Monday, October 12, 2015


Inflation seems to be rearing its ugly head again, coming at 7.2 percent in September the highest its been in more than two years. Business Vision’s Paul Busharizi sat down with Bank of Uganda director for research Adam Mugume to talk about the disturbing trend. Below are some excerpts from the interview.

Q.How would you assess this year’s attempts to bring inflation under control?
A. When we started tightening monetary policy in April everybody thought including IMF they thought we were crazy. Inflation was two percent very many people including Ministry of Finance were really not happy with BOU, because they were saying how do you start monetary policy when inflation is two percent? But we insisted we said our forecasts indicate inflation was going to rise.
By then exchange rate was not as volatile as we saw in the last three months. What was driving up forecasts by then was the outlook on the shilling. Because five to six months ago we knew the shilling would fall because we were looking at trade balance, we were looking at the possibility of US tightening monetary policy, but the biggest challenge was the Balance of Payments outlook which was really negative. We said exchange rate would depreciate, after depreciation we would have inflation and any slight food price increase would lead to a big increase in inflation that’s when we started tightening. Our forecasts have been impressive and our pre-emptive action has worked.
By the time we started in the monetary policy meeting we said if we didn’t tighten inflation by December would be 15 percent.

Q. What particular aspects of Balance of Payments were hurt?
A. All inflows were impacted. FDI, workers remittances, exports, tourism were declining. Imports were continued increasing apart from oil that have been declining but the others were still rising. Private sector imports except oil were rising. Imports were rising at 5 percent on a quarter to quarter basis. We knew the exchange rate was going to decline.
We know normally this months of September to November seasonally we normally we have high food prices because this is the planting season. We start harvesting in December and if rains are good we have a bumper harvest in January and February. Our worry is we are projecting a problem if the weather patterns are bad, El Nino affect food crops and the good harvest in January doesn’t come and then we have a spike in food prices that is where we will have a bit of uncertainty. If that happens then what we project inflation coming down will not happen and will call for more tightening.

Q.  SO why not wait for inflation to rear its head and then act? You might make a mistake in premeption?
A. You can’t allow inflation to spike. Once inflation sets in it will take you 12 months to bring it down. If you delay in handling it, it will take you 12 months to bring it down. That is why you have to start much earlier because monetary policy must be pre-emptive if you wait until the thing has come you are wasting your time.

Q. The talk is that its campaign money drivng up inflation?
A. We haven’t seen it. People who say there is a lot of money in this elections we haven’t seen it because even commercial banks are crying they are saying they have no money. If it is money with one or two individuals it can’t cause inflation. But commercial banks are telling you they don’t have money. Because we have been tightening, the source of currency is BOU and also finance has been tightening. Flows from government have been very tight that’s why you see banks are borrowing form the central bank, rediscounting treasury bills so you see a lot of tightness in credit.

Q. So in fighting inflation you are reducing growth?
A. You have a trade off. That is why we did it gradually so that the impact in private sector is not so sharp. In 2012 when we increased the policy rates so sharply in a short period its impact on activity was so dramatic that you move from a growth of 9.7 to 3.2 percent within a year’s time. We did not want a repeat.  We wanted a gradual process so activity slows down but does not collapse. If we have a growth of 5.5 percent and we have inflation of between 7 and 8 its better than having inflation of 15 percent because it becomes very hard to manage.
Once inflation takes hold even the growth you are trying to stimulate will not take hold.
"Growth has been affected by about 0.5 percentage points. At the beginning of the year we had projected to have growth of 5.8 to 6 percent but now we think about 5.2 percent is more realistic...

Q. As a result the yields on government paper are shooting up, crowding out lending to the private sector?
A. treasury bonds and bills yields have risen sharply but a combination of many factors not all related to inflation are at play.
I think there are some economic agents, those who participate in the auction they believed the government was so desperate for cash given the budget, which was misunderstood to be sh24trillion then government would be forced to come to the markets. The participants in the market are not convinced that government is serious, they think government is still going to debate the budget so they would rather wait and see. They are more interested in 91-days, they think sometime down the road government may want more money and come to the market so interest in longer term bills is low
Government has to make it clear that they are not desperate to take this money. They have passed the budget, other than borrowing in the range of 25 percent you would rather suspend some of the activities, it doesn’t make sense to borrow as government. If government borrows at 25 % then the private sector will be borrowing at 35 percent which is not good.

Q. SO what are the economic growth prospects?
A. Public investment will stimulate the economy, but also private sector credit has not slowed down as of August, it had grown by 23 percent on an annual basis. But some would say there is some exchange rate impact since some loans are in hard currency but even if you look at the shilling loans they grew 15 percent which is healthy. Overall we have not seen a slowdown in activity that’s why we believe that private sector investment, those already on the ground will not necessarily cut down on investment, we will not necessarily get new FDI but the ones already  in the market will not necessarily slow down because of the monetary policy tightening, we believe private sector credit will remain strong, investment will remain strong, will decline a bit but not stop and then if weather conditions remain conducive then agriculture also should really continue to grow.

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