Understanding Gross Income Of Uganda's Income Taxation.

Its been long since i last blogged on here but never the less i have been cooking and developing many ideas especially in the areas of Taxation.

Today i want us to explore Section 17 of the Income Tax Act. Cap 340.

Section 17 of the Income Tax Act. cap 340 explores and explains what Gross income is.Section 17(1), notes that Gross income of a person for the year of income is the total amount of a)Business income, b)Employment Income and C) Property Income. In other ward, if you are involved in any income generation activity that falls under the above category, you source of income is clearly defined in the Domestic Tax laws of Uganda.

RESIDENCE AND SOURCE .Why does residence matter? 

1. RESIDENCE. 

i) A resident person is subject to tax on his worldwide income (Section 17(2)(a) of the Income Tax Act, Cap 340, as amended (hereinafter, “the Act”)). ii) A non-resident person is subject to tax only on income derived from sources in Uganda (Section 17(2)(b)). Thus, residence status determines whether a taxpayer will be liable to tax on his worldwide income or only on income derived from sources in Uganda. Exceptions to worldwide tax on resident persons i) Foreign source employment income derived by a resident individual is exempt from tax if the individual has paid foreign income tax in respect of the income (Section 80(1)). ii) Foreign source income derived by a short-term resident or an immediate member of his family is exempt from tax (Section 21(1)(m)). Note: A “short-term resident” means a resident individual, other than a citizen of Uganda, present in Uganda for a period or periods not exceeding two (2) years (S. 21(2) of the Act). 

The Act sets forth four (4) alternative tests of residence for individuals - i) Permanent home in Uganda (S. 9(1)(a)); ii) Physical presence in Uganda for 183 days or more during a 12-month period commencing or ending during the year of income (S. 9(1)(b)(i)); iii) Physical presence in Uganda, during the year of income, and for more than 122 days in each of two (2) preceding years (S. 9(1)(b)(ii)); or iv) Official of the Government of Uganda posted abroad during the year of income (S. 9(1)(c)). Note: Residence status is not permanent; it may change from year of income to year of income (S. 9(2)&(3)). 

The Act sets forth three (3) alternative tests of residence for companies - i) Incorporation in Uganda (S. 10(a)); ii) Management and control exercised in Uganda at any time during the year of income (S. 10(b)); or iii) Majority of operations undertaken in Uganda during the year of income (S. 10(c)). 

The ‘management and control’ test requires that both management and control exist. Management without control or vice versa is not sufficient. Generally, ‘control’ lies with the shareholders, while management is exercised by officers and directors of the company.  Where directors of the company are also shareholders, management and control could be deemed to be concurrent. The Act does not outline the criteria to be following in determining where “majority of operations” are undertaken. The following factors may be relevant. 1) Number of branches or offices maintained in Uganda relative to the company’s overall offices; 2) Number of employees employed in Uganda; 3)Nature of activities conducted in Uganda relative to the group’s overall activities; 4)Revenues generated in Uganda relative to the company’s total revenues; 5) Volume of sales,Residential status of the majority share holders, etc.

The Act sets forth three (3) alternative tests of residence for trusts - i) Established in Uganda (S. 11(a)); ii) Trustee of the trust was resident (Sec 9) in Uganda during the year of income (S. 11(b)); or iii) Management and control exercised in Uganda at any time during the year of income (S. 11(c)). 

The Act sets forth three (3) alternative tests of residence for retirement funds - i) Organized under the laws of Uganda (S. 13(a)); ii) Principal purpose of providing retirement benefits to resident individuals (S. 13(b)); or iii) Management and control exercised in Uganda at any time during the year of income (S. 13(c)). One test for a partnership is defined under (Sec.12): a partner in the partnership was a resident person during the year of income.

