17-11-2011 11:27 Uganda
Bank of Uganda may print a 100,000-shilling banknote is inflation persists
KAMPALA (NNN-NEW VISION) -- Uganda's central bank says it may be forced to print 100,000-shilling notes (one USD = about 2,594 shillings) if the inflation rate in the country continues to rise over the next six months.
Bank of Uganda Governor Emmanuel Mutebile said this when he appeared before the Parliamentary committee that handles issues pertaining to the national economy chaired by Buliisa county Member of Parliament Steven Mukitale here Tuesday.
The governor was reacting to concerns by committee members about the bulk of the money in relation to the inflation rates.
The central bank had said in a statement to the media in August that the dual circulation of old and new banknotes issued in May 2010 had absolutely no relationship with the current inflation levels.
The Bank of Uganda pointed out that the overall quantity of money issued did not change with 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, was 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,” according to theAug 26 BoU statement.
Debate is still raging as to the effect of high expenditures during the just concluded presidential elections in February on the economy, with inflation having begun its rapid ascent in the months immediately following elections -- from 6.4 per cent that month to 30.5 per cent this month.
As widely anticipated, the Central Bank Rate (CBR) was raised by 300 basis points to 23 per cent, with the rediscount rate and the bank rate, the cost at which commercial banks borrow from the Central Bank, rising to 28 per cent and 29 per cent respectively.
Commercial banks have already started responding by raising their lending rates further, in a move expected to make it even harder to borrow so as to dampen effective demand and inflation in the next two or so years.
Speaking to the NewVision in a telephone interview, Patrick Mutimba, the Makerere University Director for Investments said that while the move to increase the CBR was the right one, 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.