Why is money scarce?

Due to the current high cost of living it is becoming increasingly difficult to save even a single coin. By the time you are done with purchasing basic needs, oftentimes you are left depleted and in debts.

 For example, Mr Mukisa, a father of three, says after paying fees he is left with literally nothing to cover the budget for food, clothing and other basic needs and this has been the case for a while now.

 Then Ms Nabukenya, who works as a personal assistant to a school in Kampala, told Prosper Magazine all she can afford is transport to and from work.  But whenever she tries borrowing from her friends, she is greeted with the same news.

 And then, there is the corporate class, and entrepreneurs. Most of those whom Prosper magazine spoke to appear to operate on an extremely thin budget on account of, “There is no money.”  
 
 Many of them reveal that they are operating up to 70 percent on debt which they have no idea how to repay given the current hardship of obtaining money.

 A recent online poll by Nation Media Group Uganda reveals that large pools of money are concentrated in the hands of few people including high net worth individuals, and politicians who do not pay their fair share of taxes.
 The most hit therefore are the working class and those at the lower end of the economic ladder.

 This can make money feel particularly scarce. Others argue that most people have become conduits of money; a case in point employees who say they plan for their salaries before they hit their bank account. But by the time the money lands, it is already ‘spent’ and sometimes borrowing starts.
 
Facts
 The poll reveals that money is concentrated in the hands of very few people most of whom are politically and economically connected. 

 When asked the reason why money is scarce, responses were wide range. 
 For example, one respondent says: “Whenever money is scarce, one person knows that many others don’t have”.

 Another one observed, “Money has never been scarce. The question should be why money is too much but in the hands of few people.”
 The response further continues: “There is no way can you can tell me money is scarce yet we see newly constructed apartments, new cars and weddings worth billions of money.”

 Another respondent was of the view that whoever gets reasonable money thinks of building a house. You find a man with five houses and no personal business/investment.

 The poll also reveals that most money is sunk into real estate business, creating scarcity of money in supply, advising Ugandans to learn to invest in ideas and businesses that create employment and spread money around.

 Another one says;“Money is excessively scarce in 2024. Businesses are flopping. Prices are dropping terribly especially maize, rice and beans with no demand in the market.  The little capital I have might go to zero.”

And interestingly perhaps, some pollsters claim that there is an influx of fake investors who take away money from circulation instead of investing in the economy. 

Economist’s take
 This sounds like pedestrian talk. However economists Daily Monitor talked to admit that some responses from the poll could hold some truth.

 Dr Adam Mugume, the director, research at Bank of Uganda (BoU), admits, “Your survey results seem to give credibility to BoU’s monetary policy; there could be some truth about scarcity of money since monetary policy has been tight,” he says. 

 Dr Mugume further explains; “The idea of tightening monetary policy indeed is to make the Uganda shilling scarce.”

 For instance, he says; Currency outside the depository corporations (BoU, Banks, Microfinance Deposit-Taking Institutions (MDIs) and other financial institutions supervised by BoU) was Shs 6.68 trillion in January 2024, compared to Shs 6.18 trillion in January 2023, a growth rate of about 8.1 percent.”

 With GDP growth of about 6 percent and inflation averaging 5.2 percent in the same period, nominal GDP would be around 11.2 percent according to Dr Mugume.

 “The fact that currency, which is largely demanded for transaction purposes, grew by 8.1 percent makes money scarce, since the growth rate of money is less than the growth in nominal GDP,” he says. 

 Mr Kenneth Otikal, an economist and chief executive officer at Nate Africa Consulting Limited, says money is not scarce because the BOU can influence money supply by creating new money and moderating its circulation through various actions.

 “There is also a concept of relative scarcity. Individuals, households and institutions feel money scarcity relative to their needs and wants, there are always limited financial resources compared to wants,” he says. 
 Mr Okital adds; “While money in the overall economy may not be scarce, it will be scarce for those with limited incomes and budgets.”

 “Yes, money is in few hands and when you see your friends spending on things you cannot afford yet you are within the same economy and rank, then it is no longer perception,” Mr Okital says.

 To reduce money in circulation, the central bank borrows from the public by selling their securities, increasing interest on loans through what the banks call the Central Bank Rate, withdrawing old currency notes and not replacing them among others.

 Civil Society Budget Advocacy Group (CSBAG)’s executive director Mr Julius Mukunda says wealth inequality exists in Uganda, with a significant portion concentrated among a few. 

 “According to Uganda Bureau of Statistics (UBOS), the wealthiest 10 percent of the population receives 35.7 percent of the national income; the poorest 10 percent earns a meagre 2.5 percent and the poorest 20 percent just 5.8 percent,” he says. 

He adds; “For example, unequal income distribution and limited access to financial resources contribute to this disparity, impacting economic equality and social cohesion.” 

 Mr Mukunda says; “Inflation erodes purchasing power, intensifying the perception of money scarcity. With the recent Central Bank Rate (CBR) hike to 10 percent and currency depreciation, individuals may feel their money is inadequate due to higher borrowing costs and increased prices due to the rising inflation rate.”

According to Mr Okital, inflation itself doesn’t directly reduce the money supply. 

 “Inflation reduces the amount of currency notes or nominal value of money for purchasing the same amount of goods.”

 Solutions to money scarcity
Mr Mukunda says one of the solutions is Open Market Operations (OMO), BoU can purchase government securities from commercial banks to inject money into the economy. 

“This increases bank reserves, encouraging lending and boosting the money supply; the Central bank can reduce the reserve requirements that commercial banks are obliged to hold,” he says.

Mr Norbert Kiiza Barigye, education partner, FXPesa, says one of the solutions to scarcity is crowd funding.

He explains that crowd funding is an avenue where like-minded individuals or groups meet to financially support an idea that they agree to or share.
“It is 100 percent equity and can be utilised to meet financing needs. Also, friends and families help for business funding is easier from close associates as they will be able to provide financing based on trust without an immediate need for any security,” Mr Barigye says. 

Mr Mukunda believes that the long-term solutions to this is investing in infrastructure, increasing production and productivity, promoting financial inclusion and supporting the private sector with affordable credit.

 As inflation pressures reduce and monetary policy is eased, this should allow increase in currency in circulation so that the nominal GDP growth is proportional to growth in money,” Dr Mugume explains.

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