A report by the Bank of Uganda (BoU) has indicated that a slump in global output is expected to constrain demand for Uganda’s exports of goods and services because a number of advanced economies that consume Uganda-made products are turning inward to boost their economies.
The Annual Report for the Financial Year 2021/2022 released by BoU on Wednesday points to difficult economic times fueled by spreading global inflation driven by an increase in food and energy prices. The price hikes are spurred by Russia’s special military operation in Ukraine and drought in Latin America.
Global demand-supply imbalances
The Annual Inflation in the US increased from 7.5 percent in January 2022 reaching the 40-year high of 9.1 percent in June 2022 while in South Africa it increased to7.4 percent from 5.7 percent in the same period.
This implied that inflation rose above target across many countries; to a large extent driven by supply-side shocks.
The report noted that prices of commodities increased globally due to the persistent demand-supply imbalances that were exacerbated by geopolitical tensions, particularly the Russia-Ukraine conflict.
The Russia-Ukraine conflict caused the global commodity markets to face an unprecedented array of pressures, lifting prices to all-time highs, particularly those where Russia and Ukraine are major exporters.
“During the FY 2021/22, fertilizer prices rose by 115 % compared to the level in the same period last year while energy prices were 90 % higher in the same period,” the report pointed out.
“The growth of Arabica coffee price increased by 53 % tripling the growth in similar periods the previous year. Non-energy and grains prices maintained a growth momentum of about 24% while tea prices grew by 22 % reversing an 8 % decline sustained the previous two consecutive Fiscal years,” the report reads in lines.
Further increases in commodity prices could lead to persistently high inflation and rising inflation expectations.
Harsh projections for Uganda
The report also noted that in Uganda, the impact of rising commodity prices is expected to lead to higher input costs which might worsen the already increasing marginal costs facing Ugandan importers and producers inducing a contraction in output in the affected sectors.
In addition, China’s uncompromising Covid-19 policies caused a reduction in production in the country which could drive up the prices of goods. China is a major source of Uganda’s imports, which means importing into the country at a higher cost, the report says.
“The combination of reduced exports earnings with the higher cost of imports if the price effect dominates implies reduction in net exports and thus lowers domestic growth,” the report warns.
“Moreover, as China continues to grow much slower than expected, its authorities could reduce the amount of financial aid available to developing countries including Uganda,” the report adds.
Imported inflation in Uganda
Bank of Uganda warns that as commodity prices remain elevated, the rise in global inflation means higher imported inflation going forward for Uganda.
The high crude oil prices are already adversely affecting the Ugandan economy as fuel pump prices have risen to record highs catalysing additional inflation pressures.
According to the recently released International Monetary Fund (IMF) World Economic Outlook of October forecast, Rwanda and Uganda will lead East African Community’s growth next year, however, with tough times ahead.
The forecast showed that Rwanda will grow at 6.7% and Uganda and 5.9 % in 2023; showing accelerated growths from 6.0 and 4.7 % respectively, expected for this year.
The two are followed by South Sudan with 5.6 per cent and Kenya which is expected to grow at 5.2 per cent and Tanzania with 5.1.
Writing in the report’s forward, Michael Atingi-Ego, the Deputy Governor of the Bank of Uganda indicated that although inflation was initially supply-driven, other components of inflation which were demand driven began to increase, making inflation more broad-based and persistent.
“This was an early sign that inflation expectations had begun shifting upwards. Consequently, BoU tightened monetary policy in June 2022, increasing the Central Bank Rate by 1 percentage point to 7.5 percent, to anchor inflation expectations at levels consistent with the medium-term target of 5 percent,” Atingi-Ego explained.
“BoU also increased the Cash Reserve Requirement (CRR) on commercial banks’ deposits from 8 percent to 10 percent on June 23, 2022, to minimize the spillover effect of excess shilling liquidity to the foreign exchange market, he added.