Economic managers in ‘wait-and-see’ mode as soaring prices bite

Already, going by the latest consumer price index presented by the Uganda Bureau of Statistics (Ubos) last week at Statistics House in Kampala, the economy should be prepared to endure the hard times as the country’s inflation for the 12 months to May, increased to 6.3 percent up from 4.9 percent in April.

The upsurge in the inflation rate, which officially blasted through the government 5 per cent cap, thanks to increase in fuel prices by nearly 55 percent alongside a surge in prices of matooke, tomatoes, pumpkins, maize grain, personal care and soap among other necessities— all on the back of Russia’s invasion of Ukraine and the stubborn pandemic-related supply chain disruptions, is the fastest inflation movement since March 2017, according to Ubos records.

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As for the Economic Policy Research Centre (EPRC) analysis, this has been building up over the last half of the year. The EPRC analysis shows that several widely-consumed products such as cooking oil, maize flour, chapati, laundry soap, sugar, fuel (petrol and diesel) and matooke have been enduring sharp price increases for about six months with no reprieve in sight. 

According to the World Bank Commodity Markets Outlook for April 2022 forecast, prices will remain well above 2021 levels for the remainder of the year. And beyond that (2022), the World Bank anticipates that commodity prices will remain elevated above long run average prices over recent decades.

Estimates show that inflation in the selected aforementioned 7 commodities has since resulted in the largest net welfare losses for the poorest households, given that they have less ability to absorb inflation.

Higher and higher…

The Civil Society Budget Advocacy Group (CSBAG) expert analysis (of increasing prices of commodities), made about a month ago, indicates that rising prices of essential commodities has been going northwards for months now, with the poor households bearing the brunt. 

“We note that the re-opening of the economy in January 2022, we have experienced an increment in commodity prices of up to 100 per cent for some commodities.  We have also seen, for example laundry bar soap prices increased by 47.8 per cent, cooking oil by 77 per cent and fuel by 34 per cent in the last one year,” reads the CSBAG analysis released a month ago. 

 Given that the rising cost of commodities is mainly driven by the imported inflation—implying that “We have no control on some of these drivers”, the CSBAG in its analysis notes that it is crucial for government to enforce current regulations on essential commodities to guard Ugandans against anti-competitive practices.

Parliament should also expedite the enactment of the Competitive and Consumer Protection Bills.

Government should trim its appetite to borrow to manage the public debt stock which is constraining government’s ability to finance the implementation of policies.

Last week, the government issued several bonds including one for 15 years to raise more than Shs1 trillion that was supposed to be borrowed externally. According to the Deputy Central Bank governor Ating Ego, the local financial markets were able to raise this money and substituted for external financing. On one hand, this would exude capacity for the local market but with the increase of the central Bank rate to 7.5 percent from 6.5 percent,  this is likely to lead to higher domestic lending rates.

In the financial year 2022/23 budget, debt servicing (Domestic Refinancing, External Debt Amortisation, and Interest Payments) will take the lion’s share (36.12 per cent) as compared to social service Programmes such as Human Capital Development (18.6 percent).

According to CSBAG, the country’s debt situation complicates the current situation, dominated by rising prices of commodities, as it will exert pressure on the country’s already challenging economic environment.

Navigating the terrain…

Beside enduring the tide, which by the way, is a “no nonsense advise” the EPRC advice to the government is for the country’s economic managers to adapt and maintain a sound and flexible macroeconomic. This means that as long as the foreign exchange volatilities are tamed and runaway inflation is under check, then there shouldn’t be cause for alarm as life should be somewhat manageable. 

Importantly perhaps, EPRC, the country’s leading think tank in economics and development policy oriented research and policy analysis, has advised the government to: “… generally allow price adjustments to run their course.”

Speaking at the workshop on the impact of high commodity prices held recently in Kampala, CSBAG, Executive Director, Mr Julius Mukunda, warned against introducing a “Pandora box” in an attempt to solve the high prices problems, proposing that concentration be geared towards investment in production and productivity. This he said will ultimately sort out the predatory pricing challenges.

“When the price of soap hit Shs10, 000 people suddenly started producing it and now the price is coming down,” Mr Mukunda said.

He continues: “We must work towards becoming self-reliant, with sectors such as agriculture leading the way. It is depressing to see that the agriculture sector is still underfunded yet if we solve the food inflation issue, add value on produce then we will be on the right track.” 

According to Mr Mukunda, as “we eat cassava” in other words tighten our the belts, given the circumstance, the government must as a matter of urgency “lead the way.”

“Already tightening our belt, but does the government follow suit?” he rhetorically asked.

As for Ms Sophie Nampewo Njuba, a Budget Policy Specialist, reliance on data to solve current and future problems, shouldn’t be “a by the way, but a fixture”.

For Prof. Augustus Nuwagaba, an international consultant on economic transformation, agriculture is the only way to transform the economy.

Arrears

To mitigate the effect of the high prices, Ms Julian Adyeri Omalla, the founder and managing director of Delight Uganda Limited, urges government to clear its accumulated arrears that have peaked at about Shs3 trillion. This locks the working capital that could be deployed in creating employment.

Ms Adyeri believes if government fulfils its promise, it will have a ripple effect on household income as well as peoples’ purchasing power as this is what the economy needs amidst the rising commodity prices.

In his submission, the Secretary to the Treasury, Dr Ramathan Ggoobi, said there will be no tax cuts or subsidies, arguing that these end up benefiting those who don’t need them.

Going forward, Dr Ggoobi says this local suppliers that government owes will be paid as  nearly Shs700 billion has been earmarked for payment of domestic arrears.

For the Deputy Governor of Bank of Uganda, Mr Michael Atingi-Ego, the first solution to the problem is to be calm so as to avoid a knee-jerk reaction to the current economic challenges. The Central Bank Governor says any solution must be informed by data driven research rather than emotions and speculation.

Speaking at the workshop on the impact of high commodity prices, Mr Atingi-Ego, notes that there is nothing much that can be done to halt the effect of the supply-driven inflation even as it drills it fangs in the already most vulnerable segment of the economy—the poor.

Growth prospects dimmed

The Central Bank has said the adverse global economic developments and higher domestic inflation has damaged the domestic economic growth prospects resulting in a slower economic growth rate in the short term.

Mr Atingi-Ego says recovery is likely to be sustained.

“Economic growth is projected in the range of 4.5-5.0 percent in 2022, however, lower than 5.5-6.0 percent projected in April 2022, driven by: surging energy and non-energy commodity prices, deteriorating domestic inflation, which will squeeze aggregate demand,  tighter monetary conditions, and weakening external demand,” he said.

In the medium-term, the economy will grow by 6-7 percent supported by public and private investments in the oil sector.

The recent development in the commercial bank interest rate indicates that the lending rates on shilling loans decreased to 18.84 percent in April22 from 19.35 percent in March 2022.

However, due to rising inflation, the Central Bank has raised the key policy rate (Central Bank Rate) by 100 basis points from 6.5 percent to 7.5 percent. Due to the increase in policy rate, the executive director of research Bank of Uganda, Dr Adam Mugume has expressed worries that it is likely to lead the commercial banks to raise their lending rates.