Kampala — Uganda could see it's overall inflation (including food prices) soar to alarming levels this year as the impact of drought and power shortages start to unfold in earnest, pressing up prices relentlessly.

According to a periodic economic report by Stanbic Investments for April, the sharp rise in prices of all foodstuffs is expected to continue unabated, fuelled in part by supply constraints (dwindling stocks of grains and cereals) and sky-high production costs.

"Food inflation has not yet peaked and we expect the overall inflation to continue rising for the next several months," the report said.

Also, due to the ongoing power crisis, production of foods like maize and sugar now has to rely on diesel-fuelled generators, doubling the energy bills of companies, which subsequently have to revise prices upwards to absorb the new costs. This is notably distressing for the economy with consumers struggling to cope with the already high prices of most essential items.

At the end of April, the Uganda Bureau of Statistics reported that the median headline inflation for the year ending March 2006 had spiked to 7.9 percent, the highest rate in several years.

The trend could have a negative impact on consumer expenditure, general incomes and also has a dreadful potential to induce terrible sluggishness in the economy.

Still, the report offered some quaint hope saying: " The underlying inflation (without food prices) remained unchanged at 5.1 percent and all indications are that it will be contained at below 5 percent by mid 2006."

Now that the election storm is over, Stanbic said, the government would start funneling lots of resources into "economic development" sectors like education and health.

That will be underpinned by the government's expected launch of the second round of reforms supposed to gird and secure the achievements realized under the first generation of reform package or the so the called Structural Adjustment Programmes.

Private sector credit, an important measure of the health of the economy, was reported as having risen and stabilised again after declining considerably over last November and December due to the festive season and its attendant sag in business activity.

"In the second quarter of 2006 demand is expected to stabilise so we expect the private sector credit extension to remain stable at current growth rates," the report said.

Relatively low corporate demand for foreign currency and a surge in export earnings combined to keep the value of the Shilling up in February 2006, which averaged at Shs1,825 to the dollar.

Over the next couple of months though, exports are projected to decline and the current inflationary bubble to sustain thus weakening it.

Total exports shot up to $83.8 million in January 2006 compared to $73.8 million in December 2005, a 13 percent rise. A high coffee harvest supported by a good season led to the rise in exports.