2. SOURCE. What is the Significance of source of income in Taxation.

 A taxpayer or the Uganda Revenue Authority must determine the source of income for one or more of the following reasons: i) To determine whether a nonresident person is subject to Ugandan income tax with respect to certain income (S. 17(2)(a)&(b)). ii) To determine whether a resident person may claim a foreign tax credit with respect to certain income. A foreign tax credit is available only with respect to foreign income tax incurred on foreign-source income (S.81(1)). iii) To determine whether a resident person may claim an exemption from Ugandan income tax with respect to certain income for example.: a) foreign source employment income derived by a resident individual (S. 80 of the Act). b) foreign-source income derived by a short-term resident (S. 21(1)(m), S. 21(2) of the Act).

When determining one's source of income, it is relevant to put into consideration both the residence status and the Source of income in the existing geographical jurisdiction.

From the above study, One may ask, Is all the income earned by the resident subject to tax in Uganda?,How can i know  the total tax payable or tax credits claimable in Uganda.

Sec.21 will help to address those questions and will be reviewed in detail in our next Blog.

Thank You.

 

WHY PENTECOSTAL CHURCHES SHOULD PAY TAXES.

WHY PENTECOSTAL CHURCHES SHOULD PAY TAXES.

This is not to suggest that you abandon your church or your faith. Am a Christian and an Economist by profession. For one thing, any religious organization that lives up to its commitments to its congregation and community would have nothing to fear from filing a tax return and should clearly start its expenditure patterns which should be inline with the objectives on its certificate of incorporation, After that, it should then be exempted from paying taxes just like every other non-profit. For another, we need to determine if Pentecostals in Uganda are qualified to maintain their status quo as tax exempt organizations considering their vast financial resources. In Uganda’s corporate Income Tax Act establishes a category of exempt organizations. Tax exempt organizations include charitable, educational and religious institutions of a public character (1st schedule of Income Tax Act, Cap. 340). Therefore, Pentecostals being a religious institution is exempted from income tax in Uganda, Pentecostals are exempted from corporation tax because they are regarded as organization of a public character (Bahemuka, 2006) and a non-profit organization (Non-Governmental Organization Registration Act). But of recent am asking my self why Pentecostals should maintain tax exempt status because they are perceived to be business oriented organizations they advertise, price  special service programs, profit oriented which all qualifies them as businesses.

Pentecostals emerged from the church and the movement is connected with a group of Christians that emphasize the gifts of the Holy Spirit. The free dictionary by Farlex described Pentecostals as “any fundamentalist protestant church that uses revivalist method to achieve experiences comparable to the Pentecostal experience of the first Christian disciples”. The Pentecostals in Uganda are registered under Section 1(d) of the Non-Governmental Organizations (NGOs) Registration Act of 1989, amended 2006.so with that background, the law deems them “Tax Exempt”

It will be obvious to rational people that exempting religious organizations from paying any taxes is a clear case of government "respecting an establishment of religion." But throughout history we have seen many otherwise-lucid thinkers insist otherwise, including Supreme Court justices who uphold biblical views when their taxpayer-funded jobs explicitly require them to uphold the Constitution. Because religious organizations are not accountable to the citizens who subsidize them. If churches engage in charitable work that benefits the community, do all citizens have an interest in supporting such endeavors with various tax exemptions? This is the sound basis for tax exemptions for non-profit organizations, whose activities and finances are subject to audit and public scrutiny. In the case of religious organizations, however, the books are closed. A certain new paper publication in Uganda ran an Article explaining and exposing how the different kampala churches run un Audited  books of accounts, my question is who is responsible for this money and how is it spent? Church groups receiving tax exemptions must annually file a detailed 360 statement itemizing where the money has gone.

What if churches do not engage in charitable work? Or do so far less efficiently, effectively - or charitably – than the Amount of Money (Income) that they made? Religious organizations can and do take great advantage of their tax-free status. Many amass great wealth and vast media empires and buildings - all of it off the tax rolls largely contributing to income inequalities. The point is that religious organizations can and do espouse doctrines of intolerance and hatred, filter funds to foreign enemies ( countries). They are nevertheless tax-exempt, their finances never scrutinized, because they qualify as "religious organizations." Tax-exempt status is a privilege - not a right - and churches should be held to the same standards as other non-profits - if not higher standards.

