East Africa’s Ignited Inflation Sparks
The Kenyan shilling fell to a record low 90/dollar as food prices jumped 20 percent and Ugandan regime opponents and the central bank head also railed against double-digit inflation as the two East African community linchpins postponed integration initiatives to concentrate on individual stabilization plans. The Nairobi exchange has been down all year as the GDP growth forecast lagged the Sub-Sahara average at 4-5 percent and political positioning began for 2012 presidential elections which seek to avoid repeating the tribal carnage of the previous disputed race. The ICC has questioned leading officials, including Finance Minister Kenyatta, about their role in fomenting violence then which could result in formal indictments. The benchmark rate was initially increased 25 basis points on the inflation spurt but the monetary authority has since been criticized for slow reaction as bond yields widen several hundred ticks with auctions undersubscribed. Debt market turnover had quadrupled to 20 percent of GDP in 2010 as intermediaries and regulators introduced numerous operating and systems upgrades. An over-the-counter framework will supplement prior mandatory exchange trading and be run by designated primary dealers; central depository automation has improved; and short-selling will soon be permitted. Equities have embraced their own moves such as transition to a shorter T+3 settlement cycle. Despite the revisions, investment will be cramped by indefinitely higher agricultural and imported oil costs, with the energy commission recently imposing hefty rises for consumers and businesses alike. Labor unions have responded to the living standard erosion by demanding 50-60 percent wage increases which the government claims would worsen the fiscal deficit and domestic debt load as a maiden external bond issue is contemplated with a B+ sovereign rating.
Neighboring Uganda has discovered oil but food crop inflation hit a regional high at 45 percent in May, as just re-elected President Museveni who has ruled for 25 years jailed his main opponent after prolonged street fighting over economic and political direction. European donors have suspended aid in view of alleged poll fraud and the harsh crackdown, and the longstanding central bank governor has also criticized fiscal indiscipline which caused the IMF to assign unsatisfactory marks in its latest program review. $750 million was spent for a fighter jet and a supplementary budget was passed during the campaign with ample voter largesse. Foreign reserves, after post-crisis rebuilding, have now been commandeered to defend the shilling, and although the official poverty rate has dipped to 25 percent, population growth has not abated leaving a large cohort of angry youth with scant income and formal employment prospects to resort to their own guerilla tactics against the former anti-Amin rebel chief.
