- Uganda Bureau of Statistics has indicated that the country’s inflation has for the first time since 2012 hit double digits, rising to 10 per cent in September 2022 from 2.7 per cent in January 2022 and 4.9 per cent in April 2022.
- It is said that inflation above an annual average of 5 per cent retards economic growth and derails economic development.
Cause of Uganda’s Inflation
According to an article titled Uganda grapples with soaring inflation amid persistent global uncertainties, the rise in inflation has been brought about by issues such as tightening of global financial conditions, which triggered investors’ exit from the domestic debt market, thus stoking depreciation pressures on the Uganda Shilling; the Russia-Ukraine conflict, which disrupted global production and supply chains; extended drought in some regions of the country; and increased global commodity prices.
Additionally, as the country gramples to recover from the pandemic-induced recession, the recent resurgence of the Ebola virus has made it difficult.
Effects of Inflation on Uganda’s economy
Uganda’s Tourism revenue falls
First, its biggest foreign exchange earner, tourism, has taken a further hit as tourists can no longer visit the country for fear of contracting the virus with a fatality rate of around 50%, which if compared to Covid-19’s fatality rate of about 3.4% is deadly.
To put it in perspective, this means that the tourism’s approximately $1.60 billion contribution to the GDP will not be earned.
The Investigator News reported that there were rumours that the President was almost going to announce an impromptu Ebola lockdown, but was dissuaded by its negative impact on the tourism sector.
In fact, the matter has been so sensitive that the strategists have advised the ministry of health to stop giving out the rising cases of Ebola infections and deaths because it has the immediate effect of scaring away investors and tourists. The Ebola effect has also undermined the local economy in the sense that the locals have cut down on their recurrent expenditures out of fear that the situation might worsen and find them broke.
Uganda’s low demand for exports
In its Annual Report 2021/22, the Bank of Uganda (BOU) stated that the slump in global output is expected to constrain demand for Uganda’s exports of goods and services as a number of advanced economies turn inward to boost their economies.
In addition, the high inflation and subsequently higher cost of imports has resulted in a further reduction in net exports and thus lower domestic growth for this developing economy. The high import costs has largely been fuelled by the high oil prices which have risen to record highs following the Russia-Ukraine conflict.
This produces a ripple effect of increased unemployment and a transitory reduction in the output growth rate. With time crime rate are bound to increase, if the citizen’s are to provide for their families.
Decreased purchasing power
Adirect effect of inflation is loss of purchasing power.
Talking to the Daily Monitor on How high inflation rate will affect you, Prof Augustus Nuwagaba of Makerere University said the rise in inflation leads to erosion of the liquid assets, which is not good for people and the economy at large. It is only land and buildings which may not experience erosion in value.
Consumers’ purchasing power – the real value of money – is reduced. If prices are increasing faster than people’s nominal incomes, they will not afford goods and services over time. The rise in inflation affects the purchasing power of people which results in slowdown in economic activities and may translate in slower economic growth.
Uganda increase its level of debt
As at June 2022, the debt-to-GDP ratio stood at 48.6 per cent which is worryingly set to go beyond 50 per cent, beyond which the country will be dependent on debts to run the economy.
As indicated in the report, as advanced markets continue to grapple with record inflation levels and maintain tight monetary policy stances, Uganda’s debt position becomes worse as loans become more expensive to acquire and service.
Also, following the Ebola pandemic, Uganda has stopped honouring its debt obligations and halted their investment plans. Its citizens have suspended economic activities subsequent to the silent panic which has resulted into the constriction of the economy with parents not paying school fees out of fear that the pandemic might spread further and attract closure of schools.
Investors exit Uganda
European countries are among the largest providers of grants and loans to Uganda.
It is feared that as punishment for their role in the war, Russia – the largest producer of gas – may entirely stop exporting even the little gas it has been exporting to European countries.
To cushion themselves against this, the European countries, in consternation, are already planning to divert all its resources to purchase gas, grain and all the goods previously imported from Russia. This will require huge amounts of resources meaning that the European countries may need to halt giving of aid, grants or debt until the situation is remedied. Whenever this will happen is anyone’s guess.
This will affect the budgetary framework to an extent with the intended sectors for borrowed money suffering from lack of funding.
Read: Uganda Securities Exchange creates new window for SMEs’ capital mobilisation
What Uganda’s doing to cope with high inflation
Increasing lending rates
Uganda’s prudent economic policy framework is key to fighting the rising inflation.
By October 2022, BOU had increased its central bank rate to 10 per cent, from 6.5 per cent just 5 months prior. This is the first time BOU is doing so since 2018. Raising the central bank rate – a rate set to influence the lending behaviour of commercial banks so as to foster price stability and a sound financial system – raises the cost of borrowing.
By raising the cost of borrowing, the country reduces demand-pull inflation, a condition that economists describe as ‘too many dollars chasing too few goods’. The decreased goods supply that had led to ‘too few goods’ have been caused by disruptions in the global supply chains and the Russia-Ukraine conflict which has affected fuel prices and subsequently import prices.
Boost local production
One of the natural effects of decreased government spending is uptake of local production.
To further boost local production, support import substitution and diversify the country’s export base, the government is injecting value addition efforts.
As explained by Michael Atingi-Ego, Deputy Governor of BOU in an article by Xinhua, this will increase foreign earnings and reduce the exchange rate volatility typical of a relatively shallow and narrow export base. Appropriate import substitution and exchange rate stability protect the country from externally generated inflation.
Read: Young farmers in Uganda, DRC and Nigeria to receive support from AfDB
Oil production in Uganda
Uganda is also pinning hope on the projected pick-up in Foreign Direct Investment following the February announcement of the Final Investment Decision by oil companies in the country.
France’s TotalEnergies and the China National Offshore Oil Corporation this year announced a 10-billion-U.S.-dollar project, which is a major move towards the country starting commercial production of oil. This, according to BOU, provides an opportunity as advanced economies look to new sources of crude oil away from Russia. In the short-term period, this is viable as countries are yet to concretize green energy sources.
While most experts may not agree to some of the coping mechanism implemented, at least it is a step in the right direction.
