Terrorist Attack on Kenya Likely to Worsen Inflation in Uganda

By Corti Paul Lakuma, Research Analyst & 
Lawrence Bategeka Principal Research Fellow EPRC


On Saturday 21 of September 2013 terrorists-Alshabab, attacked and took hostages in #Westgate shopping mall located in an upscale West Nairobi community.  The fact that Westgate is frequented, mainly, by up market Kenyan shoppers and expatriates suggest that the terrorist hit at, arguably, one of the symbols of East Africa’s upcoming consumerism that is attracting local and foreign investments in the manufacturing and service sectors and ambitious real estate and infrastructural projects.
The likely effect of such an attack on Uganda may be reflected in upward pressure on head line inflation to a double digit from the 7.3% predicted in August, 2013.

Short run Instability in Tourism


Cogently, the predicted rise in headline inflation may be explained by short run disequilibrium in the tourism sector as the number of tourist from the West and East reduce in response to the attack. Tourism sector experts, however, predict that the sector will momentarily recover to ‘’pre-Westgate attack’’ levels, tentatively, within months.  Unlike other industries, they argue, the tourism sector has in past shown resilience to political risk and it is imperative for Uganda to avoid panic and anxiety in a move to shore up confidence in the sector.  A strong case for this optimism is that tourism revenues hit the 1 Billion USD mark in 2012 in comparison to 800Million USD in 2011 despite the Alshabab attacks on Kampala in July 2012.

Predicted Increase in Cost of Credit for Local Businesses


Separately, we may witness exchange rate depreciation which may further exacerbate headline inflation as prices and money markets responds to supply constraints and delays in the ports of entry as more stringent security measures are put in place to contain health and safety threats presented by the terrorist. More profound, the cost of credit to local businesses may increase in the long run as interest rates and international markets respond to risk of doing business in Uganda.

Need to tighten Uganda’s Monetary Policy



In conclusion, as we commiserate with the victims of the attack, it is a dominant strategy for the Bank of Uganda to tighten monetary policy to curtail effects of inflationary pressures and exchange rate depreciation on the economy in the medium term. 

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