Surge in prices could cause inflation flare up, squeeze Ugandan economy further – experts
Uganda’s consumer price inflation fell more than expected in the past three months to September, thanks to a huge drop in non-food prices during the period, but economists say the downward trend is unlikely to be maintained if the rise in food prices continues.
The annual inflation slowed down from 5.9% in June to 4.2% in September, according to the latest data from the Uganda Bureau of Statistic (UBOS) even as the country’s manufacturing sector is still trapped in heavy debts and profitability plummeting amidst low demand.
However, the consumer price index for food crops and related items increased from -1.9% to 5.1% during the same period as a result of prolonged drought that led to poor food production in various parts of the country.
A mini survey by The Independent around Kampala shows that the price of sugar has increased from Shs 3, 400 to Shs 4, 100 while that of beef rose from Shs 9, 000 to Shs 10, 000 per kilogramme over the past two months.
A bunch of banana is now priced at an average of Shs 22, 000, up from Shs 18, 000 while maize flour and rice is now priced at Shs 2,000 and Shs 3, 600 up from Shs 1, 700 and Shs 3, 300 per kilogramme, respectively, during the same period.
On the same note, the annual energy, fuel and utilities (EFU) Inflation increased from 2.9% in July to 4.3% in September due to a surge in charcoal prices.
Economists says the continued surge in food prices in the coming months points to a likely steady build-up of inflation that could put the Bank of Uganda back on the drawing board as regards its next Central bank rate.
This is due to fact that the growth of the economy has been slow since the start of the year owing to the February polls that discouraged foreign investments.
Worse still, the World Bank suspended new loans to the government amounting to $1.5bn (Shs 5 trillion) on August 22 over poor absorption, a move that could reduce foreign exchange inflows resulting into a further depreciation of the struggling shilling.
“The drop in inflation has been as result of a bigger drop in non-food prices over the past period. However, it is unlikely that it is likely to continue coming down in the coming months unless food production is increased, a scenario that is unlikely due to erratic rains that may not support a good harvest,” Fred Muhumuza, an Economics don, told The Independent.
“There’s also excess liquidity in the market as commercial banks aren’t lending a lot to customers,” notes George Mulindwa, a portfolio manager at Stanlib, an investment management firm, adding that the BoU is currently mopping out hundreds of billions daily in a bid to stabilise the shilling.
The country’s currency has fallen from an average of Shs 3,380 to Shs 3, 406 to the US dollar over the past two weeks as a result of excess liquidity and increased corporate demand for the foreign currency. Mulindwa, however, says that in spite of the expected surge in inflation, BoU is likely to lower the Central bank rate in the coming months further to instill confidence in the business community of the status of the economy. He adds that the involvement of foreign investors in the purchase of securities in the country has helped the economy through the inflow of foreign currencies, keeping the shilling slightly above the water amid the prevailing tough economic environment.