  

A case study of a  Pentecostal  church in town, in the last month, it made 1, 0004, 000 Us dollars on what they called MMO (“My miracle offering”) and they claimed that their motive was to spend it in Israel, Southern Sudan among other countries, that’s fine a good motive but how much of it will be spent otherwise and go un taxed, on top of that, its economically irrational to see that money is collected in Uganda and being spent or taken outside the country that’s already a leakage and its contributing to our own capital outflow?. In the year 2008, the commissioner for Domestic taxes in his speech while in a conference suggested that religious organizations should have clearly audited books, filled returns and their surplus be taxed, this raised many criticisms but thinking the other way round not the obvious, he had a point, The Revenue collection in the financial year 2011/12 fell short by around 7 billion Uganda shillings and this may be partly because the taxable base is small, if we are to fill that difference we have to expand the base and the church would be such a good rescue, Any Money that Is not spent as per their motive be taxed and assets contribute to property tax.

Because it is easily and routinely abused( The tax Exemption). Consider the proliferation of phony churches as a tax dodge. An IRS attorney cites a brothel "church," where sisterly love is offered to male parishioners in exchange for donations. In Hardenburgh, New York several years ago, 235 of the 239 property owners in that town were granted religious tax exemption because the properties of the owners were made branches of the mail-order "Universal Life Church." In Wisconsin, hotels pay parking lots, farms, and communion wafer bakeries are among the church holdings that are tax exempt. Overall, at least $4.2 billion in tax-exempt religious property now exists in that state alone. It's a racket, and it costs taxpayers even more money to monitor, uncover and fight the abuse it invites - none of which would be necessary if such unenforceable loopholes in our tax code never existed. Many Pastor Drive “High End” cars, have powerful houses and dress in imported suits, make frequent first class travels and more than 70% of their congregation are starving and on Foot, what’s Godly in that, Jesus him self was humiliated so that Man can be raised and  that that’s the man we(the pastors) claim to be following. Lets practice what we preach but not the famous coward saying that “do what I say but not as I do”

It costs you and me billions of shillings. Consider that for every tax dollar/shilling a religious organization does not pay, you and I pay it on its behalf either directly or indirectly and on top of that its us that contribute to the dollars they made, you observe a double loss in this scenario. Many are among the wealthiest organizations in the world: by 1971, the amount of real and personal property owned by U.S. churches was approx. $110 billion. In New York City alone, the amount was $3 billion in 1989. A 1986 estimate showed religious income in that year of approx. $100 billion, or about five times the income of the five largest corporations in the U.S.  All tax free. Ask your self these questions, should the taxes of non-religious citizens be higher to subsidize every church, synagogue, and mosque in town? Should working women pay taxes to subsidize clergy and other employees' paychecks, when such positions are overwhelmingly - and legally - restricted to men? Because it makes no sense to deny that tax exemption is a meaningful public subsidy is to put forth an absurd proposition: just consider what your personal financial picture would look like if you never paid any taxes. Yet it is exactly this type of ludicrous logic on which religious tax exemptions have been upheld time and again by our courts.

In conclusion, Non-taxation of Pentecostals is regarded as tax inequality between Pentecostals and business organizations in the country taxation of Pentecostals would increase government income and also reduce the tax burden of other non-tax exempt organizations in the country.

Am suggesting that URA should provide legislation that would make Pentecostals operate in an environment of increasing regulation and scrutiny. This will check the unethical conducts of Pentecostal pastors. Alternatively Pentecostals should be registered and governed under the Trustee Incorporated Act. The trustees should be people of impeccable character other than the pastors. According to the Act, the trustees are responsible for the properties that come into their hands and are answerable and accountable for their own acts, receipts, neglects and defaults. This will impose strict regime of accountability and protect the activity and integrity of Pentecostals in the country. The current scheme is unfair and unnecessary. Pentecostal Churches can and should pay taxes just like everybody else.

