By Enock Nyorekwa Twinoburyo
In Uganda, annual inflation has risen in recent months to 11.1% in March 2011, 14.1% in April 2011 and 16.1% in May 2011- the highest levels since 1994. The inflation arguments have all been skewed to the fact inflation is externally generated. Inflation is blamed on the uprisings in North Africa that constrained the supply of fuel, the apparent food shortage occasioned by poor weather, and the fiscal stimulus that was employed by many countries to recover their economies from the economic crisis.
Although this is partially true, the biggest factors according the Uganda Bureau of Statistics are domestic especially given the biggest contributor to today’s inflation is arguably food inflation. What an irony when Uganda is the food basket of the EAC countries! According to the statistics as well as economic predictions, Uganda’s today’s inflation is largely attributed to these demand and supply causes,
This stems from food shortage brought about by the drought, scarcity in agricultural inputs and structural lag in production. Data from the Uganda Bureau of Statistics showed the country’s food crop inflation registered an annual inflation rate of 44.1 % for the year ending May 31 from 39.3% in April and with 2.1% in March due to mainly food shortages. The government blames the food shortage on drought experienced late last year and early this year. Food inflation is bad news for all consumers especially the poor as the food share of their overall spending increases.
This is brought about by the rising oil/ fuel prices. The increase in prices per barrel of fuel is mainly due to shortages on the world market arising out of the uprisings in Middle East and North Africa. The May 2011 prices of oil were 130 USD per barrel as compared to 90USD in May 2010 (44% increment). High fuel prices have direct and indirect effects on the cost of production on manufactured goods, as well as food production since fuel, including natural gas is used at every stage of agricultural production.
Imported inflation also stems from the exchange rate appreciation where the Dollar has gained value against the shilling and remained trading for the first half of 2011 between 2300 and 2400. This increases the cost of the imported commodities. Sustained high exchange rates could also be the result of election speculation which led to capital flight, saw increased government recurrent expenditure hence increased local currency in circulation and low levels of foreign exchange reserves in the Bank of Uganda.
If prices are expected to go high, people or firms tend to build these expectations in the pricing of their commodities, negotiation of increased wages and contractual price arrangements. When prices go high for example on the world markets, the local speculators start on speculation and this drives prices high at times higher than the movements on the global markets. Even in cases when the government Foreign exchange reserves are low, speculators know government will have limited intervention in the Foreign exchange markets to regulate. A lot of the speculation is done on the informal market. This unrecorded Foreign exchange of informal market when tapped into could destabilise the on the market rate to lower levels.
The judicious mix of interventions may require a set of rather medium to long run measures rather than short-term measures such as reduction of taxes on fuel, imposing of exportation bans on food in order to stabilize domestic markets. The long-term intervention could be tailored to enhance stability in food supplies with or without the drought that through provision of weather resistant food inputs, funding and extending irrigation schemes to farmers, and most important, improving roads, markets, and food processing infrastructure. Food silos and Fuel reserves are key in the short run.
Price expectations management now and in the future is an imperative tool in controlling inflation. The complimentary measures to control core inflation which excludes food prices and at times fuel prices may require contractionary policies usually by raising interest rates or even downsizing the fiscal space. In either case, there are costs of each policy response as increasing interest rates which are already high and costly, could deter investment. Similarly, the fiscal contraction by downsizing on the budget could be detrimental to the infrastructure projects.
Prices may keep rising since if domestic policies don’t mitigate global inflation and local structural challenges that cause food inflation. Over to the trusted central bank and MoFPED to find the right mix of policy responses.
Enock Nyorekwa Twinoburyo is a Macro Economist, Royal Danish Embassy, Kampala.
The views expressed here are personal and do not reflect the views of the Danish Embassy.
This article was originally published in the African Executive magazine: http://www.africanexecutive.com/modules/magazine/articles.php?article=5916&magazine=339