Stagflation is when a country experiences inflation, low demand and high unemployed rates. It’s a very delicate situation to handle. It’s sort of a depression but not a real one because there is too much money in circulation but majority of people cannot afford to purchase goods because they don’t have the money. There is lot of poverty amidst raising prices. Prices of goods in Uganda have been raising at a fast rate in recent months. They are not likely to stabilize soon going by the trends.
Change in price can be attributed to many factors. But an increase in prices of most goods in an economy is always due to a cascading effect. What triggers price increase is usually oil prices. True to this fact, we saw a price surge of oil prices in February this year when there was interruption at the border with Kenya. The prices have since remained high. In fact given the percentage increase on the price of oil, one would expect a corresponding increase in prices of goods across the board. It’s therefore surprising that some prices of goods have not changed much. There is no doubt that the economy is in distress. The Uganda shillings has appreciated against all major currencies including the Dollar and the British pound. This is attributed to inflows as the country gets ready for full production of it’s oil.
So, although there is a lot of foreign inflows, these are not fully backed up by local production. A lot of foreign exchange is being pumped into an economy that is virtually not producing. The absorption rate of the dollars is far lower because there is no backup activity that supports the massive inflows. The central bank, BOU is stark and cannot tell which policy intervention it should employ to sanitize the economy. They cannot print money, neither can they mop out the shilling from the market since this would lead to automatic depression. They are trying to buy out as many dollars from the market as possible to ensure the shilling doesn’t become too strong because this would completely led to the collapse of the export economy. The central Bank has been rendered a spectator in the scheme of things where it’s supposed to guide on the next steps and take charge. They are like a pilot of a plane during turbulence who leaves to plane to move by itself hoping that it will stabilize by itself miraculously. There is no doubt that Uganda is currently experiencing full scale stagflation!