For God and My Country.

Andrew Kyambadde M.

Monetary Economist.

will the Market ever trust Mutebile Again?

Will the market ever trust Mutebile again?

In any case he seems to have run out of ideas that can manage an economy that is out of the reform phase

Conventional monetary economics teaches us that financial markets are by configuration very volatile. Empirical evidence shows that exchange rates are more volatile than the underlying economic variables. Yet exchange rate volatility is dangerous because it makes it difficult to plan economic activities, and also destroys confidence in the currency of a country.

Although market fundamentals can explain changes in long run exchange rates, it is the market expectations that explain changes in short run exchange rates. It is factors such as speculative opinion about future exchange rates, rumours of political instability or uncertainty, loss of confidence in profitability of economic enterprises, real interest rate differentials, and market psychology that dictate currency movements in the short run.  

Over the past twelve months, our shilling has undergone a speculative attack because of the sudden change in exchange rate expectations. Since the February general elections last year, market expectations, fed by political and economic unrest and uncertainty, have worsened speculation leading to more volatility in our financial markets.

This forced Bank of Uganda (BOU) to deplete reserves making the country more vulnerable to speculation and exchange rate overshooting. The market expectations were further worsened by Governor, Emmanuel Tumusiime-Mutebile's media utterances when he told the Financial Times of the UK that government had raided the Treasury, took off with about two months of the country's reserves to purchase fighter jets. Although Mutebile later denied having let out government secrets to the media, only novices could accept his denials.

The shilling is sinking
In his characteristic style, Mutebile told the Financial Times whatever he told them as a way of letting the blame for the deteriorating economy off his sleeves, to the attention of his "friends" at the IMF and the World Bank. Little did he know that speculators were out to take advantage of such reckless utterances and drive our shilling to a record low!

The shilling sank so low, to the gladness of the political animals that this country has bred in crowds and soon the rumour mill was running in gear number five thus, "Mutebile has resigned as BOU Governor." The social network prophets of doom took the opportunity of the resignation of the Afghanistan's Central Bank Governor at the time to get their message home. The pit in which the shilling was falling could only become deeper.

In these very pages, I wrote asking, "Who of the two -- Government and Bank of Uganda -- should we blame for our worsening economic situation?" The BOU's continued claim that it had done enough to keep inflation under check, implied that it was government's fiscal policy that was letting the economy down.

Nevertheless inflation and exchange rate depreciation recently peaked and started to lessen. Then the Basajjabalaba saga came up and once again, our central bank Governor was in the press for the wrong reasons. 

No longer the super Governor
Parliament has been consistent in demanding for his resignation for his role in the Basajjabalaba saga. Mutebile, typical of him, faced the cameras and roared, "Only God can take me out of this chair." He went ahead to asked the market players to ignore "the ramblings in Parliament" because "I am here to stay." Indeed after a heated debate in Parliament, the votes were cast and Mutebile was saved by a visibly divided legislature.

Well, cabinet may have succeeded in defending the Governor but will the market ever trust him again? We all know that the position of Governor is critical as far as the health of the macroeconomy of any country is concerned.

Mutebile has been a very successful Governor in the last decade mainly because everyone, literary everyone - from the executive to parliament to the general public and the development partners - had confidence in him. He has been a super Governor. Can he still enjoy this confidence? 

The other night when I was watching news on a local television I heard a number of our Members of Parliament, the few patriots championing the battle against corruption, asking "When Mutebile says he is going nowhere because if he goes the economy would be affected; was this economy invented by Mutebile?"

Mutebile's sleek record
My answer to them is a big YES. It is Mutebile who in 1987, together with a few of his colleagues at the then Ministry of Planning and some expatriates, authored the famous Economic Recovery Programme (ERP) that marked the beginning of the emergence of the Ugandan Economy we are witnessing today. At the time the Mutebiles authored this program, inflation had reached 358.4%, poverty was at 56.7% and the GDP growth of 1.1% was largely driven by the subsistence sector.

