Low inflation alone won’t develop Uganda’s economy

In 1987, NRM government launched a stabilization and structural adjustment program (SAP). The first three years under the stabilization component were devoted largely to cleaning up the house through reducing inflation from triple to single digits, achieving a realistic exchange rate and balanced budget and promoting exports. This was a period of belt-tightening which reduced budget allocations to social sectors of health and education as well as agriculture. After these goals had been reached within a short period, the government was expected to relax belt-tightening and begin the process of development and economic transformation and distribution of growth benefits including increased government revenue to increase funding for social sectors and agriculture. Inflation control as well as monetary and fiscal policies would be relaxed as well. But they have remained a priority area since then, limiting economic growth and job creation prospects.

In the budget speech on June 14, 2012 the minister of finance stated that “Tackling inflation remains government’s overriding macroeconomic objective in order to protect macroeconomic stability”. Therefore a tight monetary and fiscal policy will remain in place as well. This policy poses problems for economic growth and job creation. In the financial year 2011/12 characterized by tight fiscal and monetary policy, economic growth of 3.2 percent was the lowest since NRM came to power and for the first time less that the population growth of 3.5 percent. Although inflation was reduced significantly, economic growth slowed tremendously and poverty rose to the tune of 81 percent.

To keep inflation low, the amount of money in circulation is reduced through high interest rates. Interest rates have been consistently high in Uganda (and the government has recognized their harmful effect) and have discouraged borrowing mainly by small and medium scale enterprises. These enterprises promote economic growth and create more jobs for young and unskilled workers (as we have in Uganda) than large scale enterprises which tend to be capital intensive. Uganda’s realistic exchange rate has favored exports and discouraged imports including of intermediate goods for manufacturing enterprises. As an aside, earning more hard currency through increased and diversified exports was expected to facilitate purchase of technology to speed up economic growth and productivity as tractors would replace hand hoes, for example.

In the end, a combination of high interest rates and expensive imports has dealt a heavy blow to private sector development, economic growth and government revenue. Consequently, reduced investments in physical and social infrastructure and agriculture have undermined education and skills development, healthy and well fed population for an active and productive life. Hence, Uganda has a low human capital formation.

Macroeconomic stability was designed to attract foreign direct investments (FDI) that would drive Uganda’s rapid economic growth and job creation under the guidance of an invisible hand of market forces, keeping state intervention in the economy minimal. But FDI has fallen far short of expectation because of serious domestic deficits such as energy, infrastructure, skilled human power and limited domestic markets because of mass poverty that limits total demand for goods and services.

Economic growth and development is a complex multi-dimensional process. It requires a combination of leadership, peace, macroeconomic stability, favorable global environment and human capital (well educated and skilled, healthy and well fed people). In Uganda structural adjustment did not work as expected. Economic transformation through forward and backward linkages did not occur. As a result the sectors of education, health care and food security have remained insufficiently funded. Uganda’s population is thus poorly educated and mostly functionally illiterate, in poor health and short life expectancy and hungry, thanks to shock therapy structural adjustment program since 1987.

Studies such as those conducted in Asia show that countries like South Korea that invested heavily in education and skills, health and nutrition have performed better economically than those that didn’t. Tight monetary and fiscal policy in Uganda since 1987 to keep inflation at 5 percent has undermined prospects for human capital formation and in turn economic growth and job creation. However, some studies have shown that a moderate rate of inflation in double digits does not necessarily damage growth. In this regard, W. K. Tabb (2002) observed that “The IMF [which has had a significant influence in Uganda] is still obsessed with inflation control, even though there is little evidence to indicate that moderate rates of inflation, below, say 20 percent, damage growth in poor countries, rather than encourage it, as many think”.

In conditions of hard economic times as Uganda is experiencing when the private sector is cautious about investments what is needed is increased public spending in such areas as infrastructure and environmental regeneration to create jobs, stimulate demand and growth and get the country out of recession, not to maintain austerity measures through tight monetary and fiscal policy as NRM has continued to do with disappointing outcomes as 3.2 percent growth rate and poverty rising to 81 percent.

Uganda government needs to engage in an economic policy that balances concerns for macroeconomic stability, economic growth, job creation and poverty reduction as contained in UDU’s National Recovery Plan. Inflation control at the expense of employment as has happened in Uganda isn’t a good policy and should be recast without further delay.

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