By Jude Matovu and Samuel Sanya
THE Central Bank may be forced to print 100,000 shilling notes if the inflation rates in the country continue to rise over the next 6 months.
The governor Emmanuel Mutebile has revealed this while appearing before the parliamentary committee that handles issues pertaining to the national economy chaired by Buliisa county Member of Parliament Steven Mukitale.
The governor was reacting to concerns by committee members about the bulk of the money in relation to the inflation rates.
The Central Bank explained in an August statement to the media that the dual circulation of old and new bank notes issued in May 2010 has absolutely no relationship with the current inflation levels.
The Bank of Uganda pointed out that the overall quantity of money issued did not change due to the introduction of the new notes and that supply side shocks to food and international oil prices, not excessive money supply associated the issues of new currency notes is at the heart of the runaway inflation.
“The decision to allow concurrent circulation of both series for some time was deliberate and intended to enable a smooth transition to the new series without disruption of normal business activities among the public,” reads the BoU August 26th statement.
“Although no deadline was set to phase out the circulation of the old banknotes, the Bank of Uganda is progressively replacing the old series in circulation with new series Banknotes,
“Currently, only about 20 percent of the old series remain in circulation. At an appropriate time, the Bank will inform the public when the old series will cease to be legal tender.”
Debate is still raging as to the effect of high expenditure during the just concluded Presidential elections in February on the economy, being that inflation began its rapid ascent in the months immediately following elections from 6.4% that month to 30.5% in November.
As widely anticipated, the Central Bank Rate (CBR) was raised by 300 basis points to 23%, with the rediscount rate and the bank rate, the cost at which commercial banks borrow from the Central Bank, rising to 28% and 29% respectively.
Commercial banks have already started responding by raising their lending rates further up, in a move expected to make it even harder to borrow so as to dampen effective demand and inflation in the next 2 or so years.
Speaking to the NewVision in a telephone interview, Patrick Mutimba, the Makerere University Director for Investments said that the move to increase the CBR is the right one, however, rapid increases in core inflation spelt out the need to solve structural issues like electricity and the transport system in the country.
“If this were to continue, high prices may become a new normal. The private sector has to avoid borrowing for consumption and use the money for production now that rates have gone up,” he noted.