Mr. President, I trust you remember how in 1986 your Marxist economic policies had worsened the already bad economic spell Uganda had faced at the hands of Amin and Obote II.  It is Mutebile who restored both fiscal and monetary discipline; agitated for liberalisation of consumer and producer prices to eliminate distortions such as price controls, black markets, high tariffs, smuggling, excessive printing of money to finance fiscal deficits and fixed exchange rate regime.

It is Mutebile who in 1990 wrote the "Way Forward 1", a macroeconomic strategy he authored while working as Permanent Secretary of the then Ministry for Planning and Economic Development.

This policy paper forever changed the face of the economy of Uganda. In his typical arrogant tone, Mutebile asked you Mr. President and your cabinet to choose between failing the economy under the weight of fiscal indiscipline or work for full and sustainable recovery by stopping NRM's thriftlessness.

It is Mutebile who proposed five key reforms that provided a pebble upon which this economy has been built in the last two or so decades. These are:     

(1)    Merger of Ministry of Finance (MoF) with Ministry of Planning and Economic Development (MoPED) in 1992 to ensure fiscal discipline,

(2)    Granting of independence to the Bank of Uganda through three legislations -- the 1993 BoU Statute, the 1993 Financial Institutions Statute, and the 1995 Constitution,

(3)    Setting up of Uganda Revenue Authority (URA) in 1991 to improve revenue administration,

(4)    Setting up of Uganda Investment Authority (UIA) to administer the Investment Code, and

(5)    Abolition of taxes on export goods

Mr President, without question you agreed to implement these reforms and appointed Mutebile the PS of the newly created Ministry of Finance, Planning and Economic Development to execute the task, until he became the Governor. We all know what these reforms have done for this country. That is how critical Mutebile's contribution to the resurgence of our economy has been.

His economics inapt in post-reform
However, as I wrote in these pages back in 2010 when you, Mr President, renewed Mutebile's contract to give him a third term, the embattled Governor has outlived his usefulness.
He seems to have lost ground to the changing times. Certainly he was at his prime in the 1990s and early 2000s. He seems to have run out of ideas to manage an economy that is out of the reform phase.

We need new blood at BOU and Finance. Luckily, in Louis Kasekende, Mutebile's deputy, we seem to possess a guy better suited to guide the post-reform economy into take-off. He was a star performer at the World Bank where between 2002 and 2004 served as Executive Director before having a three-year distinguished service at African Development Bank as Chief Economist.

I am told that actually there is an ideological cold war at BOU between Mutebile and his deputy. The latter, with support from a good number of other top brains at the Bank, believe that the former is still frozen in the past; agitating for policies and economic ideologies which are not in agreement with today's economic realities.

So could this be the time we prepare for his exit? But as we do so we need to be careful on the timing, tactics, and methodology we employ to uproot this monetary fundamentalist out of this critical seat. That is why I supported government when you protected him against the reckless method of operation by Parliament. That is not how they sack a central bank Governor. You may sack a Syda Bumba or a Kabakumba Matsiko using the method parliament used but not the chief guardian of the economy.

Nevertheless, the bottom line remains that we must prepare the post-Mutebile Uganda because sooner or later he has to leave that position. He has lost the confidence he exuded in the last couple of decades. Our financial markets are now vulnerable to speculative volatility owing to the likely continued onslaught on the man with divine right to print and keep our money!

China's rise calls for cool heads

China’s economy has grown 18-fold since 1980 and is expected to surpass the United States in 2016. 

Australia has every reason to be close friends with Beijing and Washington.
The rise of China and, following it, India is a massive realignment of economic and, in due course, political and strategic power at an unprecedented speed and scale.
By any measure China’s growth has been extraordinary – from 1980 to 2010 its economy grew 18-fold, an annual average of 10 per cent. China has been the world’s second largest economy since 2002 and according to the IMF’s forecasts will overtake the US in 2016.
India’s reforms started after those in China and its re-emergence as a global economic power has been more gradual. Still, from 1980 to 2010 India’s GDP increased six-fold, an annual average of 6 per cent. In 1990 western Europe and North America produced 49 per cent of world GDP, but by 2030 their share will almost halve to 26 per cent, according to Willem Buiter at Citigroup.

