Mutebile Plays Down High Inflation In 2016

13 Dec 2014 13:46

Audio 2

The Bank of Uganda (BOU) Governor, Prof. Emmanuel Tumusiime-Mutebile, is playing down any re-occurrence of the 2011 spike in inflation and election spending. In November 2014, media reports quoted him admitting that he was misled by government during the 2011 electioneering period.

Since then, the Governor has been on a charm offensive in attempt to re-assure Ugandans that 30% inflation in 2011 will not suffice in 2016. In 2016, there will be another cycle of presidential, parliament and local government elections.

At a media briefing on Friday, Prof. Mutebile explained that election spending was coupled with increased prices for food, which contributed to a two decade high inflation of 30%.

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In 2011, food prices were up by 32.5%, the highest level in almost decade. Sugar prices, milk and food crops rose sharply as supply was constrained according to the Uganda Bureau of Statistics (UBOS).  Prof. Mutebile's reassurances come as the election period approaches and higher inflation tends to lead to a rise in interest rates by commercial banks, which slows borrowing by the private sector.

In 2011, as a result of higher inflation, interest rates on soured to as high as 35%. Borrowing slowed and loan defaults by businesses were on the rise. Notably, the traders in Kampala went on a week-long strike over the high interest rates in the same year.

Earlier this month, the BOU Governor sought to reassure bankers and business community that inflation this time will be manageable. In the Monetary Policy Statement issued on Friday, he took note that there will be increased spending in the next twelve months.

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But for some economists, the reassurance by Prof. Mutebile has been met with scepticism, especially because the independence of the Central Bank appears to be constrained.

“Because BoU has dejure independence but not the defacto operational independence, it may in long run dent the effectiveness of monetary policy. To avoid that, its operational independence needs to enhanced,” says Enock Twinoburyo a Phd Research Fellow from the University of South Africa.

The BOU independence is stipulated in the constitution. In excising independence the BOU has to determine the quantity of money and its price in the economy. In 2011, there was increased money in circulation and BOU was faulted for not being able to play its role in controlling the quantity.

“A central bank, which is not independent of political interference, would face pressure to pursue expansionary monetary policies which generate short-term gains in output at the expense of higher inflation in the future,” Prof Mutebile has himself admitted.