Why budget cuts are failing to tame inflation

The Uganda Bureau of Statistics on August 31 said the main cause of inflation in Uganda has been transport inflation, which rose from 7.3 percent in August 2021 to 8.7 percent in 2022.

 Ministry of Finance officials yesterday explained that the deep cuts in planned government public expenditure in the first quarter of this fiscal year were meant to reduce the demand side of goods and services and the supply side which is facing shortage of items. 

 The ministry said the initiative aims at reducing the rise of inflation.

 The commissioner macroeconomic department in the Finance ministry, Mr Albert Musisi, told the Monitor after the end of a two-day sixth high level economic forum in Kampala that the government’s move to cut public expenditure was to reduce the money supply in the demand and not supply side.

 “The price of oil is high and has really gone up due to disruptions in the global supply chain, so what we did was to reduce the money supply to meet the demand of oil, whose supply is not increasing. Again the reduction in the public expenditure is meant to reduce the speed at which inflation is rising in the country and not to stop inflation from rising because it is still rising in the African countries and the advanced countries as well,” he said.

 Mr Musisi, however, said the inflation rate in most African countries is higher than Uganda’s, for instance, Rwanda’s annual inflation rate rose to 19.6 percent in July up from 16.1 percent in June.

 The Bank of Uganda has indicated that it could tighten monetary policy further if inflation continues to rise.

 The director of International Growth Centre (IGC), Dr Richard Newfarmer, told Daily Monitor that almost all countries in the world are facing high inflation.

 He said: “The countries are confronting global supply chain shortage. Lockdown in China has also constrained the key products, which is driving high inflation in the world. In managing the rising inflation, the central banks have tightened monetary policy, there is also slight fiscal policy tightening”.

  “However, I expect the inflation rate to come [down] before the end of this year due to policy actions by both the advanced economies and developing economies.”  

 While presiding over the closure of the sixth high-level economic forum yesterday, Prime Minister Robinah Nabbanja said the economy was doing well before the eruption of Covid-19 pandemic, adding that Uganda’s economy has been resilient amid challenges.

“As we were getting out of Covid-19, inflation started rising, disruption in the global supply chain, the lift in restrictions led to more demand for raw materials than the supply, the Russia–Ukraine has also caused economic shocks,” she said.

In its updated World Economic Outlook released on July 26 in Washington DC, the International Monetary Fund (IMF) said global inflation prompts more central bank tightening.

“Since 2021, consumer prices have consistently risen faster than widely expected, including in the World Economic Outlook. In the United States, the consumer price index rose by 9.1 percent in June, compared to a year earlier, and it also rose by 9.1 percent in the United Kingdom in May—the highest inflation rates in these two countries in 40 years,” said the IMF.

Adding: “In the Euro area, inflation in June reached 8.6 percent, its highest level since the inception of the monetary union. Equally concerning, in emerging market and developing economies, second-quarter inflation is estimated to have been 9.8 percent.”

It explained that higher food and energy prices constrain many sectors and rebalancing of demand back towards services have in most economies driven up inflation.

But underlying inflation has also increased, as reflected in different gauges of core inflation, reflecting the pass-through of cost pressures by way of supply chains and tight labour markets, especially in advanced economies.

It said wage growth has on average not kept up with inflation across both advanced and emerging markets and developing economies, eroding household purchasing power.

Although long-term inflation expectations have been stable in most major economies, they have started to rise according to some measures, including in the United States.

Overall, the IMF said the baseline projection for global inflation is also more pessimistic, having been revised up to 8.3 percent in 2022 on a fourth-quarter-over-fourth-quarter basis, from 6.9 percent in the April 2022 World Economic Outlook.

The upside inflation revision in 2022 is larger for advanced economies, where it is expected to reach 6.3 percent from 4.8 percent projected in the April 2022 World Economic Outlook on a fourth-quarter-over-fourth-quarter basis, driven by significant increases in headline inflation among such major economies as the United Kingdom (a 2.7 percentage point upward revision to 10.5 percent) and the Euro area (a 2.9 percentage point upward revision to 7.3 percent).

IMF forecast

The IMF said forecasts for 2023 are relatively unchanged––up by only 0.2 percentage point on a fourth-quarter over-fourth-quarter basis––reflecting confidence that inflation will decline as central banks tighten policies and energy price base effects turn negative. For emerging market and developing economies, inflation in 2022 is expected to reach 10.0 percent on a fourth-quarter-over-fourth-quarter basis.

Inflation

Food and related items inflation in August 2022 rose to 18.8 percent compared to 0.5 percent in August 2021.

For the year ending August 2022, matooke inflation rose to 62.4 percent from 6.3 percent in August 2021. Beans inflation 27 percent, cassava 26.4 percent, milk fresh (loose) 15.8 percent, cabbage 25.3 percent, and water melon 6.5 percent compared to August 2021 when  beans inflation was 25.0 percent, cassava fresh 11.4 percent, milk fresh (loose) 11.9 percent, cabbage 17.7 percent, and watermelon 4.2 percent.

Energy Fuel and Utilities (EFU) inflation in August 2021 was at 0.5 percent and rose in August 2022 to 19.6 percent.

For the year ending August 2022, charcoal inflation was 4.8 percent, petrol 59.4 percent, diesel 69.7 percent, gas 27.3 percent, compared to charcoal inflation which was 3.5 percent, petrol 7.4 percent, diesel 4.8 percent and gas 14.4 percent in the year ended August 2021.

 In the mid of strong cost-push inflation pressures blamed on external shocks, the Monetary Policy Committee (MPC) meeting held on August 12, the Bank of Uganda (BoU) increased the Central Bank Rate (CBR) by 50 basis points to 9 percent. This was intended to tame inflation. BoU is expected to raise CBR in an attempt to curb the spiraling inflation. Most of the ministries, departments and government agencies are cash strapped because Finance ministry officials are trying to control inflation.