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Emerging Asia – excluding Japan – produced 14 per cent of world GDP in 1990, but will more than triple its share to 44 per cent in 2030 according to Buiter. Those are much bigger shifts in the location of global production than were recorded after the Industrial Revolution, and they are occurring over much shorter time frames.
More than almost any other country, Chinese leaders draw strength and guidance from history. Deng Xiaoping reached back to the trade and exploration of Admiral Zheng He in the 15th century when, in 1979, he began to open China to foreign trade. He reminded the hardliners that when China had engaged with the world it had been strong. When in the 16th century it closed off the world, this began a decline that ended with 150 years of humiliating invasion, colonisation and exploitation by stronger nations.
The world may be amazed by China’s dramatic rise, but the Chinese recognise this as very much a return to the natural order of things.
China represents a unique challenge to the US. Americans, imbued with a deep sense of their own exceptionalism, have assumed they will always be the strongest, richest and cleverest nation on earth. But now Americans everywhere feel the core of their economy is being hollowed out. Their pessimism has a basis: 42,000 factories closed in the US between 2001 and 2010 and 5.5 million manufacturing jobs disappeared. China now makes more cars than the US and Japan combined.
It is becoming all too clear that in the developed world the rising tide of convergence and globalisation will not lift all boats, and certainly not at the same rate. The key, if obvious, insight is that a converged global economy is much larger and much more competitive but with many more opportunities. Within two decades there will be more middle class consumers in Asia than in the rest of the world.
The firms and nations that will succeed will be the most efficient and innovative, and the highest quality. For high-wage countries that seek to remain so, the pursuit of excellence was never more important. Our schools and universities should be turning out the world’s top students – not settling for middle of the pack, which is where one measure suggests many advanced nations find themselves.
Just as research, education and infrastructure are long-term investments, so too is there a need in my country to recognise our terms-of-trade windfall will not last forever. There is a view that it will, especially in Canberra, and that is dangerous complacency.
As worrying as the shift of manufacturing and economic output to Asia, in the eyes of many in the West, are the transfers of political, institutional and military influence that will surely follow. Shifts in economic weight and military potential are a legitimate cause for anxiety. Previous threats to more than a century of US economic primacy were not credible: the USSR of the late 1950s and Japan of the late ’80s, the two alleged challengers, had economies only 40 per cent as large. So the stakes are high, and this time the challenger is real.
Yet most Americans appear utterly flummoxed by the swiftness of China’s rise, which was not on their horizon until recently. As late as the 2004 US presidential race, for instance, China’s economic rise barely rated a substantive remark from either candidate in three hours of debate over America’s future watched by a combined audience of 160 million.
Economic anxiety has been felt before in America and Europe – over the rise of Japan, for example. But this time there is also strategic anxiety in the West, particularly the US, over China, reflecting a concern that the Middle Kingdom has a very different understanding of the way in which world affairs should be ordered than the West.
It is important to note China’s growth in power, economic and military, has not been matched by expansionist tendencies beyond reuniting Taiwan. Large areas in China’s north-east taken by Russia under duress have not been left unresolved as a possible future casus belli, but instead were legitimised in new treaties.
The central role of trade in China’s prosperity also argues for its rise to remain peaceful. China’s trade was 55 per cent of its GDP in 2010 – five times larger than the role of trade in the US economy of the 1950s and 1960s, when US economic dominance was greatest. China has more to lose than most from any conflict that disrupts global economic flows.
With its energy and resource security depending on long global sea lanes, it is hardly surprising that China would seek to enhance its naval capacity. Suggestions that China’s recent launch of one aircraft carrier and plans to build another are signs of a new belligerence are wide of the mark.
It makes no sense for America, or its allies, to base long-term strategic policy on the contentious proposition that we are on an inevitable collision course with a militarily aggressive China. I disagree with the underlying premise of the 2009 Australian white paper that we should base our defence planning on the contingency of a naval war with China.
Cool heads are required on all sides. China needs to be more transparent about its goals in the region and on the basis of that build confidence with its neighbours so that misunderstandings can be avoided.
As China rises to become the world’s largest economy and in time a military rival of the US, we in Australia are presented with a nation whose institutions and culture are very different to ours. Yet China is our largest trading partner, and largely responsible for our prosperity.
We have every reason to remain, and every prospect of remaining, close friends of both these giants. But as Australia adjusts to a multi-polar world, we have much to do to draw closer to the other nations in our region, including India, as we deepen our relations and trust with our neighbours.
This is an edited extract from a speech given by opposition spokesman for communications Malcolm Turnbull to the London School of Economics.

