A united front against rising inflation

Globally, a combination of Covid-19 pandemic-related supply chain disruptions, a rebound in global spending following the lifting of pandemic containment measures, and the war in Ukraine has spiked the prices of essential commodities.

Locally, the extended drought conditions added further inflationary pressures through higher food crop prices. Spikes in food crop prices disproportionately hurt the less well-off, especially the urban poor and vulnerable in society, because a large proportion of their expenditure is on food.

Having started among commodities such as cooking oil, edible oils, laundry bar soap, personal care items, and cleaning products, the sharp rise in prices has spread across other consumer goods and services.

In addition, the weakening of the Uganda shilling against the US dollar, as with numerous other currencies, and the spike in fuel prices aided the escalation of the price increases.

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Persistent price increases erode the real value of financial savings, thus reducing the resources available for investment hence disrupting economic growth. Therefore, protecting the economy from the ravages of inflation calls for appropriate remedies at the policy and household levels.

Milton Friedman, an American economist who won the 1976 Nobel Memorial Prize in Economic Sciences, asserted that “inflation is an old, old disease. We’ve had thousands of years of experience with it. There is nothing simpler than stopping inflation—from the technical point of view. [In the short run], the only cure for inflation is to reduce the rate at which total spending is growing. There is no way of slowing down [a generalised increase in] inflation that will not involve a transitory increase in unemployment and a transitory reduction in the rate of growth of output. But these costs will be far less than the costs that will be incurred by permitting the disease of inflation to rage unchecked.”

As a disease weakens the body and diminishes people’s activity and productivity, inflation erodes the purchasing power of money. As noted earlier, those with less money are hurt the worst as the little they have affords them even less than before the price increases. Curing the economy of inflation becomes urgent for securing people’s survival and well-being. Unfortunately, restoring inflation to low and stable levels involves taking medicine with some temporary side effects.

In June, the  Bank of Uganda started administering the medicine against inflation and is committed to sustaining the fight until victory is assured. Therefore, seeking to control spending, which is the most precise weapon against inflation, BoU embarked on reducing the supply of money in the economy. As a result, we started increasing the policy interest rate, the central bank rate, for the first time since October 2018.

So far,  BoU has incrementally raised the central bank rate from 6.5 percent in May 2022 to 7.5 percent in June, up to 9.0 percent in August, and most recently to 10 percent in October. We will keep gradually increasing the policy rate until our projections show that inflation will average 5 percent in two to three years ahead. 

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BoU is confident that the medicine being administered works because the central bank rate is the benchmark for commercial bank lending rates. In line, a higher central bank rate implies higher lending rates. Practically, raising the cost of borrowing helps to avoid having too much money chasing too few goods whose supply has been severely constrained by the various disruptions.

Uganda will succeed in the battle against inflation because of a consistent and prudent economic policy framework. The tightening of government expenditure by the Ministry of Finance reinforced the contractionary policies undertaken by BoU.  In addition, the restraints on demand coupled with foreign exchange rate stability will gradually dampen the inflationary pressures.

Prudently, the government wisely avoided distortionary, expensive, and ineffective subsidies in the face of spiralling commodity prices. Similarly, Ugandans have persevered and tightened their belts by prioritising expenditure on essentials. The government’s efforts to boost local production and increase value addition will support import substitution and diversify our export base. 

Government’s commitment and people’s efforts to protect and preserve the natural environment will soften the adverse impact of climate change on agriculture, thereby safeguarding food security, price stability, and livelihoods.

Mr Michael Atingi-Ego is the Deputy Governor of the Bank of Uganda.