High food prices, power tariff push up inflation to 8.8 %

Foodstuffs on display at a stall in a market. Fruits, among other food crops, have registered increase in prices

Kampala. Reduced supply of food crops in the market coupled with high electricity tariff have pushed Uganda’s annual headline inflation rate to 8.8 per cent for the year ending October 2015 compared to 7.2 per cent recorded in September.

This is the highest inflation rate Uganda has recorded since September 2013 when the country’s annual headline inflation rate stood at 8.4 per cent.

The rise in the country’s inflation levels implies the general public is facing the problem of high food prices and high energy charges amid stagnated income.

Main drivers
On October 30, Uganda Bureau of Statistics (Ubos) said the main drivers of the annual headline inflation during this period were foodcrop inflation which rose to 20.2 per cent for the year ending October 2015 compared to 10.2 per cent increase recorded in September 2015.

Ubos explains that the other driver responsible for the inflation increase is the annual energy fuel and utility inflation that accelerated to 11.9 per cent for the year ending October compared to 3.8 per cent for the year ended September 2015, on account of the increase in electricity tariffs.

Last month, Electricity Regulatory Authority announced 17.4 per cent in electricity tariff retail end users, a development that impacted more on domestic consumers (households) than the large commercial users (the industrialists).

Domestic consumers are to pay nearly 20 perc ent more in the next three months. They will have to part with Shs667.4 per unit, up from Shs558.4. Commercial consumers see their rate jump to 18.9 per cent to Shs604.6. Medium industrial users will see their power costs rise by 17.4 percent to Shs577.1. Large industries - after some lobbying - see their rate rise by 15.9 per cent to Shs386.1.

Releasing the Consumer Price Index at Statistics House in Kampala last week, Ubos director macroeconomic statistics Chris N. Mukiza attributed the increase in foodcrop price in the market to reduced food supply because of the off harvest season.

“The general public will have to bear the brunt of the high prices because food is needed and is consumed by people every day,” he said.

Uganda is an agricultural country but it lacks food storage facilities meaning whatever is produced in a given period of time is consumed or wasted without taking precaution of the future in time off harvest season consequences.

Dr Mukiza said: “What needs to be done to solve the problem of low food supply during the off harvest is having storage facilities to store food during the time of harvesting season.”

BoU predicted rise
While announcing the Central Bank Rate for October, Bank of Uganda predicted an increase in inflation. In the next six months, the Central Bank projected that inflation will rise in the range of 8 to 10 per cent.
BoU projected El Nino rains would result in higher food crop prices leading to heightened inflationary pressure.

“External sources of inflation are likely to stay generally benign, given weak global conditions. On the domestic front, the exchange rate depreciation experienced over the last 12 months is yet to feed through completely to prices and will therefore continue to put upward pressure on inflation,” BoU governor Tumusiime Mutebile said.

Core inflation declines
While the annual headline has increased, annual core inflation for the year ending October 2015 declined to 6.3 per cent compared to the 6.7 per cent recorded in September 2015.

Dr Mukiza said the decline in the annual core inflation could be attributed to tight monetary policy in place by the Bank of Uganda (BoU).

BoU last month hiked the Central Bank Rate to 17 per cent from 16 per cent citing inflationary pressure and exchange rate depreciation.

BoU said it is better to have tight monetary policy than high inflation because of its impact on the public and economy . “To ensure that the medium term inflation converges towards the BoU’s policy target of 5 per cent, a further monetary policy tightening is warranted,” governor Tumusiime Mutebile said.

Other factors
Affected foodstuffs. The food crops that registered increased prices during the month are: Matooke, Irish potatoes, fruits, pineapples, mangoes, onions, tomatoes green pepper, beans, maize flour, and sugar in most centres.

Uganda’s rising population. In an interview with Daily Monitor, senior research fellow at Economic Policy Research Centre Swaibu Mbowa (pictured above) said Uganda’s population growth is one of the highest in the world.

This means that the size of the arable land for food crop growing is being eroded by the increasing population size thus reducing the size of the farm land where food is grown.

“Population growth in Uganda is 3.4 per cent per annum and agriculture growth rate on annual basis is 2 per cent, while food crop growth is either 1 per cent or -1 per cent. This is problematic; the population figures are catching up with us because there is need for more food which is instead reducing,” he said.

Dr Mbowa said there is need to increase food production in the country through land intensification, something which is currently not there. “The rain has just started and the farmers are just beginning to plant food crops, some of the households have already consumed all the food they produced in the previous season,” he said.

Depreciating Shilling. Dr Mbowa further blamed the inflation increase on the depreciation of the Shilling which is making cost of imported goods to go high.

Predicted growth. Uganda’s economy is being projected that it will grow by 5 per cent this fiscal year but the current inflation rate is above it.

Speaking about the economy, Dr Mbowa said: “Uganda is an economy which is dependent on imports because the productivity in the economy is still very low which contributes to slower growth; with the dollarisation of some items, it will be tough for us because we shall continue experiencing the depreciation of the Shilling against the US dollar.”

High cost of production. According to the Producer Price Index statistics released last month, imported raw materials and rising interest rates had pushed up the cost of production. The Uganda Bureau of Statistics figures show that prices of manufactured goods rose by 10.5 per cent in August 2015, up from 8.1 per cent in July 2015.

A weaker Shilling, which makes the import of raw materials more expensive remains on the largest contributors to rising costs of production.