Inflation steady at 13%

By Patrick Kagenda

So why is BoU celebrating?

Even if we might not bring inflation down, we will keep it steady and predictable. That is the message Bank of Uganda appears determined to send out as it struggles to anchor economic expectations amid fears of the global economic meltdown hitting the economy.

In its latest report, focus was swung away from the month-on-month core inflation rate which increased to 1.7% in January 2009 from 1.1% in December 2008 on the back of increasing petrol prices.

Instead the Central Bank statement led with the annual headline inflation rate which was more stable at 14.3% in January 2009 compared to 14.2% in December 2008. Equally downplayed was the monthly headline inflation, which increased to 1.1%, compared to 0.6% in December 2008.

The core inflation rate, which is the more reliable predictor of the inflation rate trend, is normally less volatile and the basis for most major investment decisions in an economy.

Ms Mary Katalikawe, the acting Director Research at Bank of Uganda, who presented the monthly economic and financial indicators report to the press last week emphasised that the Uganda economy is still resilient against any negative effects of the global economic crunch.

She said the banking system is very healthy with five months of foreign exchange reserves.

Managers of Uganda monetary policy, who had successfully targeted inflation within the 5 ” 6 % for over a decade, have been anxious to rein it in since it swung to an all time high of 15% in August last year. The official target is a 5% rate but the 14.3 % registered in January was due to higher food prices as a result of increased demand.

Uganda is short of food in its market due to high demand of the food stuffs in the regional markets especially South Sudan, Eastern Democratic Republic of Congo, and western Kenya.

In a related policy shift, Ms Katalikawe told the press, the Uganda Central Bank had last week halted the issuing of treasury bills which are supposed to suck out excess liquidity from circulation. It might be a reflection of a trend in which the deepening global recession is shifting attention to ensuring economic growth, rather than merely targeting inflation.

But Katalikawe said forex inflows were on the increase in the month of February and because of this the central bank has not intervened in the market to stabilise the exchange rate.

She however said the country experienced an impact in December driven by a trade deficit with remittances declining to $ 40 million. Uganda’s remittances which had in 2007 overtaken traditional exports totaled $785.88 million though figures for 2008 are not yet available.

Compared to Uganda, in Tanzania lower food prices have led to a drop in Tanzania’s annual inflation rate to 12.9 % in January from 13.5 % in December, according to the Tanzania National Bureau of Statistics (NBS) latest indicators.

In Kenya, the region’s biggest economy, the headline inflation rate was at 21.9 % in January down from 27.7% in December, helped by slowing fuel and power prices according to the Kenya National Bureau of Statistics.

While the inflation rate is expected to remain stable, the figures pose a problem for policymakers at a time the region’s economies are cutting growth forecasts for 2009 on fears a global slowdown will hurt commodity exports and tourism.