Experts explain Uganda’s inflation as country’s financial sector is ranked first in East Africa

Uganda should avoid making the same error as the United Kingdom which made economic decisions based on populist politics, experts have warned. The UK government under recently-elected Prime Minister Liz Truss faced a historic downturn just weeks after her election in September. Last Friday, Truss fired her Treasury Secretary Kwasi Kwarteng after the economic package the two unveiled on September 23 spooked financial markets and triggered an economic and political crisis, PBS News Website reports.

The two unveiled the plan which had 45 billion pounds ($50 billion) in unfunded tax cuts, but this shortly after sparked turmoil on financial markets, hammering the value of the pound and increasing the cost of U.K. government borrowing according to PBS, which further reports that the Bank of England was forced to intervene to prevent the crisis from spreading to the wider economy and putting pension funds at risk.

On Monday Kwarteng’s replacement, Treasury chief Jeremy Hunt, scrapped almost all of Truss’ tax cuts, along with her flagship energy policy and her promise of no public spending cuts. He said the government will need to save billions of pounds and there are “many difficult decisions” to be made before he sets out a medium-term fiscal plan on October 31.

Truss apologized Wednesday and admitted she had made mistakes during her six weeks in office but insisted that by changing course she had “taken responsibility and made the right decisions in the interest of the country’s economic stability.” This was not good enough for her critics and she was forced to end her chaotic premiership after only 45 days.

Ugandan Economics Professor Augustus Nuwagaba, makes a comparative analysis of the local economy stating that the current inflation the country is a global phenomenon. “It is largely imported inflation caused by three factors; disruption in supply chains of oil products, leading to rise in prices of fuel (petrol, diesel )and gas; the Russian-Ukraine conflict unleashed on February 24 2022 and still raging on and climate change results in drought and crop failure, which have driven headline inflation,” Prof Nuwagaba states, adding that the three factors have led to soaring prices of goods and services in Uganda.

Nuwagaba, a lecturer at Makerere University, a researcher, social commentator and an international consultant on economic transformation, weighs in on arguments that government should provide subsidies, particularly to oil products, saying while this approach sounds popular, it is not good economic management. “It may sound popular, but this is not the time for courting populism,” Nuwagaba asserts.

He makes a comparison to the UK which he says “made the greatest mistake of mixing politics in fiscal metrics and the results have been catastrophic. Simultaneously with huge tax cuts, in a situation of high inflationary pressures, bordering on a recession,” Nuwagaba explains. He warns fellow economists to be careful and not politicise prudent economic management.

The economist’s remarks are in tandem with Uganda’s President Yoweri Museveni who has reiterated on several occasions that the government will not make the error of subsidising essential goods. On May 22, Mr Museveni outlined measures that his government was taking to address the rising commodity prices and ruled out cutting taxes or subsidising commodity prices. He argues that the country’s long-term achievements should not be overlapped by rush actions to curb what he called a temporary problem. Mr Museveni instead called on Ugandans to concentrate on increasing production of essential commodities and reduce spending on imports.

Meanwhile a recent study indicates that Uganda is running an economy with the most developed financial sector in East Africa. According to the study this development is just one of many indicators depicting a major milestone in the country’s race towards becoming a regional financial hub, with an eye to increased inflow of foreign direct investments.

The study by the Official Monetary and Financial Institutions Forum (OMFIF) and Absa Bank resulted in the sixth edition of the Absa Africa Financial Markets Index (2022) report entitled “Harnessing the Power of African Opportunity”.

It shows that Uganda has made significant improvement in five key areas compared to Kenya, Tanzania, Rwanda and the DR Congo. These include access to foreign exchange market, transparency in taxation and regulatory regime, capacity of local investors, state of the macroeconomic environment and transparency in the enforcement of legal contracts.

According to the report released last week, Uganda beat its regional peers, Kenya, Tanzania, Rwanda and the DRC, respectively on market accessibility, openness and transparency.

Among the measures outlined by the report that Uganda has taken to achieve this is the Bank of Uganda’s ability to manage volatility from foreign capital flows by considering the adequacy of forex reserves.

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