Are oil revenues the new payday loan?

The Bank of Uganda recently increased its benchmark lending rate by 50bps to 10.0 percent in an attempt to tackle rising inflation. The Deputy Governor is to be commended for his clarity and forthrightness. He soberly remarked: “overall, risks to growth are tilted to the downside”.

To their credit, the special Monetary Policy Committee (MPC) met quickly and acted decisively.

The decision to raise rates came in response to two interconnected economic realities: imported commodity price increases (out of Uganda’s control) and excess supply of (and potentially lower demand for) the Ugandan shilling as holders sell their shillings and seek to invest internationally or keep their funds in foreign currencies. The imported inflation is unavoidable.

In a ‘one-two blow’, as the shilling declines in value versus the international currencies, the price of commodities are also increasing in real terms. This is akin to holding a punctured water bottle in the desert- as the temperature gets hotter, we desperately need more water, but the less water we have.

The decision made by the central back is, however, not enough. As the Deputy Governor stated in his Monetary Policy Statement, the main inflation driver was foreign commodity prices – it is supply driven and international. This makes it significantly more difficult to stem, particularly when those imported goods are essential.

Furthermore, although rising interest rates may also attempt to woo investors back to holding their money in shilling savings accounts and bonds, this must be thought of in the context of the economic situation overall. If investors, concerned about inflation and a worsening fiscal situation, are moving their capital into foreign currencies or abroad, more attractive savings rates in a worsening economic situation likely won’t get them back.

In unfortunate timing, the same day the Bank of Uganda had their emergency meeting, the Executive Board of the International Monetary Fund (IMF) reviewed and issued disbursements under their Extended Credit Facility (ECF) Arrangement with Uganda.

The irony being that, as the decision was made, some of the data that initially underpinned it had become stale. While the IMF operated on the assumption that “core inflation expected to remain subdued at 2.8 percent in FY 23/24 and rising to the Bank of Uganda’s target of 5 percent in the medium-term”, the Deputy Governor of the Bank of Uganda explained that “inflation is projected to rise above the medium-term target of 5 percent by quarter 1 of FY 2024/25 and stay above 5 percent throughout 2025 unless monetary policy is tightened”.

Nigeria is currently facing an extreme financial crisis driven by the same imported inflation and plummeting exchange rate, a programme of subsidies that attempted to stem these, and central bank money-printing to provide short term loans to the government to make up its budget deficit.

Kenya, too, has recently experienced the same (though not as severe) coupled with a national debt crisis. In short, Uganda faces similar risks with budget shortfalls, a growing fiscal deficit, increasing government borrowing, and imported supply-driven inflation. Unless we pursue aggressive fiscal consolidation, it is not clear what the future holds for our economic security.

A ray of hope has typically been the expectation of activity in the oil sector. We see our payday on the horizon and the temptation has been to borrow in advance.

Oil is our payday, and the central bank monetary policy decision (and decisions they will likely have to make over the course of this year) is the loan. The sad reality of such a situation is that usually the easier the payday loan is to get, the less radical the employee is about rationalising finances, cutting unnecessary expenses, and plugging fiscal holes.

If it is possible to simply receive some money to ‘make it to the end of the month’ – that is the option many choose. The cost is simply taken on as it is considered less important.

However, Payday loans are notorious because, although the income is anticipated, the cost of the loan might eat up more than our surplus before we even receive it, leading to a cyclical dependency on loans in the future.

Uganda has the opportunity to expand its potential through its God-given natural resources, but it would not be surprising to see the cost of fiscal and monetary decisions today eat up much of the benefit of that income.

The Deputy Governor said increasing activity in the oil sector may only “somewhat mitigate the negative effects above”, not overcome them altogether. We must, therefore, aggressively pursue fiscal responsibility without relying on the economic catalyst of oil. Otherwise, we risk seeing the paycheck come and be paid out before we receive its benefit.

This, I fear, would be a great disappointment to the hard working and enterprising Ugandans participating in the economy today.

Mr Cezar Rugasira is a Lawyer & Investment Advisor