New approaches needed to boost Uganda growth –CSBAG
KAMPALA,APRIL 7- Ugandan policy makers need to pay more attention to the agricultural sector and encourage consumption if the economy is to achieve its full growth potential, argues the Civil Society Budget Advocacy Group CSBAG.
As the country puts final touches to spending plans for the next financial year, the group says the current tools being used to control inflation were having unwanted consequences that have trapped the economy in the low growth bands for the past five financial years.
Presenting a position paper to members of the Finance Committee of parliament this morning, CSBAG pointed out that annual GDP growth has been in retreat since the 9.8percent peak recorded in fiscal 2010/11 with subsequent years failing to achieve growth targets. Quarterly growth remained weak into the first six months of the current financial year, trending 0.5 percentage points. This continued a slanting trend from the last quarter of fiscal 2014/15 when the economy grew at a paltry 0.8 percent.
CSBAG partly blames the tight monetary policy stance adopted by the Bank of Uganda that while successful in controlling inflation has stifled access to credit by the private sector as lending rates shot through the roof and dampened household consumption.
According to CSBAG, while the central banker has exclusively relied on monetary policy to target inflation, it is necessary to understand the key drivers before the most appropriate tools can be applied to control.
“The slump in quarter one was premised on poor performance of industry which fell by 4.9 percent and administrative support services which were down -23.6 percent. With the tight monetary policy stance, the forecast for improved growth remain dampened,” CSBAG says in its brief.
It recommends increased funding to the Agricultural Credit Facility to promote inclusive growth and easing of the CBR further to stimulate uptake of credit by the private sector and increased household and investment.
Faulting the BoU’s focus on inflation targeting, CSBAG observes that at 27percent, food crops contribute most to headline inflation and therefore actions that keep food inflation low could negate the need for a high CBR. For instance headline inflation has been on a downward trend since December 2015 in tandem with falling food crop inflation.
CSBAG points out that another folly of controlling inflation through monetary policy lies in the fact that even when inflation comes down; prices in Uganda tend to remain high. This is because inflation in Uganda is mainly driven by food crop prices and exchange rate depreciation whose effects are transmitted through the high price of energy and utilities to the real sector.
The group suggests that this can partly be offset by the government introducing mechanisms to counter the predatory pricing of essential goods and services.