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