Tuesday, March 8, 2016

THE MACRO ECONOMY IS TICKING ALONG BUT ….

It’s very easy to lose sight of the facts with the current tense political environment. Thankfully presidential candidate Amama Mbabazi has petitioned the Supreme Court to annul the presidential elections so we can expect that by the end of that process clarity will reign and we can go back to being the benign society we are known to be.

Last week this column suggested that given the experience of the just concluded campaigns, which were dominated, by angry, unemployed youth, it doesn’t take a rocket scientist to work out that we need to focus on creating jobs.

For that to go beyond political rhetoric the government has to ensure a stable macroeconomic environment – low inflation and continued growth. This should go hand in hand with determined efforts to improve the business environment – reduce red tape, widen markets and improve the quality of human resource, to make Uganda attractive for investors.

It is heartening to know while the rest of us were running around like the sky was going to fall on our heads some people were keeping their eye on the ball.

Last month the Bank of Uganda released its monthly policy report, which outlines the state of and the actions the central bank to regulate money supply. If money supply grows out of control price increases will not be far behind.

The central bank reported that money supply growth was subdued as a result of a determined tightening of supply by the bank of Uganda that begun in February last year.

According to the report growth, M2, which includes money in circulation, cash deposits and near money instruments grew by 5.2 percent. While during a similar period just after the elections in 2011 the same measure was growing at 26 percent.

"What this means is that inflationary pressures are much more contained than they were during a similar period five years ago...

Of course we remember that as a result of the central bank’s delay on clamping down on growing money in circulation inflation hit 30 percent, a 19-year high, in October later that year.

The shilling too held steady in the run up to the election but it is expected to continue its decline as importers return to the market.

Of course BOU’s vigilance has its short term downside. In an attempt to wrestle down in inflationary pressures they have raised the  policy Central Bank Rate (CBR) to 17 percent from 11 percent a year ago which has had the knock on effect of raising bank lending rates and put a damper on credit to the private sector.

Lower private sector activity has registered in lower economic growth projections to five percent from the previous 5.8 percent.

In the near term this is painful but the alternative scenario of runaway inflation is too horrendous to contemplate.

The Bank of Uganda was harangued  last year for beginning to tighten money supply in February when inflation stood at about two percent, but indicators pointed to rising inflationary pressure especially as a result of anticipated depreciation of the shilling.

In hindsight they were obviously wise to take pre-emptive action to put a lid on growth in money supply at the time because they would have been scrambling like they did in 2011, now to mop up all the campaign cash sloshing around right now.

But that was a short term intervention, although the last 12 months have lasted longer than normal!
Bank of Uganda’s role is not unlike first aid to bridge the gap between the accident and when the real medical care comes along and as such is not a permanent solution to our woes.

By definition inflation is too much money chasing too little goods. The way to bring inflation under control is to either reduce the money in circulation or produce more goods, a combination of both often does the trick.

Bank of Uganda does not produce any goods. So that is why the government needs to focus on creating the environment – beyond macroeconomic stability, that allows for the creation of more goods. More investment in the productive sectors like agriculture and manufacturing is key because these two sectors have the potential to suck up all our unemployed.

"It’s safe to say that the central bank has got its mandate under control, but we probably can’t say the same for government....

To entice new investment government has to be committed to a stable macroeconomic environment, in addition they need to, reduce red tape around registration of businesses, land and other properties, ease the process of paying for licenses and tax, smoothen the flow of goods and services in and out of Uganda, all while improving the quality of the human resource available in the market.

In addition government needs to take a more determined stand on corruption. Corruption exacerbates the issues of unemployment for example, by concentrating resources in a few hands to the detriment of the majority.


It is self-defeating for the central bank to be doing its best while the rest of the government is not and threatening the gains we have made so far as a country and the future gains that should be made.

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