Tuesday 31 May 2011

inflation in Uganda is controllable througha judicious mix fiscal tightness, building silos, and fuel reserves- though in the medium term-


Using the analogy When 2 bulls’ fight, it is the grass that suffers. Over the last 2 Months, the news have been dominated by the Walk To Work, Hoot 4 change campaigns by opposition whose efforts have been suppressed by government and to date we see not fruition on curbing inflation instead inflation continues to increase and the common man continues to suffer the consequences/remains at the tail end of far reaching effects. Inflation that bad in fact was considered Public Enemy No. 1 in the US by President Gerald Ford in 1974 has been the cause of the social unrest in the Middle East and North Africa. The inflation fatality on the Zimbabweans who grappled with high inflation of about 1000 percent at times was the giving up the National currency as a counter measure to avert inflation. Inflation probably the commonest economic term - is the rise in the general level of prices of goods and services in an economy over a period of time normally a year. Measuring inflation requires governments to establish a number of goods that are representative of the economy which is referred to as a "market basket." The cost of this basket is then compared over time (annually). This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year.
Inflation globally has been on the rising trend largely attributed to the uprisings in North Africa that constrained the supply of fuel, the apparent food shortage attributed to poor weather, and the fiscal stimulus that was employed by many countries to recover their economies from the economic crisis.

In Uganda annual inflation has risen in recent months to 11.1% in March 2011, 14.1% in April 2011 and 16.1% in May 2011- the highest levels since 1994. The inflation arguments have all been skewed to the fact inflation is externally generated which Is partially true but the biggest factors according the Uganda Bureau of statistics are domestic especially given the biggest contributor to today’s inflation is arguably food inflation. What an irony when Uganda is the food basket of the EAC countries. However the right mix of anti- inflation policies, depends on the causes of inflation  According to the statistics as well as economic predictions Uganda’s today’s inflation is largely attributed to these demand and supply causes, ;
Food inflation as the major driver of inflation is mainly as results of food shortage brought about by the drought, scarcity in agricultural inputs and structural lag in production.  Data from the Uganda Bureau of Statistics showed the country's food crop inflation registered an annual inflation rate of 44.1 % for the year ending May 31 from 39.3% in April
and with 2.1% in March due to mainly food shortages. The government blames the food shortage on drought experienced late last year and early this year. Food inflation is bad news for all consumers especially the poor as the food share of their overall spending increases.
Imported inflation- There are mainly two main causes;
The first being the of Global inflation esp. with oil/ Fuel prices. The increase in prices per barrel of fuel is mainly due to shortages on the world market arising out of the uprisings in Middle East and North Africa. The May 2011 prices of oil were 130 USD per barrel as compared to 90USD may 2010(44% increment). High fuel prices have direct and indirect effects of the cost of production on manufactured goods, as well as food production since fuel including natural gas is used at every stage of agricultural production
 The second factor is that the exchange rate appreciation where the Dollar has gained value against the shilling and remained trading for the first half of 2011 between 2300 and 2400. This increases the cost of the imported commodities. The main reasons for sustained high exchange rates could be the election speculation where lead to capital flight, increased or expansive government expenditure that is largely re current that increases the local currency in circulation and the low levels of the foreign exchange reserves in Bank of Uganda limits the level of Government intervention the Foreign exchange trade on the domestic market,
Lastly I think speculation has been part of the current inflation trends: if prices are expected to go high, people or firms tend to build these expectations in the pricing of their commodities, negotiation of increased wages and contractual price arrangements. when prices go high for example on the world markets, the local speculators start on speculation and this drives prices high at times higher than the movements on the Global markets . Even in cases when the government Foreign exchange reserves are low, speculators know government will have limited intervention in the Foreign exchange markets to regulate. A lot of the speculation is done on the informal market. This unrecorded Foreign exchange of informal market when tapped into could destabilise the on the market rate to lower levels

The judicious mix of interventions may require a set of rather medium to long run measures rather than short-term measures such as reduction of taxes on fuel, imposing of exportation bans food in order to ensure the domestic markets. The long-term intervention could be tailored to enhance stability in food supplies with or without the drought that through provision of weather resistant food inputs, funding and extending irrigation schemes to farmers, and most important improving infrastructure of Roads, markets, and food processing. Food silos and Fuel reserves are key in the short run. Price expectations management now and in the future is an imperative tool in controlling inflation. The complimentary measures to control core inflation which excludes food prices and at times fuel prices may require Contractionary policies usually by raising interest rates or even downsizing the fiscal space. In either case there are costs of each policy response as increasing interest rates which are already high and costly, could deter investment. Similarly the fiscal contraction by downsizing on the budget could be a detrimental to the infrastructure projects.    The unfortunate answer is that prices may be here to keep rising since the domestic policies may be able to mitigate global inflation as well as the structural changes globally that have caused food inflation. Over to the trusted central bank and MoFPED to find the right mix of policy responses



Monday 23 May 2011

Has Uganda's growth lead to economic and social development?

