Friday, December 23, 2011


According to the statistics the year started on a rather benign note.

Inflation in December last year was 3.1%, the more than doubling of the rate from November’s 1.4% could explained away easily as due to the festive season. Petrol was selling for less than sh3,000 a liter and unsecured lending rates were just about 20%. Foreign exchange reserves stood at 5.2 months of imports.

Fast forward to today. Inflation in November slipped to 29% from a record high 30.4% in the previous month. Petrol is on the verge of touching sh4000 a liter at the pump and lending rates are now up to more than 30%. Foreign reserves have plummeted to 3.7 months of imports in October. To put that in perspective we shed about $500m or sh1.5trillion in reserves between December and October this year.

The more reserves a country holds the better a government can cope by battling inflation and stabilizing prices and smoothing out currency fluctuations, both of which if left unchecked can sink economies.

We might have to go back ten years or more to find a time when our reserves were less than four months of the imported goods and services.

But for the man on the street he did not need official statistics to tell him something was badly wrong.

"When sugar became scarce for the first time in more than 20 years, alarm bells went off. Sugar scarcity is a throwback to a time an older generation would rather forget and an inconceivable occurrence for a younger generation. As a symbol of things gone bad, few things beat sugar shortages in this country...

It is safe to say that no one saw this coming, and for good reason.

A perfect storm is used to describe the coincidence of adverse events to make an already bad situation worse.

Regional drought and famine that stressed local food stocks, an election year, with its attendant fiscal loosening, a deepening Euro crisis, which caused a dollar appreciation, dampened demand in our traditional export markets, reduced foreign direct investment and remittances from Ugandans abroad, all conspired to create our perfect storm.

Uganda’s predominantly subsistence agriculture sector has failed to respond adequately to growing regional demand. This was made worse by failed harvests in the Kenyan rift valley due to drought in the early part of the year. This was important because not only did we start feeding western Kenya but food demand, which was previously covered by our eastern neighbor, from Southern Sudan shifted to Uganda.

When food prices, which constitute the biggest single component of how we calculate inflation, rise general prices follow suit.

According to official statistics the food price increases peaked in March before beginning to slide starting in May.

The presidential and parliamentary campaigns not only served to cause more money to come into circulation but also caused some uncertainty, which held back inflows as investors adopted a-wait-and-see attitude – a now traditional occurrence ahead of the last three elections.

Diminished hard currency inflows put the shilling under pressure forcing import costs higher, most especially for fuel. Fuel prices are an important component of all product prices on our shelves or services we consume.

In a related incident the Euro crisis seemed to come to a climax this year with real fears that the Eurozone was likely to break up and the short lived Euro currency in its final days.

The crisis which has its roots in the global financial crisis that kicked off in 2008 saw the weaker European states – Portugal, Ireland, Greece, Spain and more recently Italy straining the Eurozone’s resolve to remain afloat. Massive bailouts of Greece, Portugal and Italy have cause uncertainty which has served to further strengthen the dollar.

It has been reported that as a result of our remittances have never recovered to the pre-global financial crisis $1b as our relatives in the diaspora tighten their belts in anticipation of tougher times.

All this also fed into our power situation with government being forced to make the choice between the discomfort of loadshedding or paying out billions of shillings to subsidise the expensive thermal power generators. The lifesaving hydroelectric power expected from the Bujagali power dam missed deadline after deadline and is now expected to come on line by the end of April next year.

But finance officials believe we have got over the worst part and barring any other shocks inflation should return to single digits next year, while the exchange rates have already begun to slide following determined and consistent action from the central bank all year long.

As we wind up the year there is evidence that export earnings are picking up, with export figures for September up more than 50% from the same month last year.

"The main lesson from 2011 seems to be that we need to shore up out food production. The reality is that as the East African Community takes hold and the continued free moment of goods and services gets entrenched we will not be producing for our own consumption any more. This will require a reorientation of our farming methods and a determined push into agro-industry...

With the Eurozone crisis far from resolved, the ever unpredictable weather patterns it would be full hardy to make any predictions going into 2012.

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