Bank of Uganda faces difficult set of choices

Bank of Uganda headquarters in Kampala. PHOTO/FILE

What you need to know:

  • The issue: Inflation
  • Our view: Above all, we believe the central bank has to think and talk in lockstep with where the levers of power rest in Uganda.

The Bank of Uganda (BoU)  yesterday hiked its benchmark interest rate by one percentage point to 8.5 per cent.

The central bank in fact broke ranks with tradition to issue its latest monetary policy statement (MPS) within one month. The time-honoured fashion is to put a finger on the pulse after a couple of months. But with the dashboard flashing red, the BoU can ill afford sticking to custom niceties.

BoU has not ruled out further tightening to slam the brakes on inflation. Its hawkish stance suggests that inflationary pressures are showing no signs of subsiding, and above all that Uganda has been caught cold by the same. 

The government has been open about the prospect of prioritising reining in inflation over concerns about economic growth birthing pain. BoU used yesterday’s MPS to offer reassurances. It said thus: “Economic growth is still projected in the range of 4.5-5.0 per cent in 2022 and rising slightly to 5.0-5.5 percent in 2023, in part supported by public investments.”

At its simplest, a recession is defined as negative growth across two consecutive quarters in a financial year. While the hard information indicates that Uganda is not in the depths of a recession, the situation on the ground rather suggests the inverse. The latest figures from the Uganda Bureau of Statistics (Ubos) offer a measure of the trouble that is brewing. 

According to Ubos, headline inflation increased from 6.3 per cent in May to 6.8 per cent in June. Core inflation, which excludes food and fuel items, also increased from 5.1 per cent in May to 5.5 per cent in June. 

Elsewhere, the energy, fuel and utilities index increased from 12 per cent to 14.2 per cent. Specifically, the petrol index jumped from 35.8 per cent in May to 45.9 per cent. The kerosene index also witnessed a spike.  Perhaps, most vexing is annual food crop inflation’s sharp rise from 0.7 per cent in February to 14.5 per cent in June. The citizen-centred initiative, Twaweza recently noted in its Sauti za Wananchi baseline survey that the food crisis in Uganda predates the war in Ukraine that has thwarted access to much-needed wheat and sunflower oil.

“In October 2021, 24 per cent of the wealthier households and 55 per cent of the poorer households went without eating for a day,” the baseline survey report reads in part.

Since then, the Integrated Food Security Phase Classification’s dataset has captured acute food insecurity in regions such as Karamoja. And the sad reality is BoU will continue holding a blank sheet of paper where they should have answers. It’s through no fault of their own. 

Conventional monetary policy can only do as much when faced with a supply-side shock as is currently the case.  With different public servants—some successful; others not—keen on wage growth, a wage-price spiral cannot be ruled out entirely. But that is getting ahead of ourselves.

The more imminent threat is the BoU’s tightening cycles leading Uganda into a recession that indices pick out.

Needless to say, BoU faces a set of hard choices in a bid to ensure that inflation does not become a white whale. It will have to be judicious as it deals with what is by all accounts a difficult balancing act. Above all, we believe it has to think and talk in lockstep with where the levers of power rest in Uganda.