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Bank of Uganda’s move to stop price increases is right

For a long time, economics has been perceived to be a discipline exclusive to the Brahmin, and has for the most part been left to the upper crust.

This explains why communiqués from central banks, even though deemed serious, aren’t read by the general public [neither do they take the time to understand them], because of the sophistication associated with the subject.

This has created an aura of mystery around the profession, and institutions that guide it — central banks; making it back-breaking to call these establishments, their policies, and effectors to order. To demythologize this stereotype, some of the biggest contributors in economics didn’t study it.

For example, Lord Maynard Keynes only took an eight-week summer class in economics and never sat an exam in the subject. Likewise, the present governor of the Bank of England, Andrew Bailey, is a History major, while Christine Largarde, the former managing director of the International Monetary Fund, and now president of the European Central Bank, graduated in English and Law.

To add to the list, the present governor, Central Bank of Nigeria Godwin Emefiele is a Finance graduate. The lesson to learn from this is that economics isn’t rocket science, and can be mastered by anyone willing to invest the time.

This means that uninstructed remarks on Bank of Uganda [BoU]’s official Twitter page that followed the release of June’s monetary policy statement, such as, “seems we’re entering a phase of hyper-inflation,” accompanied by numerous calls to ‘kindly explain the document in lay terms,’ would be few and far in between.

Instead, the rhetoric would center around the central bank being tasked to firmly defend its position. Sadly, that isn’t the case. In the spirit of Ubuntu, below is a breakdown of BoU’s June policy statement, its ramifications, and justifications in lay language.

To begin with, the policy statement kicks off by announcing that the Central Bank Rate [CBR], the rate at which BoU lends to other banks, has been upped by one per cent to 7.5 per cent from 6.5 per cent.

What this means is that banks are going to charge a higher interest rate on loans because the rate at which they borrow from BoU has been increased. This implies that we are going to hear of loans with interest rates of 25 per cent to 26 per cent.

As it stands, there are banks that charge up to 24 per cent interest on loans, while they borrow at 6.5 per cent from BoU. Therefore, a one per cent increment means the interest charged on loans is going to go up. To leap to BoU’s defence, hiking the CBR is necessary in containing the prevailing inflation, seeing as increasing the CBR [also known as the discount rate], discourages borrowing and reduces the volume of money in circulation.

The increased circulation of the shilling has eroded its purchasing power, suggesting more units of the currency/shilling are needed to buy less goods and services in the economy, hence inflation.

This is going to have an adverse effect on the business sector as it’s going to make credit expensive and unaffordable, and will lead to the collapse of many businesses, causing unemployment.

The policy statement continues to highlight that headline inflation has increased by 3.6 per cent in four months. What this means is that the price of household items [fuel and foodstuffs included] has spiked, straining households enormously in the last four months.

Core inflation, which focuses on the underlying trend of inflation as it blocks out the temporary spikes in prices [food and fuel], is said to have gone up 2.8 per cent in the last four months. This implies that the monetary disturbances [increase in quantity of money] went up by 2.8 per cent in the last four months.

However, I disagree with the policy statement shifting the blame of the price pressures on the supply/demand imbalances caused by Covid-19 and the Russia/Ukraine war.

To gain a broader perspective of the effect of supply/demand imbalances at the peak of the pandemic [when trucks were held for days at Malaba border due to Covid protocol], fuel stayed in the confines of Shs 3,700 a litre and the price of foodstuffs was manageable. Cooking oil went for Shs 3,500 a litre, soap was less than Shs 4,000. Now, the price of these items has more than doubled.

Acclaimed economists John Maynard Keynes in his book Essays in Persuasion 1931; Milton Friedman in his 1980 television series How to cure Inflation, and Friedrich Hayek in his 1975 NBC interview on Meet the Press, all agree that inflation isn’t by accident, and all through history it has been caused by the increase in volume of the supply of money in the economy.

They all strongly suggest that only two great forces have the sway to influence the growth of money — governments and the political class. It is based on this background that I insist that the increase in the volume of money to finance the elections, through supplementary budgets, led to this inflationary situation as was the case in 2011.

The Ukraine war merely added fuel to the fire and has been used by many governments including the United States to mask their incompetence.

This prompted President Putin on a June 3, 2022, Rossiya 1 TV interview to say, “Our partners [financial and economic authorities of the USA] have made a lot of mistakes and now they’re looking for someone to blame and, of course, in this sense, Russia is the most convenient candidate for that,” in relation to the current global inflation crisis.

As for the depreciating shilling, the policy statement reads “higher prices in the global markets … could further weaken the exchange rate.”

What [BoU] should have communicated instead is that as inflation proceeds [in Uganda], the real value of the shilling will continue to fluctuate from month to month.

With regard to economic growth, the policy statement makes projections in the range of 4.5 per cent and five per cent for 2022. This doesn’t make sense because in the first place, economic growth means an increase in goods and services produced in a country.

That’s hard to realize because with core inflation forecast at 6.1 per cent, it means real [forecasted] economic growth [adjusted for inflation] would be -1.1 per cent [a negative growth rate implies a recession], that is, projected growth of five per cent, subtracted from the projected rate of [core] inflation of 6.1 per cent.

To put it simply, inflation causes the costs of production to go up, leading to businesses shutting down and people losing their jobs. At the same time, credit is going to be hard to access because of BoU’s increment of the CBR, which is going to push banks to increase their lending rates.

This environment is not conducive for economic growth. And to project it, is to paint delusions of grandeur. Further, the policy issue discloses that it’s going to phase out the remaining target credit relief measures for the education and hospitality sectors.

It continues to outline that the Covid-19 Liquidity Assistance Program [CLAP] set up to act as a buffer for companies/individuals to access credit during the pandemic, has been discontinued.

In essence, this is logical because the growth of money in circulation has got to be stopped, as it will only lead to more inflation.

As callous as BoU’s measures seem [promising to continue raising the CBR until inflation is firmly contained], they are taking a step in the right direction to stop inflation.

Because, as Nobel laureate Milton Friedman avowed, the way to stop inflation is by stopping the rapid growth of money: “stop printing money, it’s that clear, that straightforward,” he asserted.

Twitter: m_kidamba

The author is an independent financial/investment analyst.


0 #1 kabinda 2022-06-17 03:24
I cannot help but laugh out loud at this outrageously myopic argument.

Of course supply side issues are causing inflation because so much money is increasingly available to buy the few goods in circulation .

Of course covid is a factor because it disrupted not just labour mobility and effectiveness but as a consequence difficulty in delivering goods and services hence inflation. The war? Of course. Russia is a contributor to global oil supplies and sanctioning it inevitably causes constraints
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0 #2 kabinda 2022-06-17 03:35
Part 2. If you have oil supply constraints your economics tells you the price of goods will somehow stay low?

How do those who deliver your cooking oil to take in the hiked cost of transporting your oil and take the loss on the chin?

Yes the reference to war in Ukraine is not about bullets. Its about the sanctions that had to be imposed to avoid Putin's adventurous conduct .Revise or consult on your economics before you call others naïve using your own shallow arguments. Observer ,where do you get these pseudo analysts?
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