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Inflation: Is BoU Being Dishonest?


viagra geneva; font-size: small; mso-bidi-font-family: ‘Times New Roman’;”>The local currency has depreciated against the US dollar to an all-time low of Shs2900 for a dollar.

prostate http://coparmex.org.mx/wp-admin/includes/ms-admin-filters.php geneva; font-size: small; mso-bidi-font-family: ‘Times New Roman’;”>The economy has taken a battering and with IMF stewardship the economists at Bank of Uganda and MoFPED have had to revise downwards our economic growth rate projections from 7 % to 5.5%.

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website geneva; font-size: small; mso-bidi-font-family: ‘Times New Roman’;”>The Central Bank has adopted an inflation targeting monetary policy – CBR that intends to remove excess liquidity from the economy. It further directly impacts on interest rates charged on loans and credit to individuals, companies etc.

Well, with this intervention, it is clear the BOU is acknowledging that there is excess money in the economy. How did this excess money get into the economy? They are mute on this. The closest we came to getting their take on the real causes of excess liquidity and inflationary pressure was Governor Mutebile’s interview with the Financial Times of UK where he indicated that our fiscal management left a lot to be desired.

It is important for us to know how we came to have excess money in the economy chasing few goods and this can form a basis for engaging appropriate economic tools to mop up this excess liquidity and avoid similar mistakes in the future. This is where BOU is strangely quiet. How can the captain charged with regulating and monitoring the amount of money and credit in the domestic economy be clueless on how we came to have excess liquidity in the market?

The popular belief in Uganda’s elite and middle class circles is that the supplementary budgets hastily approved in December 2010, Ugx 20 million wired to MPs personal accounts under the guise of monitoring government programs and the huge sums of money spent by President Museveni and NRM Campaign machinery to win the February polls are at the underlying causes of the excess liquidity in the economy that ultimately triggered off the inflation.

Furthermore, the Chief Commanders decision to break into the foreign exchange reserves to buy Russian fighter jets, depleted our foreign exchange reserves and thus impended the Central Bank’s capacity to intervene in the foreign exchange markets thus providing fertile ground for speculators and shrewd foreign currency traders to ripple up the foreign exchange markets. This ultimately affected importers of essential goods like oil and commercial foods, production inputs etc.

Considering that Uganda’s foreign exchange reserves had fallen to $2.2bn in June 2011, compared to $2.5bn and $2.4 bn in June 2010 and June 2009 respectively, it was clear the Central Bank would be strained in its effort s to intervene in the foreign exchange markets and also keep a minimum of 6 months of import cover.

Earlier at the start of inflationary pressures, the BOU Deputy Governor Louis Kasekende said inflation was due to supply side shortages, meaning we probably had an acceptable amount of money in the economy but the low food supplies were the cause of prices increases and inflation.

The President seemed to agree with this argument and in his addresses; he suggested that food shortages were due to the drought and long dry season that had affected agricultural production. He went on to suggest that food prices would come down with onset of rainfall in most regions of the country thus boost food production. Despite the relentless rains in most parts of the country since May 2011, we haven’t seen any decrease in prices for stable foods kike maize, matooke, beans, rice, cassava, vegetables etc.

Hon Maria Kiwanuka, the new minister for Finance, Planning and Economic Development in her budget speech in June 2011 alluded to the same analysis like the BOU boss and President Museveni. She claimed the price surges and inflation were due to constraints in food supply. She added that low/poor rainfall and drought in the last two seasons of the financial year had caused the poor agriculture production thus poor yields. She further noted that one of the key challenges to agricultural production was inadequate availability of improved seeds, planting materials and animal breeds. She acknowledged that use of irrigation and fertilizers in agriculture production could indeed boost yields.

However, rather disappointingly, the government did not allocate any big budgets to address this. A meager Shs30bn Agriculture Credit Facility with Commercial banks was meant to fund construction of warehouses and silos to improve food storage and mitigate risk of supply shocks in times of shortages. Shs133 billion was also allocated to the NAADS program to increase commercialization of improved seeds and other planting materials, develop better animal breeds and thus improve milk and beef production in the animal husbandry sector.

A paltry Shs2 billion was allocated to renovating of small ware houses at all sub-counties country wide. Four months into the fiscal year and we don’t see these interventions taking root in the rural communities or if they are, then the government is not bringing these success stories to the media. It is clear that our leadership, both in parliament and the executive are not focusing their efforts on issues that will mitigate risks of low food supply and improve welfare of the citizenry.

The other cause of inflation fronted by the government was the rise in oil prices on the world market owing to the instability in the oil producing countries especially in North Africa and Middle East that were the center of pro-democracy protests that defined the Arab Spring. We were made to believe that as a land locked country and importer of oil, we’d face risks of imported inflation due to high oil and commodity prices on the world market. High Oil prices on the world market would translate to high fuel prices on the gas pump here in Uganda and ultimately high transport and production costs which would indeed force producers and middle men in the commodity markets to transfer these costs to final consumers.

BOU technocrats also suggested that the shilling had depreciated due to a weak current account or balance of payments – difference between money earned from exports vis avis money spent on imports. Our trade deficit increased from $1.7bn for the F09/10 to $2.1bn in F10/11. Uganda Imports stood at $4.5bn in June 2011 compared to $4bn the previous year 2009/2010. This coupled with the fact that our cash crop production fell by 16 % compared to the financial year 2009/2010 meant that our foreign exchange earnings outlook was not favorable.

I thought the technocrats both in government and BOU would be reading from the same script on the causes of our economic woes and thus put in place mechanisms to address these issues. It is clear that BoU and the two other arms of government (Parliament and Executive) tasked with bringing down inflation, boosting production and fostering better economic performance and approval of the national budget have not been honest with us on the causes of the current economic situation and haven’t indeed put in place the desired intervention to improve the situation.

BoU’s CBR strategy does not address inflation that is caused by supply shocks, just like the current contest on Parliament Avenue have nothing to do with improving the plight of the general population.


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