Read more: http://www.smh.com.au/opinion/politics/chinas-rise-calls-for-cool-heads-20111005-1l9k8.html#ixzz1ZzR7tBuo

Whats the Point behind This inflationnary situation in Uganda

 Is Dual Circulation of Uganda Bank Notes  the Cause of Inflation now?.....
Economic reasonings and analysis needed for assessment.

personally is would suggest that its currently a monetary inflation ( 2011 elections) with a dummy variable as the international Fuel prices. among other relevant factors but those are much pressing ccurrently? How do you see things.

Central Bank sets new borrowing rates

THE governor of the Bank of Uganda, Emmanuel Tumusiime-Mutebile, has announced a 13% Central Bank rate for July, the first in a series of monthly rates aimed at clamping down inflation through adjusting the cost of borrowing.

Commercial banks will have to pay the 13% interest up from 11% on money borrowed from the Central Bank and in turn transfer the burden to their loan clients thereby making borrowing more expensive during the month of July.

“To tighten monetary policy, the Central Bank rate will be set at 13% for the month of July. The interest rate will be used to guide the seven–day interbank interest rates,” the governor said while addressing journalists at the Central Bank in Kampala.

The seven-day interbank rate is the rate of interest one bank charges another for money borrowed for a week.

Mutebile said the Central Bank would use its daily secondary market operations in the money market to steer the seven-day interbank rate as close as possible to the Central Bank rate.

He pointed out that the shortfall in supply of commodities that has seen prices of food and fuel shoot up is soon subsiding to bring down core inflation currently at 12.2% by the end of the year. “The Bank of Uganda intends to maintain a tight monetary policy stance to curb demand for credit and thus dampen inflationary pressures over the next six to 12months,

“This will ensure that core inflation is pulled back towards the target of 5%,” he explained.

Adam Mugume, the BoU director for research, said tight monetary stance would inevitably slow the country’s economic growth even while reducing demand for loans and the core inflation.

“We believe that in the next three months the tight monetary stance will drive down core inflation to a level between 10% and 12% and core inflation between 12% and 14%. This should increase interest rates and slow the country’s economic growth momentum,” he explained.

Some analysts said they had expected a higher Central Bank rate given one-week interest rates are running above 16%, but given the Central Bank’s stated determination to tackle inflation, it should be positive in the long run.

“With the promise of more tightening still to come, market expectations will be firmly geared towards further policy rate increases, especially if the foreign excahnge threat to the inflation target remains sustained,” said Razia Khan, an economist at Standard Chartered Bank in London.

“For now, the policy rate is at least positive with respect to core inflation. From an economic perspective, the Central Bank is delivering what is needed. Real interest rates are positive with respect to core inflation and given the substantial impetus to inflation as a result of supply-side shocks, yes, there is a requirement not to overdo the pace of tightening” he remarked..

