Double digit inflation spells trouble ahead

The registration of the first double-digit inflation reading this side of the year has been greeted with horror and dismay. And rightly so. While inflation at 10 percent is a startling figure, all indications are that it is set to go even higher.  The strong headwinds that the Ugandan economy is facing are sobering yet sadly unsurprising. From the petrol pump to the supermarket checkout, the cost of living squeeze remains unrelenting.

At macro level, telltale signs can be traced in the number of months of imports that can be covered with foreign exchange reserves available to the central bank. The depreciation of the shilling has whittled down Uganda’s foreign exchange assets to under four months. Eight to 10 months of import cover is essential for the stability of a currency.   

It has also become apparent that the government doesn’t have the war chest it hoped for when Finance minister Matia Kasaija read the budget for the 2022/2023 fiscal year. It was forced to run a straightened first quarter budget, with anywhere between Shs2 trillion to Shs4 trillion slashed. Payday requirements were not met on a number of occasions.

Stability is yet to return to the currency markets. The shilling is menacingly close to touching the 3,900 level against the dollar. At the start of the year, it comfortably traded in the 3,500 region.

We agree that it would be disingenuous to blame the government’s budget wonks for this dire current scorecard. We are, however, also alive to that fact that there is a body of empirical evidence that points to the cost of credit bottlenecks predating external shocks such as the pandemic and the Russia-Ukraine war.

While the government inherited a bad hand; it has gone on to play it badly. The government should as such address the long-term structural issues that have increased the cost of credit. The public administration bill, for one, remains disturbingly huge. Consumptive activities like buying luxury cars for public officials continue to hold sway when a squeeze on public spending would suffice. Instead, policy wonks in government have shown a preference for suppressing prices by hammering down on workers.

We understand the merits of the central bank’s hawkish stance. It, however, shouldn’t be lost upon policy wonks that a slowdown of tightening monetary policy will allow businesses to recover. These businesses need liquidity for lubrication purposes. Since we are dealing with supply side shocks, liquidity support measures shouldn’t be entirely frowned upon.

While interventions like the Parish Development Model and Emyooga are timely, they continue to make access to credit a politically driven process. They are also haunted by corruption and red tape. Failure to get a handle on these impediments will have wide-ranging implications. By resisting the temptation to go in for Eurobonds—that have burnt the fingers of a few across the region, —the government’s technocrats have shown that they can make the right calls. They will need to showcase more of this Solomonic wisdom going forward. A good starting point would be getting monetary policy experts at the central bank and macro-economic handlers at the Finance ministry on the same page.

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