The opening of the global economy from the COVID-19 pandemic came with an unprecedented problem: rising commodity prices.
Bank of Uganda’s state of the economy report of December 2022 shows that international inflationary pressure persisted and became widespread, driven by supply-side shocks in agricultural commodities, energy, and non-energy industrial goods. Global inflation was further exacerbated by prolonged geopolitical tension, particularly the Russia-Ukraine war, which caused global commodity markets to face unprecedented pressure, lifting global commodity prices to all-time highs.
For instance, during the first half of 2022, fertiliser prices were 110 percent higher in May 2022 compared to the same period in 2021, energy prices were 86.7 percent higher, while crude palm oil and wheat prices increased by 12.8 and 33.7 percent between February and May 2022. Even though global prices of the above commodities registered a slight decline during the second half of 2022, domestic prices in money terms remain elevated in many developing countries because of currency depreciation. This is likely to exacerbate several countries’ existing food and energy crises.
In Uganda, the price of several commodities and services continues to increase tremendously. According to the Uganda Bureau of Statistics, the country’s annual inflation rate, over the last 7 months, rose to 10.2 percent in December 2022 from 6.8 percent in June 2022.
Indeed, in anticipation of commodity price hikes in 2023, the President, in his end-of-year message, highlighted the need for the country first to address domestic commodity shortages rather than prioritise policy measures to curb the runaway commodity prices, whose cause is way beyond government’s regulatory control.
Despite the anticipated domestic price increases, global commodity prices are projected to ease in 2023, buoyed by a slowdown in global growth. Projections by the Bank of Uganda show that energy prices are expected to fall by 11 percent in 2023, while agricultural, and metal prices are projected to decline by 5 and 15 percent in 2023. Nonetheless, this relatively favourable outlook might not be achieved because of the following potential risks both in the short- and medium-term.
First, prolonged dry weather; climate played a significant role in sustaining price hikes in 2022 and is likely to do so in 2023. For Uganda, annual food crops inflation, usually buoyed by prolonged dry spells, has long been a key driver of headline inflation. With no substantial short-term policy interventions to increase investment in affordable irrigation facilities for farming households, prolonged water shortages for agricultural production will probably continue pushing up commodity prices.
Second, a strong resurgence of the COVID-19 pandemic across the globe, through new high-spreading COVID variants from China, would increase supply chain disruptions, block ports and logistic networks and cause delays in the supply of raw materials for manufacturing consumer goods.
This risk is heightened following the 2022 easing of the COVID-19 restrictions in China, a major trading partner for Uganda. To avert this risk, Uganda must intensify its COVID-19 vaccination campaign. With only about 28 percent of its eligible population fully vaccinated. As few as 41 percent of its population has received a single COVID-19 shot, Uganda’s vaccination rate remains low, and any strong global resurgence could strongly affect the domestic prices.
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Third, a prolonged escalation of the Ukraine-Russia war into 2023 is likely to increase the price of agricultural commodities such as wheat and sunflower as well as those of raw materials, namely, fertilisers, fuel, and other industrial commodities, that are directly imported from both countries. In addition, like in 2022, further escalation of the war is likely to also indirectly impact other agricultural commodities, such as palm oil production in exporting countries such as Indonesia and Malaysia, because of high fertiliser prices resulting in shortages and hence higher prices.
Finally, a persistent elevation of global fuel prices in 2023 will probably be transmitted directly into the final consumer price. According to the World Bank, global energy prices fell by 6.2 percent in the last half of 2022 and are further anticipated to decline by 11 percent in 2023. However, with China easing domestic COVID-19 restrictions in January 2023, demand for fuel is likely to increase and exert further pressure on the final fuel price. In addition, with OPEC issuing production quarters to its member countries, it is anticipated that oil prices shall average US dollar 85 per barrel.
If this projection materialises, energy prices will still be 75 percent above their average over the past five years. The anticipated high energy prices in 2023 are likely to be translated to high commodity prices domestically, emanating from high transport costs.