How to live During Inflation

Of the various ills the economy can face, inflation is simultaneously the worst for society as a whole, and yet the easiest for individuals to deal with successfully. The strategies for dealing with inflation are pretty straightforward.
In theory, inflation shouldn't matter at all, "as long as it is predictable". If you know that inflation is going to be 10% next year, you demand a 10% raise (and your boss gives it to you, because he knows that 10% inflation means that the raise doesn't cost him anything). Everybody else does the same and prices, wages, interest rates, stock market returns, etc. are all 10% higher, even though in real terms everyone is standing still.
In practice, of course, it isn't so simple:

• Just because you demand a raise that matches inflation doesn't mean you'll get it.
• When inflation is bad, prices go up every month (maybe every week), but wages and salaries generally only go up once a year. People are always feeling like they're playing catch up.
• Inflation is never really predictable. Everybody has their own guess about what inflation will be, and most of them will be wrong. Whether your estimate is high or low, you'll have problems to the extent that you're wrong. Even if you're wrong in a good way, such as having negotiated a 10% raise when inflation turned out to only be 8%, you're still in trouble (maybe your company has to lay you off).
• Taxes are imposed on nominal returns, so you can find yourself in the perverse situation of losing money in real terms, and yet still paying taxes on supposed profits.

For individuals, the strategies for dealing with inflation are:

1. Be careful about holding cash. This is a big change for people who have come of age since 1981 or so--since then, holding cash has been a perfectly reasonable thing to do. People whose saving and investing experience includes the 1970s, though, remember having a bank account that was earning 5% interest rates that was nevertheless worth 5% less at the end of the year.
2. Don't make long-term, fixed rate loans. Until the inflationary period is over, don't buy bonds. High inflation rates completely destroy the value of long-term bonds. The flip side of this is that borrowing money on a long-term, fixed rate basis (such as a mortgage) can make good sense, if you can get good rate. There are a lot of people who bought a house with a 30-year mortgage at a fixed 6% or 7% and held as rates went up to 14% or higher. They made out like bandits.
3. Invest in "stuff" rather than in money. This can be gold (although I'd hesitate to establish a position at these prices). Even better is stuff that you're going to use anyway. If you're going to use it anyway, and you can get it at a good price now, it makes a great deal of sense to buy stuff now, rather than save cash and then buy it later.
4. Invest for long-term capital gains. Inflation tends to produce illusory profits: you look like you're making a profit even when you're just keeping up with (or even failing to keep up with) inflation--and you have to pay taxes on those profits. This makes investing for income (where a large fraction of the income is really just keeping you even with inflation) a bad deal. It also makes short-term capital gains a bad deal for much the same reason--you have a big (taxable) gain, even if in reality you're just breaking even. Investing for long-term capital gains helps with these issues.
5. Use barter and the informal economy. If your neighbor hires you to help him create a website and you hire him to help you cut down a diseased tree next to your driveway, you both owe income taxes on whatever you're paid. If you instead swap these services informally, you still owe the taxes, but you're expected to declare the income at its fair market value. It's perfectly reasonable, though, to declare the income at what the service would have been worth the previous year.

For businesses, the strategies are similar, except that it's possible to greatly expand on that last point--use barter and the informal economy--by vertically integrating the company so that the steps of producing your product are all internal transfers rather than cash transactions with another company.
If company A produces raw materials, company B refines them, company C builds sub-assemblies, company D makes consumer goods, company E ships them, company F wholesales them, and company G sells them to consumers at retail, imagine what happens as inflation forces prices up at each step along the way--producing illusory profits that each company has to pay taxes on. On the other hand, if one company handles the entire production chain, the only cash transactions are things like salaries and rents--that can be fixed for a year at a time. All the other transactions can be dealt with as an internal accounting matter, with no taxes due.
In addition to vertically integrating, it also makes sense for businesses to reverse the trend toward outsourcing--instead of paying someone else to haul the trash away (a taxable transaction), haul your own trash away (an internal transfer that doesn't incur any taxes). Likewise, in-source anything you can--accounting, legal, maintenance, facilities, etc.Inflation works its harm on the economy in several different ways. None of them are really due to the inflation itself, which is why economists always insist on pointing out that mere inflation does little harm. The harm is done, though. It's just one step removed.

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