Tuesday July 3 2018

‘Social media tax could push up communication inflation’

Social media tax could push up communication inflation

A subscriber browses Internet. Inflation on communication services is likely to go up due to the Shs200 tax slapped on social media data. PHOTO BY ERONIE KAMUKAMA  

By Eronie Kamukama

The financial year has ended. What is the status of inflation in the country?
The annual average inflation for this financial year reduced to 3.4 per cent compared to 5.7 per cent that was recorded the financial year 2016/2017. Annual headline inflation for the year ending June 2018 recorded 2.2 per cent compared to 1.7 per cent recorded in May 2018. The main driver was high inflation in energy, fuel and utilities particularly high prices of charcoal.
In addition, kerosene registered higher inflation to 14 .8 per cent from 12.3 per cent. Going by the monthly changes between May and June, we recorded a drop in headline inflation by 0.2 per cent from 0.5 per cent recorded last month.
So, prices generally declined apart from the increase in price of charcoal and kerosene.
We also noticed that there was a rise in education charges between the month of June and May by 0.1 per cent. Food crops also registered a negative inflation compared to an earlier rise of 1.6 per cent.
In the past six consecutive months, we registered higher yields in food crops especially maize, beans, bananas, vegetables and fruits. Because of high yields in maize, grains and maize flour also registered low prices.

What explains the trends in annual inflation?
During the budget speech, you noticed that the economy grew by 5.8 per cent and that is a real expansion of the economy compared to the slow growth of 3.9 per cent. That one shows you that there was more production and a higher gross value added compared to the year 2016/17 and this production filtered into the price movements. In particular, in 2016/2017, food crop growing activities grew by 2 per cent and in this just ended year, food crops activity grew by 3.7 per cent. That increase by 1.7 per cent indicates that there was increase in supply to the markets for consumption and export to neighbouring countries which led to overall decline in food and non-alcoholic beverage prices. The real sector (agriculture and industry) tells us the movement and the biggest push factor for annual inflation was food crops inflation.
In fact, across all the sectors manufacturing registered a very impressive growth compared to the year 2016/2017. Therefore, the movements in inflation are largely attributed to the increased production in the economy from the real sector. You can also relate to the financial side. Central Bank will explain more on why inflation has gone down but you know there has been an effort to lower the Central Bank Rate. Banks have also lowered lending rates. The private sector credit is growing and that is supported strong performance of the real sector.

Prices of housing, water, electricity and fuel have shot to 8.7 per cent in June compared to 5.8 per cent in May. What does this mean for a household in terms of expenditure?
It is mainly driven by charcoal prices which have risen due to scarcity from Shs80,000 to Shs100,000 in the last one month. That is a very big rise and charcoal has a huge contribution to the energy, fuel and utilities inflation.

What is the impact of the exchange rate on the real price of goods and services?
We have not yet seen the impact actually. It appears that it is only affecting the price of capital goods imports, otherwise we would be seeing inflation rising rapidly in core inflation which is not the case here. But it may be affecting kerosene prices because we import it. Diesel, on the other hand, prices have stabilised.

How long does it take for the impact of the exchange rate to be transmitted to prices of goods and services?
The effect of the exchange rate depreciation to real prices is between three and four months. So maybe the imports will filter into the core inflation in the coming months and we shall see it rising.

What does consumer behaviour look like right now, in relation to purchasing goods and services?
The aggregate demand or call it total demand for goods and services is picking up compared to the previous period, although it is not picking up strongly. We noticed that business people and borrowers are going to commercial banks to borrow and credit has slightly increased and people have started demanding for goods and services. Compared to the last period where we were seeing contracting aggregate demand, these last two months have witnessed some rebound.

What is the impact of taxation on inflation now or in the future, given that we have started the new financial year?
We cannot tell now because the rates have not changed. Both the excise duty and Value Added Tax on manufactured goods have not changed. We have not yet seen them filtering yet so we have to wait and see what happens. I suspect the inflation for communication could go up given that there is Shs200 charged for mobile data accessed.
It could be so because it is directly going to impact on price levels. For the rest, I do not think there were any changes in the tax for instance on the tax imposed on manufactured goods in Uganda.