Economic development in Uganda
GDP growth: Uganda’s economy grew rapidly over the past 20 years, propelled by consistent policy reforms. Annual growth in real GDP averaged 7.4 percent over the 10 years ending in 2009/10. This generally high Growth Rate has not been enough to spearhead economic development as shown below;

Economic development of any country commonly measured by the Human development Index and the GDP per capita. Human Development Index is a comparative measure of life expectancy, literacy, education, and standards of living for countries worldwide. It is a standard means of measuring well-being, especially child welfare. It is used to distinguish whether the country is a developed, developing, or under-developed country, and also to measure the impact of economic policies on quality of life.
According to the Human development report 2010, Uganda ranks 143 out of the 169 countries assessed with a human development index of 0.422 which is low as compared to high Human development countries like Norway (0.938), Australia 0.937, and USA (0.902). Uganda’s life expectancy of about 54.1 years is still low as compared to Norway (81), Australia (82), and USA (79.6).
Poverty in Uganda has declined over 20 years, though inequality persists. The poverty head count fell from 56 percent in 1992/93 to 31 percent by 2005/06  and further to 24.5% in 2009/10(Uganda  National Household Survey 2009/10). The decline, especially between 2002/03 and 2005/06, came from better crop prices (particularly coffee), agricultural diversification, growth in non-wage, non-farm employment (primarily household enterprises), and the creation of new wage and salary jobs in urban areas, mainly Kampala. However, inequality persists among regions, between rural and urban areas, and within cities. The Gini coefficient of expenditure was 0.41 in 2005/6 and increased to 0.42 in 2009/10. War in the North until recently prevented it from developing with the rest of Uganda thus regional disparities. Households in poorer areas have fewer services and have worse health and education outcomes. Infant mortality in Kampala was 54/1000, but it is twice as high in the neighbouring districts of the central region and in the north. Student-teacher ratios and classroom sizes are much larger in poorer areas, especially in the north, resulting in lower primary completion rates and gender disparities
Population growth hampers Uganda’s economic progress. Uganda has the third highest fertility rate in the world, with 6.8 children per woman. The population has doubled since 1986. At the current growth rate of 3.4 percent, the population will grow from 32 million today to 68 million in 2035 and 100 million in 2050. Uganda’s dependency ratio of 1.12 is high, which decreases household ability to save and invest productively and puts pressure on public services.
Uganda’s progress toward the MDGs is fast in some areas (seethe notes I gave u on MDGs). Uganda
has registered strong progress and is likely to achieve MDG 1, poverty reduction and hunger eradication; MDG 2, universal primary education; and MDG 3, gender equality and empowerment of women. Poverty has fallen steadily since the late 1990s, and with the introduction of universal primary education, primary enrollment has increased to 92 percent, with near gender parity. Access to safe water in both rural and urban areas is on target; 65 percent of rural households and 71 percent of urban households have access, compared with MDG targets of 62 and 77 percent, respectively. Access to sanitation facilities is 68 percent, compared with the MDG target of 72 percent However Uganda will not reach some MDGs. Child and maternal mortality are still too high and unlikely to be met, with under five mortality of 137/1,000 and maternal mortality of 435 per 100,000 births. MDG 6, combating HIV/AIDS and malaria, and MDG 7, environmental sustainability, could still be met if given sufficient attention. The HIV/AIDS prevalence fell from 15 percent in 1990 to 6.2 percent in 2000, although it appears to be rising once more. Malaria continues to be a main cause of mortality In Uganda today.

Infrastructure investments have not matched growth in demand. The absence of adequate infrastructure – in particular in transport (90% of the transport network is by roads) and electricity – throughout urban and rural areas is the greatest obstacle to shared economic growth because it raises production costs. Improving transport connectivity between farmers and markets would induce a stronger supply response in agriculture and raise household incomes among the rural poor

Despite Uganda have made significant progress in reducing poverty, it is still a developing or poor country because its income levels are low GNP per capita of USD 501 compared to middle income bracket of USD 1000 to 11000 US. Uganda requires doubling its GDP per capita to get middle income status
.The main other impediments to tackle;
·         That Uganda growth is largely generated from the few urban centres largely Kampala.Regonal disparity remains a big challenge. This has an effect on business community, why would an investor go to work in district or region with limited government presence or intervention?
·         We need on both the private sector and public sector in delivery of services. The private sector premium or user costs are high and only serve to exploit the poor. The public sector as well has failed to deliver public services like infrastructural improvements in energy; railway which would reduce costs of transactions thus costs of products.
·         Political influence in the planning, and budget execution process. Often times u get presidential orders to create districts against what was set out in the National development plan to reduce administration costs
·         Corruption- we have both elements of corruption in Uganda, the political corruption along with administrative. The former being the dominant and this has lead to impunity mushroom in politicians heads. Largely the oversight bodies are not effective since it can be argued that they are not independent- another next 5 years of ineffectiveness- passing on bills in the only  target , one can commend parliament.
·         Poor public servants attitude- you want to moonlight and do you other things, public service is the place one would crave to be in. high absenteeism, high vacancy rates are observed year in year out. Why pay someone for being absent? If absent why not take action against these guys
·         Doing business is increasing becoming difficult given poor infrastructure and corruption among others that Uganda currently ranks 112th out of the 183 economies measured by the Doing Business 2010 report on the overall ease of doing business.
·         Lack of skills and integrated systems for  the function of the agencies also affects productivity and efficiency
·         Population growth as explained above
The state in Africa has a crucial role to play in facing various current and emerging development challenges. Unfortunately as aforementioned our state is like a broken bridge. Driving on the road with a broken bridge means u cannot reach your destiny, thus even with increased inputs and budgets- we still have same development challenges. Thus we need to focus on patch up the bridge. It all is political and requires political answers and commitment. Malaysia’s successful economic transformation was achieved by deliberate state Intervention, based on a disciplined planning process (state).NB. Malaysia and Uganda had same GDP per capita in 19970s

