There is a common tale around town of late where everyone is talking about economy. Everyone says “I would have done this or this but “enkonome” as it is always spoken by the city dwellers. Well, the truth is, these are surely bad economic times! These tales however should be backed up with knowledge of what is faced in the economy. In my previous articles, I mentioned that Uganda’s FY 2023/24 USh 52.7 Trillion budget was shaped by the huge debt burden and the anti-homosexuality bill. Among the so many factors that make the economy difficult, inflation plays a significant role.
Inflation simply means the general increase in prices of goods and services over time, resulting in a decrease in the purchasing power of a currency. When the demand for goods and services exceeds their supply, there is a rise in their prices. So many reasons that strike inflation rates including increased consumer spending, rising production costs, and changes in the money supply. Economists often measure inflation using indices like the Consumer Price Index (CPI), which tracks the prices of a basket of commonly purchased goods and services.
Our beautiful Uganda has experienced its fair share of economic challenges, including high inflation rates. It has grappled with hyperinflation, particularly in the late 20th century, but in recent years, it has managed to stabilize its economy to some extent. In September 2021, Uganda’s inflation rate fluctuated between 2% and 7% in the preceding years. This has been a notable improvement from the double-digit inflation rates of the past. However, inflation remains a concern and still poses challenges to the nation’s businesses.
Low and predictable inflation is one of the conditions that every economy seeks to establish so as to foster a macro-economic framework conducive to economic growth. Other conditions include the balance of payment, a competitive exchange rate, a strong yet stable fiscal policy among others. Uganda among other sub-Saharan African countries implemented Structural Adjustment Programs (SAPs), restored macroeconomic stability to move away hyperinflation that was affecting it decades ago.
The current inflation problems in struggling countries where Uganda falls has been greatly influenced by the Covid-19 pandemic induced shortages and the Russia-Ukraine war. The war added heavily to the inflationary pressures building up in the euro area during the post-pandemic recovery and pushed up consumer prices, especially for energy and has messed up the global supply chain disruptions. As a result, the prices of essential commodities such as fuel and food have increased globally. For instance, both Russia and Ukraine account for almost one-third of global wheat exports. The war has caused shortages that have increased food insecurity due to the soaring food prices. Most affected are poor countries that are already grappling with other issues such as climate change.
Its impact has seen the dollar gaining against other currencies, especially after the hike in the Fed benchmark rate. This means more debt servicing costs for poor countries like Uganda which have in the past relied on dollar-denominated loans to finance activities, especially capital-intensive ones such as building roads and other transport networks. And therefore, as inflation continues to bite and fiscal space continues to shrink as a result of other macroeconomic factors, it is important for citizens to know what inflation is, its effects on them personally and as businesses.
The effects of Inflation include among others; –
- Reduced Purchasing Power – Consumers purchasing power decreases when inflation is high. They can only be able to buy fewer goods and services with the same amount of money. Businesses therefore experience reduced sales and lower profits.
- Increased Costs – Businesses face higher expenses for raw materials, labor, and energy, which leads to reduced profit margins or the need to increase prices, further impacting consumer purchasing power because of the increased cost of production.
- Reduced International Competitiveness – As Inflation increases, the domestic currency loses value, exporting becomes more expensive, making local products less competitive abroad.
- High levels of uncertainty and low levels of Investment – With high inflation rates, the business environment becomes uncertain. A prudent investor would think twice and hard to invest in such uncertain times. Businesses may be hesitant to make long-term investments, such as expanding operations or purchasing new equipment, as the future value of money becomes uncertain. This hesitancy stifles economic growth.
- Financial Instability – High inflation rates cause financial instability in the banking sector, as interest rates rise to combat inflation. It becomes expensive for businesses and individuals to access credit and capital for growth.
- Wage-Price Spiral – High inflation rates cause wage pressures as workers in whatever arrangements demand higher salaries to keep up with rising living costs. In turn, businesses increase their prices, perpetuating a cycle of inflation.
In such hard-economic times, it is the role of the government to regulate and curb down inflationary tendencies as a macroeconomic tool to mitigate the adverse effects of high inflation. This is normally done through; –
Monetary Policy implementation where the Central bank implement tighter monetary policies, including raising interest rates, to control inflation.
Fiscal Policy where the government adopts responsible fiscal policies, such as reducing budget deficits and curbing unnecessary public spending, to stabilize prices.
Exchange Rate Policies management which helps in maintaining price stability in a globalized economy.
Businesses also adopt strategies such as indexing contracts to inflation, diversifying revenue streams, and managing costs efficiently.
The unstable inflation rates is a key catalyst in eroding away liquid assets in an economy as their value keeps on going down in a short period of time. In such times, one has to think twice about a certain investment. Do all the necessary feasibility of the business idea you have before being affected otherwise investments in Land and buildings may be the ones that may not be affected by this erosion in value.
The writer is a Certified Chartered Accountant and Tax advisor
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