Distortions of controlling inflation in Uganda’s economy

occurs when the price level goes up overtime and the inflation rate is the
percentage of change in the price level. One of the causes of inflation is an
increase in the amount of money in the economy without a corresponding increase
in the supply of goods and services. Instead of raising taxes which is
politically risky, many governments create and spend more money leading to
inflation and many economic and social problems. Changes in the rate of
inflation create uncertainty in the minds of companies, investors and
households. Price stability is therefore desirable because it enables people
make decisions based on anticipated inflation.

the Golden Age expansion after the Second World War, central banks by and large
supported governments’ efforts to keep the economy as close to full employment
as possible. The end of the Golden Age was followed by economic stagnation, high
inflation and unemployment (stagflation) in the mid-1970s which introduced
major changes in monetary policies. The neoliberal monetarists stressed the
importance of controlling inflation rather than maintaining full employment.
They argued that unemployment reflected laziness or the perverse impact of
labor market rigidities such as the minimum wage. Full employment as a
government policy was abandoned.

the inflation rate can, however, be very painful, in some cases involving
recessions, high unemployment and lost economic opportunity. The growth of the
money supply and spending were controlled by charging high interest rates and
balancing government budgets. The neoliberal central bankers believe that the
free-market economy is basically efficient and self-adjusting and should be
allowed to determine output, employment and productivity without state
intervention. Central banks have therefore been characterized as institutions
with a tunnel vision of controlling inflation while ignoring other goals such
as job creation.

the implementation of neoliberal economic policies progressed, the promised
boost to investment, growth and productivity by controlling inflation has not happened.
Thefore failure to stimulate stronger improvements in the economy and create
adequate jobs has led to the abandonment of the Washington Consensus upon which
the notion of inflation control through interest rates was based.

signing of an agreement between the government of Uganda and the International
Monetary Fund in 1987 signaled the beginning of a neo-liberal economy with a focus
on economic stabilization through fiscal, monetary and exchange rate policy. The
National Resistance Movement government came to power in the midst of a high level
of inflation at 161 percent in 1986. Therefore controlling inflation became a
top government priority after declaring that inflation was indiscipline. The ministries
of finance and planning and economic development were merged. The minister of
finance and governor of the central bank were replaced signaling radical changes
in economic policy.

a seminar organized for parliamentarians in December 1989, the then permanent
secretary for planning and economic development stressed the importance of
defeating inflation and balancing the budget. The seminar laid the foundation
for a ‘radical liberalization’ of the economy with economic growth and
employment left to the market forces and the private sector.

implementation of monetary and fiscal policies through high interest rates and
retrenchment of public employees helped to reduce the money in circulation and
brought down inflation which has been kept around 5 percent. Export
diversification and economic growth at an average of 6 percent annually have taken
place. According to one senior official, the costs of adjustment had been relatively
low and consumption remained robust with no major food insecurity and
malnutrition problem.

as time passed, the shortcomings of a neoliberal economy with a focus on
inflation control, export promotion and economic growth began to show. Investment
fell short of expectations in large part because small and medium enterprises
could not access adequate funds largely as a result of high interest; unemployment
increased, absolute poverty remained stubbornly above 30 percent, income
inequality widened, under-nutrition especially among children increased and
environmental degradation worsened.

of the chocking interest rates of between 20 and 28 percent charged by local
banks, suggestions have been offered that the Uganda business community should seek
cheaper loans abroad. Complaints from executive and legislative branches of
government in Uganda have also been expressed about the high level of the interest charged by banks.

the governor of the central bank has argued that the solution to high interest
rates lies in competition by allowing more players into the financial sector,
implying that there is no room for state intervention. The minister of finance
has also stated that inflation will continue to be targeted at 5 percent in the
2008/09 financial year, signaling that the high interest rate will be
maintained to reduce the quantity of money in the economy.

social and environmental deterioration as well as the economic growth rate
lower than the minimum for achieving the Millennium Development Goals by 2015 have
underscored the necessity of state intervention in strategic sectors of the
economy to correct the imperfections of the market forces and the private
sector that have distorted priorities in favor of controlling inflation and encouraging
export diversification at the expense of employment creation, institution
building, human capital formation, environmental conservation and the
realization of food security for every one.

recently concluded United Nations Conference on Trade and Development (UNCTAD)
meeting in Accra, Ghana has called for strategic state
intervention in collaboration with the private sector. Studies have also shown
that moderate rates of inflation, say up to 20 percent encourage rather than
discourage economic growth rates.

facto, the central bank and the
ministry of finance need to refocus their stand on low inflation and the
associated high interest rate. Line ministries also need to participate more
actively than is the case in setting national priorities, a responsibility that
is being discharged almost completely by the ministry of finance and the
central bank.