Uganda's consumption bubble will burst

Uganda’s Consumption bubble will burst!!!
Uganda is a country which is largely rural with 80% of population rural bound, and 70% of its population employed in agriculture. This means Uganda has a small formal sector which ideally pays the tax, bears the tax burden and according to the Uganda national household survey 2009/10, 24.5 %( about 7.5 million) Ugandans still live in poverty means one can’t afford the basic necessities/caloric needs like food and shelter. Also noting that the population is increasingly becoming younger with 60% of population under 18 years, means Uganda has a high dependency ratio of 115 percent.Dependancy eats the working population income leaving them with limited savings. 
Despite the high dependency and high unemployment levels, Monday to Sunday, week-in week-out, 365 days a year, you will be assured of party time in Uganda and more particularly Kampala bars. There are theme nights by different bars that attract masses 7 days a week in all corners of town. No wonder we are ranked among the top notch alcohol consumers by volumes consumed annually bearing in mind we have large informal drunk amounts not taken into account in the comparisons.  Strangely you will notice that Ugandan’s are quite generous to churches, some churches reporting Sunday collections of about average Ushs 200Million collections. Every month, one has to part with wedding contributions least one could save minimally UShs 100,000 to that cause monthly. Gone are the days when owning a car was a luxury for the corporate class yet the minimum expenditure on fuel alone given today’s prices is Ushs 300,000. Given the potholed Kampala, the breakdown of the cars is likely to be monthly. Most corporate class fellas stay in the moderate upscale locations (not affluent) whose rent prices today are exorbitant. To those who own homes they are largely funded through mortgages which eat big chunk of one’s salary each month, to a tune of about 50% If you also delve further into the same class you would notice that they go out on dates more than once a week.
Since Government does not provide adequately the basic necessities like Education and health; we also have to spend much of our little savings on the same basic necessities. Also bearing in mind our economies are prone to diseases, inevitably we have to spend on our health. The aforementioned expenditure excludes the most basic need basket of goods and services like food, fuel, clothing and energy. The common basket of goods and services used to compute inflation figures has been prone to inflation especially food whose inflation in April 2011 was 39.3%.
Economists have always observed that with inflation firms tend to be slower in adjusting wages commensurate to the price movements, meaning in real terms the salary earners earn less when there is inflation. To put this in context - one friend recently narrated he bought a descent meal at 3000 UGX 4 years ago and now the same food costs 8000UGX(166% increment), his rent that was once 250,000 UGX is now 500,000UGX(100% increment) yet his salary scale has only changed marginally over the years by about 10%.  In real terms he is worse off than he was 4 years ago. Also notably when inflation is high, rather than companies increasing salary scale commensurately, they instead reduce the number of employees. Use few to do same work-efficiency
Against that backdrop, arguably incomes/expenditure of average Ugandans are consumption bound or basic needs share of income/expenditure is high, thus less savings and investments. One is left to wonder how is this expenditure funded? The unfortunate answer is our expenditure per capita is higher than the income capita meaning expenditure is largely funded by the private sector credit from banks including the unsecured salary loans- of which the non secured loans are also on the increase. These loans fetch interest rates averaging 20-25%. Unlike Governments which could get debt reliefs on their debt, the individuals don't and if anything could lose their property (if the loan was secured) on failure to pay.

It is not strange to find a young graduate more likely to ‘invest’ in a black berry (i-pad, galaxy or any android based phone) before any savings for future. Another would rather borrow for boda boda than walk from their residence say in Mbuya to Makerere University Business School, even when time is available. Hotel, bars are one of the major profitable ventures and less is being invested e.g in production for export (both traditional and otherwise).
Arguably Uganda is largely consumption bound yet produces little. Low production reduces employment and in the long run, there will be no income to support the consumption. What is regarded as savings is actually immediate tomorrow’s consumption. Talking of savings, we still witness limited collective savings like investment clubs and limited stock market participation. If we don't re-adjust to live within our means, this consumerism is unsustainable. (Unlike governments which could get debt reliefs on their debt, the individuals don't if anything could lose their property (if the loan was secured) failure to pay-repeated from above). Drawing from the US experience, once the consumption bubble bursts, it will have spill-over effects on business slump and credit default rate would likely increase thus creating a ‘Uganda crisis’. However Uganda’s economic crisis wouldn’t lead to the famous Global crisis.