On July 5, Uganda’s Monetary Policy Committee convened an unscheduled sitting at the end of which it moved its indicative price, the Central Bank Rate, by 100 basis points to the right. The sitting came on the back of a rapid increase in inflation which, according to some, was 50 percent off the 5 percent ceiling.
Uganda is not alone in this frying pan. Inflation has become a hydra-headed monster in East Africa, with everything except economic growth going up. After toying with subsidies for a while, Tanzania finally relented, allowing fuel prices to go up this week. In Kenya, inflation is officially at 7.9 percent.
This has thrown the market into speculative mode as everybody tries to hedge against a possible escalation in the near future. In the liberalised regional economic landscape, the result has been that the price of everything, from the exchange rate, food, fuel, to credit, are simply going into a spiral every passing day.
The resulting pain is especially unbearable because of the Covid-19 pandemic’s lingering effects: the supply side has not fully recovered and many breadwinners are still out of employment.
Tighter monetary policy, the recommended recipe, has been applied but the pain will continue, because it will be a while before the policy benefits set in.
Also, the gestation period will run longer because of the sheer number of people living outside the cash economy; and the political imperative.
Political patronage is creating leakages in some parts of the region, undermining policy. An impending election in Kenya militates against frugality. The uncertainty around security of tenure is also a likely distraction for bureaucrats preoccupied with personal survival.
All this should perhaps not be surprising. Financial analysts predicted this chaos right from the onset of the Ukraine crisis and the anti-Russia sanctions that followed. Emerging markets are particularly exposed because many countries have a disproportionately high food and fuel import bill. The spike in international prices for crude and globally traded food items such as wheat and rice means that a significant portion of the inflation in emerging markets is actually imported.
The more insidious effects of the current state of affairs are twofold. Global uncertainty often triggers a retreat by offshore investors to their home markets. Raising of rates by the FED and the European Central Bank offers reasonable returns at minimal risk. This weakens national currencies against the greenback and creates significant volatility. And the FED has already indicated that they are willing to raise the rate by another 75 basis points this month.
Meanwhile, tighter monetary in domestic markets makes credit expensive, firms pull the brakes on expansion, and economic growth takes a hit. With thin reserves and a slump in export markets, smoothening the rough edges of foreign exchange volatility will deplete resources. It will not be long before already overleveraged economies troop to the World Bank for yet more credit to support budgets.