Inflation drops to 3.4% due to increased food production

Although the Uganda Bureau of Statistics attributes the continued ease in headline inflation to increased food production and supply to markets, experts say high commercial bank interest rates and delayed payment of salaries for public servants has played a part.

This, according to Mr Lawrence Bategeka, a senior research fellow at the economic policy research centre, has contracted public spending; thus, the fall in inflation as people can’t spend money they don’t have.

He added that despite Bank of Uganda easing its Central Bank Rate – the rate at which commercial banks borrow money – the avenues through which money is getting to the public are still restricted.

At 3.4 per cent, this is the first time in about 25 months that the country is experiencing this level of headline inflation since December 2010 when it stood at 3.1 per cent.

Central Bank Rate
The CBR has been eased to 12 per cent for February yet most commercial banks’ lending rates have only been marginally lowered. This is said to be affecting growth in private sector credit; thereby, contracting domestic demand.

Dr Bategeka added that the public sector has also been slow at paying wages, with majority of teachers going without salaries for months. This, according to him, has contracted demand for credit to support investments and production on the part of the private sector and dampened consumption on the part of the public.

According to the Ubos consumer price index (CPI) – the official measure of inflation – released yesterday, the headline inflation eased further to 3.4 per cent in February this year, compared to 4.9 per cent that was recorded in January.

While releasing the February CBR, BoU indicated that economic growth is expected to improve slightly this year with downside risks emanating from continued subdued private sector credit growth and high lending rates, which impact private sector spending.

While releasing the CPI figures in Kampala yesterday, Dr Chris Ndatira Mukiza, Ubos director in charge of macroeconomic statistics, said there has been increased food production and supply to markets; thus, a fall in inflation.

During the month, however, price reductions were recorded for matooke, irish potatoes and onions according to Ubos while increases were registered for oranges, pineapples, cabbages, tomatoes, green pepper, fish and sugar due to reduced supplies.

Food crop annual inflation decreased to -6.2 per cent in the period under review compared to 3 per cent that was registered in January.
Dr Mukiza, however, explained that if the fall in inflation is as a result of increased food production, it is good news for the economy but if it is as a result of contracted demand, it will affect economic growth.

Regional inflation rates
At 3.4 per cent, Uganda’s headline inflation is lower than Kenya’s 4.45 per cent, Rwanda’s is 5.67 per cent and Tanzania’sis 10.9 per cent.

Dr Bruno Yawe, an economist from Makerere University told this newspaper that the stabilsation of the foreign exchange rate could also have contributed to the continued ease in inflation.

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