On July 5, Uganda’s Monetary Policy Committee called an unscheduled meeting, at the end of which it raised its indicative price, the central bank’s policy rate, by 100 basis points to the right. The meeting took place against the backdrop of a rapid rise in inflation, which some said was 50 per cent below the 5 per cent ceiling.
Uganda is not alone in this frying pan. Inflation has become a hydra-headed monster in East Africa, with everything but economic growth rising. After toying with subsidies for a while, Tanzania finally gave in, allowing fuel prices to soar this week. Inflation in Kenya is officially 7.9 percent.
This has put the market into speculation mode as everyone looks to hedge against a possible escalation in the near future. In the liberalized regional economic landscape, the result is that the price of everything from the exchange rate to food to fuel to credit spirals every day.
The resulting pain is particularly unbearable because of its enduring nature Impact of the Covid-19 pandemic: The supply side has not fully recovered and many breadwinners are still unemployed.
Tighter monetary policy, the recommended prescription, has been applied, but the pain will continue because it will take a while for insurance benefits to kick in.
Also, the gestation period will be longer due to the sheer number of people living outside of the cash economy; and the political imperative.
Political patronage leaks and undermines politics in some parts of the region. An upcoming election in Kenya speaks against frugality. The uncertainty surrounding the security of property is also a likely distraction for bureaucrats concerned with personal survival.
All of this should perhaps come as no surprise. Financial analysts predicted this chaos from the very beginning of the Ukraine crisis and the anti-Russia sanctions that followed. Emerging markets are particularly at risk, as many countries have disproportionately high food and fuel import bills. The rise in international prices for crude oil and globally traded foods such as wheat and rice means that a significant portion of inflation in emerging markets is actually imported.
The more insidious implications of the current situation are twofold. Global uncertainty often triggers offshore investors to retreat to their home markets. Rate hikes by the Fed and the European Central Bank offer decent returns with minimal risk. This weakens the national currencies against the greenback and leads to significant volatility. And the Fed has already indicated that it is poised to raise interest rates by another 75 basis points this month.
Meanwhile, tighter monetary policy in domestic markets is making borrowing more expensive, companies slowing expansion and economic growth taking a hit. With reserves thin and export markets slumping, smoothing out the rough edges of FX volatility will drain resources. It won’t be long before already heavily indebted economies are turning to the World Bank for more loans to support households.