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Reduce interest rates to boost local investments

By Vision Reporter

Added 9th July 2009 03:00 AM

In Uganda and Africa, relying on external aid to finance budgets, subjects us to stringent structural adjustment policies from the International Monetary Fund (IMF) and the World Bank.

By Richard Musani

In Uganda and Africa, relying on external aid to finance budgets, subjects us to stringent structural adjustment policies from the International Monetary Fund (IMF) and the World Bank.

One of the local policies from IMF and the World Bank is deflation.

Deflation aims at reducing the monetary base of the economy in order to check inflation. The main effect of deflation has been high unemployment levels as a result of the fall in aggregate demand.

Deflation is fuelled by a high powered monetary base, inflated interest rates, and prohibitive credit and loan conditions of financial institutions.

Inflated interest rates not only discourage local investors, they also make local products uncompetitive. This creates room for dumping, smuggling, poor quality products, counterfeits and large informal markets.

It is not surprising, therefore, that the Uganda Revenue Authority recently reported impounding an influx of counterfeit goods flooding the market.

On the other hand, impounding counterfeits provides the economic justification for second hand imports.

Compared to deflation, inflation is generally a time of rise in prices for goods and factors of production.

Inflation is usually associated with high employment opportunities. It is no wonder we are currently faced by a deep depression. I was particularly disturbed that the President, during his State of the Nation Address pretended that Uganda had not begun witnessing the global crisis. Yet it is evident with the recent closure, the value of the shilling dropped.

We have also registered a reduction of remittances from Ugandans abroad. In addition, there is falling demand for our exports and donor support has reduced.

A fall in donor support means, we are uncertain about the 33% projected revenue for the 2009/10 budget expected from donors. It should be noted that unlike in Western economies, in Uganda and Africa, inflationary tendencies are not associated with high employment. Instead, inflation comes with increased imports of non-durable consumer goods via the floating exchange rates.

Imports contribute to domestic inflation, increase manufacturing costs and reduce producers profits. Imports also increase the cost of freight and that of handling and distribution by the importer.

In his adress, the President presented key macro elements intended to address the unemployment problem.

One element was a call to Ugandans to denounce opponents to foreign direct investment. The other was a caution about extravagant expenditure and consumption patterns at the expense of savings.

I agree with the President, but contend that our savings not backed by credit from financial institutions, will hardly address unemployment. Commercial banks currently give credit at an average of 24%.

Whereas the Government would like to encourage local investments to generate employment, the high cost of capital scares them away. What we need is continued dialogue and lobbying by the Government.

In my opinion, there is a potential threat to our rate of economic growth if precautionary measures are not undertaken.

The writer is a strategic management analyst at Kampala Motors

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Reduce interest rates to boost local investments

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