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Towards the Election: Uganda’s Inflation Outlook Print E-mail
Friday, 11 February 2011
As the country barrels towards general elections, scheduled for February 18, Uganda’s economy is showing signs of vulnerabilty. The economy has seen impressive expansion over the last 20 years, averaging 6.8% annual growth since 1990. But over the next few months, Uganda will need to tighten its belt. Beyond the predictable threat to the value of the Ugandan shilling in advance of a presidential election, a number of factors threaten to push up inflation:

  • Going into the third quarter of this financial year, the government announced massive overspending. Having front-loaded much of its UGX7.18tr 2010/2011 budget, the Ugandan parliament was forced to pass an emergency UGX600bn supplementary budget on 4 January 2011. Increased government spending is not unusual ahead of a major election. But if the announcement of overspending was not enough to raise eyebrows, the submission that each MP would receive UGX20m out of the supplementary budget certainly was.
  • Officially recompense for monitoring NAADS, the country’s agricultural development strategy, the UGX20m per MP disbursal has raised suspicions of old-school politics-by-patronage. Indeed, 12 MPs have returned the money, presumably to avoid implication in scandal.
  • Global price increases may also bear heavily on Uganda’s economy, which is a net importer. Food prices around the world have crept back up to near-2008 crisis levels, and oil recently broke USD100 per barrel. Although Uganda has discovered commercially viable oil reserves, no oil will be pumped until at least 2012 – the beginning of local oil production had to be pushed back further after the capital gains tax dispute from the Heritage Oil asset sale to Tullow Oil. At the moment, all fuel is imported.
  • In addition to global economic dynamics, regional weather patterns will also have an impact Ugandan inflation. Headline inflation rates in East Africa have been on the rise for the past few months, and are set to continue their climb. After failed short rains across the region, the La Niña cyclical ocean-atmosphere phenomenon is likely to exacerbate agricultural problems associated with dry weather. Regionally too, then, food prices are likely to rise as unfavourable climatic conditions compromise harvests.
  • In the current political context, the Ugandan shilling is predictably depreciating against the dollar. The Bank of Uganda (BoU) has intervened on several occasions, selling off dollar reserves, but these are limited and BoU may be doing little more than staving off an inevitable fall. The exchange rate currently stands at UGX2335 to the dollar. As companies prepare for potential political upheaval, year-on-year data show that investment is down by as much as 72% as of January 2011. Individuals, too, seem to be anticipating a storm: as many Ugandans sell shillings for dollars and investors and NGOs delay investment decisions, the demand for shillings declines.

Perspectives
Looking forward, government borrowing in the wake of tremendous overspending might have an adverse effect on the availability of loans to the private sector. Interest rates are likely to climb as inflation rises, which will also Uganda’s business environment in months to come. The lack of rain will not only drive food prices upwards, but may also result in declining nationwide electricity provision as hydropower plants struggle to cope with Lake Victoria’s dropping water levels. While opposition candidates and news media debate the likelihood of Egyptian or Ivorian-style political crisis, new economic challenges seem far more certain. Fiscal indiscipline and a host of external economic pressures might make 2011 a tough year for Uganda’s economy to weather, and indeed, 2011 might slow down the country’s impressive growth trend despite having withstood the global financial crisis relatively well.

Look out for:
  • If there are serious irregularities in the elections, will donors significantly reduce their aid commitments?
  • Will the stand off between the Government of Uganda and Tullow Oil over the disputed capital gains tax payment on the Heritage Oil asset sale lead be resolved after the elections or will there be further delays to the start of oil production?
  • Will demand from border regions in Southern Sudan and eastern DR Congo remain strong?



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