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, ;
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.
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
Building food reserves/ silos maybe a short term solution to the increasing food prices if production is not increased (Remember Uganda's population is steadily growing). The problem lies with Uganda's agronomic practices. The government needs to provide more support to farmers and encourage the idle and jobless youth to engage in agriculture. Uganda has vast chunks of uncultivated land, and yet the productive population continues languishing in urban centers. It's alarming to find that Ugandans actually engage in agriculture when they hit retirement age, implying that most of their productive years are put to waste. The bigger problem is however on the government side. As a farmer, my biggest challenge is providing all year round irrigation on my farm to ensure that I have all-year round production (meaning that I don't need to wait for rains). I will give an example of the Mubuku irrigation scheme where my farm is located. If it wasn't for the gravity flow irrigation channels that were established in the 1970's, I would produce food during only one season a year. However, with the harvested water from rivers and other water sources, I am able to channel water during the dry spell, which means I can have 3 seasons a year (for vegetables). I would therefore suggest that the government puts much more emphasis on devising more efficient micro-irrigation projects at every sub-county. With irrigation, we can have food produced all year round for the entire great lakes region.
ReplyDeleteOne other thing that the government needs to do is to train farmers on how to adopt better agronomic practices (use of pesticides, improved seeds, mechanisation - for efficiency and increased production), collective marketing of farm produce and value addition (To avoid wasteful production that in turn destabilises prices). All these need to be integrated in government programs directed towards the local farmer, and these programs should put more emphasis on implementation of policies, and not policy formulation (we waste more time on developing policies but never execute them)
This comment has been removed by the author.
ReplyDeleteMany thanks Enock and Allan for the remarks.
ReplyDeleteIn light of food inflation, I am of the view that Commercializing agriculture is the way forward. This is basically because, much as the market base for agricultural produce has significantly increased as a result of relative peace in the East African region and South Southern Sudan the supply of produce has systematically largely remained subsistence based with the surplus finding its way to the market. With such a market potential, unless agricultural practices are commercialized, adjusting agricultural produce supply shall largely remain low thereby increasing the likelihood of persistent high food prices.
I am certainly in agreement that irrigation is appropriate to control for seasonal dry spells. However, its viability is questionable if agricultural production remains subsistence based.
Finally, for as long as the consolidated fund is a “common access resource”, fiscal discipline will unfortunately remain a farce and inflation will consequently persist!
Both arguements valid and spot on. my article is entirely centered on the fact that when the supply is overshadowed by demand , prices will go high. Todays inflation is largely attributed to domestic factors since food inflation is the biggest contributor and follwoed by external factors - fuel spillover effect- a litre of fuel iBra now in Ug costs 3600. damn we are in for a killing. see my article on the consumption bubble in Ug will burst- u might want to agree or disagree- with the prevailing aggregate demand , prices will always rise until the demand cant just afford the prices( even with dependancy on loans), the cycle breaks and spills over back to producer, thus production yet no affordability, which could lead to closure of some business- consumption bubble bursting.
ReplyDeletevalid points i get from your arguements, commercialisation though will be hard esp since the trade to the regional markets alot of it is even on the informal markets. commercuialisation of agric also depends on whether the producers will be able tap from the high market prices which is not teh case in Uganda- for many reasons- globally Africa exports less than 1% to the world market. internally the Non tariif barriers are enormous, no markets, roads are poor, agro processing industries are lacking, etc..... irrigation again comes in handy esp since the food crisis is largely caused by the drought. so a combination of irrigation programmes, and silos would help here- again read countries must keep reserves of essential products like fuel, food, etc....
article has been amended including some evidence and also incorporating some of your thoughts-enjoy the reading
ReplyDeleteEnock,
ReplyDeleteYou pretty much have everything about the discussions of inflation. The
unrest in the Middle East, food shortages, et cetera. But my argument is
that we need strong measures beyond the usual medium to long term arguments
that government keeps fronting.
I, to some extent, agree that there shouldn't be any export bans on
food. As that would distort the trade relations we have with our
neighbours, who could react the same way on a commodity we need. However,
that begs the question: Who benefits when food is exported to say South
Sudan or western Kenya? Is it the farmers in Bushenyi or the middlemen?
Then again, government needs to come with a clear strategy on how to
fund commercial agricultural projects. This issue of putting up a Shs 30 bn
fund has its challenges, with the 12% uptake of the fund as witnessed last
year as a clear example.
We need to see banks push more credit to farmers. But there should be
incentives. Government should scrap all tax on any interest income that
banks generate from lending to farmers.
There should also be other incentives for companies that engage in
commercial agriculture.
Now on fuel, I agree that easing tax on fuel might not be the best
strategy. Besides, the Shs850 tax on a litre of petrol accounts less than
half of the average price of Shs3500.
As government, there is a need to implement the fuel storage rules for
at least 14 days. Drafting such regulations and leaving them on the shelves
does not help much.
Like the former world bank country manager wrote recently, Uganda's fuel
pricing mechanism does not reflect the true cost of fuel. Government needs
to look into that.
Otherwise we can have these arguments all day, and this aint
wolokoso...Nice article though.
Cheers.
jeff