Uganda: Inflation Down, Shilling Us As Gold Exports Rise

Increased gold exports in recent months have strengthened the Ugandan shilling, helping to ease inflationary pressure from imported goods.

The Uganda Bureau of Statistics this week reported that annual headline inflation had slowed to 1.9 per cent in the month of September compared to 2.1 per cent registered in August, a factor largely attributable to a stronger shilling.

Bank of Uganda data shows that the shilling, which was trading at 3,765.6 against the dollar in May, has remained stable at just over the 3,600 units for the months of August and September, coinciding with a steady fall in headline inflation since June 2019.

Uganda's earnings from gold exports have been increasing since May from $78.7 million to $97.3 in July, which is the freshest month for which data is available.

Dr Fred Muhumuza, a development economist, says the shilling -- which had been destined to reach the 4,000 units to the dollar mark, is now gaining strength thanks to Uganda's gold exports.

The source of Uganda's gold has previously been questioned with some reports suggesting that the country was used as a conduit for smuggled Venezuelan gold.

African Gold Refinery faced accusations of questionable importations of 7.4 tons of gold in March, some of which was suspected to have originated from Venezuela.

The gold mining and export industry has not been recorded as a major source of employment, giving credence to doubts about origins of the precious metal.

The increased gold exports are having a far-reaching effect on the economy. The increased gold earnings, according to Dr Muhumuza, are behind the strengthening of the shilling. A stronger shilling has caused a reduction in the price of imports, especially oil products, which is one of Uganda's main imports, helping to ease inflation.

Experts have however cautioned that the growing importance of gold as a major Ugandan export is providing mixed results for the economy. On one hand, gold exports have made imports cheaper leading to a fall in the inflation rate for the third month running while on the other hand over-reliance on the mineral could distort the export market.

Chris Mukiza, Director Macroeconomic Statistics at UBOS, has previously cautioned that the movement of headline inflation further away from the 5 per cent target signifies shrinkage in aggregate demand for goods and services.

He however says the current trend is not cause for worry.

The most recent reduction in inflation has, instead been hailed as good for the economy, since it is as a result of the strengthening of Uganda's perennially weak shilling.

With a stronger shilling, the merchandise trade deficit has narrowed by 17 per cent. In June, the merchandise trade deficit reduced from $ 278.91 million to $ 231.42 million in July while export earnings grew by 5.9 per cent, even as the receipts from major commodities like maize and tea shrank.

Ministry of Finance data shows export earnings grew from $300.6 million in June to $318.4 million in July, which is the most recent data that has been provided by the Bank of Uganda and the Ministry of Finance. The value of imports on the other hand has reduced by 5.1 per cent from $579.5 million in June to $549.9 million in July.

The shrinking merchandise trade deficit has been driven by reduction in the price of oil, which is one of Uganda's major imports.

Dr Muhumuza says the strengthening of the shilling has resulted in a reduction of the price of oil in Uganda, at a time when attacks on fields in Saudi Arabia should have led to a different outcome.

"The oil price drives the cost of other consumer goods," says Dr Muhumuza.

Uganda is a net importer of goods and services.

***

NARROW DEFICIT

With a stronger shilling, the merchandise trade deficit has narrowed by 17 per cent. In June, the merchandise trade deficit reduced from $ 278.91 million to $ 231.42 million in July while export earnings grew by 5.9 per cent.

Experts have however cautioned that the growing importance of gold as a major Ugandan export is providing mixed results for the economy.

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