EPRC Predicts Inflation in Uganda to Hit Double Digits in October 2013

Inflation in Uganda has lately increased from 3.4 percent in April to 7.3 percent in August 2013. The surge in inflation has come on the backdrop of a prolonged drought that affected food production and resulted in poor harvests across the country. 

Food Inflation


The food supply shock has been exacerbated by the seasonal demand for seeds as the planting season starts. Thus food and cereal prices have started to increase and this has fed into higher inflation. For example, the average price for a kilogram of beans is now Ushs 2,500 compared to Ushs 1,500 two months ago. However, food inflation can feed into core inflation (that excludes food, energy and utilities prices) directly through its effect on the prices of processed food, cost push effects and inflation expectations for example through hoarding and speculative tendencies. Indeed increases in food inflation from -7.5 (minus 7.5) percent in April 2013 to 13 percent in August 2013 have been followed by increases in core inflation from 5.8 percent to 6.6 during the same time period.

Raising of Interest Rates


The Bank of Uganda has responded by raising the Central Bank Rate (CBR) by one percentage point from 11 percent to 12 percent signifying a tight monetary stance. This is likely to result into slower private sector credit growth and reduced real economic activity in the short term.  It is clear that the Central Bank has limited options for controlling inflation.  However, when the primary cause of inflation is a shock to the agricultural sector, tightening of monetary policy alone may not provide the desired results.  In such circumstances, the fiscal side (budgetary expenditure) must respond by providing the appropriate budgetary allocations to boost production and productivity.

Improving Agricultural Productivity is Key


What is required therefore is Government’s commitment to pursue long term strategies that will focus on improving the productivity of the agricultural sector and ensuring food security. We should remember that Uganda’s agricultural policies are market led, yet the majority of the farmers do not produce for the market and mainly engage in subsistence agriculture. Therefore, it is important to focus on boosting production and productivity in the agricultural sector through interventions that would reduce post-harvest losses and prioritize commodity exchange programs, value addition, land reforms and strengthen farmer organizations. 

In addition, a total rethink of macroeconomic policies for Uganda is required to improve the effectiveness of monetary policy, especially in the face of an underdeveloped financial sector.

Prediction


Having reviewed the inflation trends over the past twelve months, our prediction is that inflation may hit double digits by October 2013 as the full effects of the drought and resultant shocks to agriculture are realized. 
Location: Kampala, Uganda

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