There is a common story around town lately, everyone is talking about the economy. Everyone says “I will do this or that” but city dwellers always say “enkonome”. The truth is, these are indeed bad economic times! However, these stories should be backed by an understanding of what the economy is facing . In my previous article, I mentioned that Uganda’s $52.7 trillion budget for the 2023/24 fiscal year is determined by a huge debt burden and an anti-gay bill. Among the many factors that contribute to economic hardship, inflation plays an important role Role.
Inflation is simply a general increase in the prices of goods and services over time, resulting in a decrease in the purchasing power of money. When demand for goods and services exceeds supply, their prices rise. There are many reasons that affect the inflation rate, including increases in consumer spending, rising production costs, and changes in the money supply. Economists often measure inflation using indices such as the Consumer Price Index (CPI), which tracks the price of a basket of commonly used goods and services.
Our beautiful Uganda has experienced its fair share of economic challenges, including high rates of inflation. It has struggled with hyperinflation, especially in the late 20th century, but in recent years it has stabilized the economy to some extent. In September 2021, Uganda’s inflation rate has fluctuated between 2% and 7% over the years. This is a significant improvement compared to the double-digit inflation rates of the past. However, inflation remains a concern and continues to pose challenges for national businesses.
Low and predictable inflation is one of the conditions that every economy seeks to establish in order to foster a macroeconomic framework conducive to economic growth. Other conditions include the balance of payments, a competitive exchange rate, a strong and stable fiscal policy, etc. Uganda, along with other sub-Saharan African countries, implemented a Structural Adjustment Program (SAP) to restore macroeconomic stability to eliminate the hyperinflation that affected it decades ago.
Uganda’s troubled country’s current inflation problems are largely affected by shortages caused by the Covid-19 pandemic and the Russia-Ukraine war. The war has severely exacerbated inflationary pressures that have built up in the euro zone during its post-pandemic recovery, pushing up consumer prices, especially energy, and causing disruptions in global supply chains. As a result, prices for basic commodities such as fuel and food have increased globally. For example, Russia and Ukraine account for almost a third of global wheat exports. The war caused food shortages and skyrocketed food prices, exacerbating food insecurity. Those most affected will be poor countries already grappling with other problems such as climate change.
The impact has caused the dollar to rise against other currencies, especially after the Federal Reserve raised its benchmark interest rate. That means higher debt-servicing costs for poor countries such as Uganda, which have relied on dollar-denominated loans to fund activities, particularly capital-intensive activities such as building roads and other transport networks. Therefore, as inflation continues to increase and fiscal space continues to shrink due to other macroeconomic factors, it is important that citizens understand what inflation is and its impact on individuals and businesses.
The effects of inflation include: –
- Decreased purchasing power – When inflation is high, consumers’ purchasing power decreases. They can only buy fewer goods and services with the same money. As a result, the company’s sales decrease and profits fall.
- Increased costs- Companies face rising costs for raw materials, labor and energy, resulting in lower profit margins or the need to raise prices, further affecting consumer purchasing power due to increased production costs.
- Decline in international competitiveness – As inflation rises and the domestic currency depreciates, exports become more expensive, making local products less competitive abroad.
- High uncertainty and low investment levels – The business environment has become uncertain due to high inflation. In uncertain times like these, prudent investors will think twice and invest hard. As the future value of money becomes uncertain, businesses may be hesitant to make long-term investments, such as expanding operations or purchasing new equipment. This indecision can stifle economic growth.
- financial instability – High inflation leads to financial instability in the banking sector as interest rates rise to combat inflation. Access to credit and capital to grow has become expensive for businesses and individuals.
- Wages and prices spiral upward—— High inflation leads to wage pressure as workers, regardless of arrangement, demand higher wages to keep up with the rising cost of living. In turn, businesses raise prices, perpetuating the inflationary cycle.
In times of economic hardship, the government’s role is to regulate and curb inflationary trends as a macroeconomic tool to mitigate the adverse effects of high inflation. This is usually done by: –
monetary policy implementation Central banks are implementing tighter monetary policies, including raising interest rates, to control inflation.
Fiscal policy The government adopts responsible fiscal policies, such as reducing budget deficits and limiting unnecessary public spending, to stabilize prices.
Exchange rate policy management This helps maintain price stability in a globalized economy.
Companies are also adopting strategies such as indexing contracts to inflation, diversifying revenue streams and managing costs effectively.
Erratic inflation rates are a key catalyst for eroding liquid assets in the economy as their value continues to decline over a short period of time. In times like these, people have to think twice before making a certain investment. Carry out all necessary feasibility studies on your business idea before being affected, otherwise investments in land and buildings may not be affected by this erosion of value.
The author is a certified public accountant and tax advisor
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