Monday, August 6, 2012


Last week the bureau of statistics announced that inflation had fallen to 14% the lowest it had been since April last year, declining inflation mainly due to falling food prices has been aided along by a tightening of money supply by the central bank over the last year.

 Inflation is too much money chasing too few goods, it therefore stands to reason to combat inflation  you can reduce the money in supply or increase production or a combination of both.

As the overseer of government’s monetary policy, the central bank put the brakes on growing money supply using a number of instruments at its disposal, one of which was the Central Bank Rate (CBR).

The CBR is a policy rate that indicates to the banks what the Bank of Uganda thinks about the level of inflation and serves as a benchmark against which they set their lending rates.

Since its inception in July last year the CBR rose to 21% from the initial 13% in reaction  to mounting inflation but has now fallen back to 17%. The lending rates followed suit, but have not been as fast coming down as when they were going up.

A lot of the increase in money supply came from a jump in bank lending in recent years. By following BOU’s lead and raising lending rates, credit application were halved between July last year and April this year before rising again in May according to the latest figures from BOU. Amounts lent did not mirror this plunge in approved applications but fell nevertheless to sh345b in April from sh460b in July 2011.

The way it looks inflation is on course to fall to single digits next year as the central bank had expected.

But dampening monetary expansion using monetary instruments as the BOU has so ably done for years is like treating malaria fever with panadol, the fever – the symptom, will subside but the malaria parasite – the cause, continues to ravage the body.

The main cause of inflation of the last year was our inability to boost production to meet a spike in regional food demand.

Planning for increased production is not a BOU function, that function lies with the ministry of finance and economic planning.

Our best bet for increasing the amount of goods that the too much money is chasing, is to  boost agriculture. The share of economic output for agriculture has fallen over the last two decades to about a fifth of total GDP. This is due to the explosion in services, construction and industry, which is not a bad thing and is actually a natural progression, but sadly it is also a function of how time has stood still in the agricultural sector.

As it is now Uganda’s major challenge is to shift a lot more land into commercial and away from subsistence production. To do this we have to regularize our land tenure system, enhance agricultural production processes, improve access to credit and invest more in agricultural research and development to attract investment into the sector.

Attracting meaningful investment into agriculture as it stands now is a hard sell.

We have to increase production to the point that industry can find it attractive to operate here, once industry sets up shop a market will be created and more farmers will jump into the fray. A virtuous cycle.

The land issue has to be sorted once and for all. Land has to be commoditised. As it is now the real value of our land is not valued because there really is no incentive to unlock it true potential. All land should be taxed for starters, this will compel our farmers to think more commercially forcing them to derive the maximum value from their land or sell it if they cannot. The political permutations surrounding this initiative would be have to be managed.

Currently loans to agriculture lag behind all other sectors including personal loans a situation that is an anomaly given that four in every five Ugandans derive a livelihood from the sector. The case for an agricultural bank with products tailored specifically to the sector, could not be stronger.

And last but not least a targeted education of our rural populations on how to unlock the value of the land they till. It sounds obvious but it is deceptively so and needs a tectonic mindshift to think commercially after generations of subsistence farming.

The state of the world is economy is such that we are going to have to look more to ourselves for a long time to come as the western donors scramble to salvage their own ravaged economies.

As day follows night expect more inflationary spikes in coming years if we continue to pussy foot around the issue of our inadequate food production.

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