When the Uganda Bureau of Statistics (UBOS) released its October Consumer Price Index (CPI), food prices were projected to become the single biggest concern in the country as prices continue rising.
Despite annual core inflation falling to 6.3% for the year ending Oct. 2015 from 6.7% for the year ended September 2015, annual headline inflation for the year ended October 2015 has kept an upward trend topping 8.8% from 7.2% recorded in a month earlier.
UBOS officials blamed poor harvests, the impact of the el Nino rains and the high power tariffs that were recently increased for contributing to the continued rise in food prices.
Chris Mukiza, the director for macro economic statistics, while releasing the CPI report, said that since August 2015 inflation has been increasing and price levels have also been going up.
Industry analysts now say that with the shilling appreciating against the dollar, the situation may not get any better.
Fred Muhumuza, a research analyst at the Financial Sector Deepening, said food inflation will continue due to the previous drought that compromised the harvest of last season and now the e Nino rains that could certainly affect the supply of food until the second quarter of next year. "So we will continue to see uphill inflation pressures from food more so in January/Feb when schools buy to stock," he said.
Over the last the last two weeks, the local currency has rebounded and by close of trading week ending Nov. 6, the shilling was trading at Shs 3,380/3,480 down from Shs 3,640/3,670. On commencement of the trading week on Nov.9, KCB Bank quoted the shilling trading at Shs 3,255/3,465 a further appreciation from Nov.6
The appreciation comes barely a fortnight after Central bank Governor Tumusiime-Mutebile raised the Central Bank Rate for November from 16% to 17%. While industry observers warned about the CBR rising and how it would affect the private sector, the shilling appreciation may not make ripples though the Central bank has not come out yet to explain the cause of the new found strength for the shilling.
Financial analysts however told The Independent that a couple of issues are at play.
Alpha Capital Partners Managing Partner Stephen Kaboyo attributed it to significant portfolio flows targeting the government bond market. He said the shilling broke through the Shs 3,500 support level and this prompted market players to cut their long dollar positions, which increased dollar supply and hence the appreciation. "This bullish trend is likely to continue as supply outstrips the demand in the market," he said.
"On the inflation, what we see transmitting through are the lag effects and this is what we saw last month as inflation jumped to 8.8%. It is likely that when all is said and done, we will see double digit inflation. If the appreciation is sustained, of course it will have an effect on inflation in the coming months as adjustment takes a while."
Muhumuza cited the coffee season that starts in October to January/February as a contributing factor in addition to remittances from Ugandans abroad (kyeyo dollars) ahead of the festive season. Also, the corporate entities that remit end of year profits are yet to do so as they are compiling final accounts. "It's also possible that we also might have received foreign money intended to be injected into the ongoing electoral campaigns," he added.
However, Bank of Uganda suggested to The Independent that the foreign exchange market is only responding to their intervention in the market. Christine Alupo, the director for Communications, said the shilling was depreciating in August, and when the Bank intervened towards the end of August it stabilized. That stability continued up until late October when the Central Bank Rate was increased. "Given that the outlook of the currency had improved by the time of the CBR increase (it had not depreciated further), the rate hike attracted some offshore players into the market. This stability in the forex market, coupled with high yields in the government securities market have helped the Shilling strengthen against the dollar," she said.
She added that the indirect impact of monetary tightening on the exchange rate is that reducing the amount of liquidity in the system helps to support the Shilling against the dollar. "In the process, it should over time dampen inflationary pressures arising from exchange rate depreciation," she said.
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