“The key characteristic of this region is the very volatile weather conditions we did see in 2011, a drought which impacted the whole region. Back then, inflation went up to 30 per cent in Uganda and close to 20 per cent in Kenya, and along the same levels in Tanzania,” Absa Capital Africa strategist Riddle Markus told CNBC Africa.
“With the improved weather conditions, improved agriculture output, we have seen that food inflation particularly has come down quite rapidly over the past year and a half. We know that food is quite an important driver.”
Food accounts for 48 per cent of the total inflation basket in Tanzania, 36 per cent in Kenya and roughly 27 per cent in Uganda. Whatever changes occur in food inflation in these economies therefore tends to have an impact on the rest of the inflation picture.
Non-food inflation, in comparison, has also been moderate but Markus explained that there were pressures expected to start coming through. A broad increase in the tax space across the region in June has put an upside risk on non-food inflation, which is expected to continue.
“The inflation story particularly in Kenya and Uganda is turning slightly more negative, while Tanzania’s inflation is still on the downturn. At some point that downturn will also come to an end and inflation increasing there as well,” he added.
Although interest rates were kept at 8.5 per cent in Kenya, the recent implementation of the new VAT bill saw a significant decrease in the number of tax-exempt items on the consumer’s shopping list.
“The focus is not so much on the goods but rather on the pressures governments are experiencing on the revenue side. Government in Uganda is under pressure to increase their revenues. We’ve also seen Kenyan authorities looking at various measures to increase tax payers, so each one of these countries have got a very specific reason. The common factor here is that there’s a realisation that you need to increase your domestic revenues,” said Markus.
“Donor funding is under pressure and that is what’s been behind the removal of exemptions and increasing of certain rates. Going forward, the authorities will probably be more mindful in putting even more pressure on consumers and I think we’ll probably not see the same kind of announcements that we saw this year in the next budget.”