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Inflation Takes Toll on Ugandan Construction and Housing

Inflation Takes Toll on Ugandan Construction and Housing
Mbarara City Residential House
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The construction sector is facing significant challenges due to rising inflation. The increased costs of construction materials and building supplies have made it more difficult for people in Uganda to afford homes. Economists attribute the main cause of this inflation to high fuel prices.

According to data from the Uganda Bureau of Statistics (Ubos), the rate of cost increase in the construction sector rose by 0.2 percent in August, compared to a 0.1 percent increase in the previous month. Specifically, inflation in demolition and site preparation increased by 0.5 percent in August, whereas it had decreased by 0.1 percent in July.

Additionally, the high cost of establishing civil engineering structures has led to a monthly change in building material prices, affecting primarily the construction of residential buildings. The prices of diesel, iron, steel or aluminum plates, adhesives, seals, nails, bolts, and screws have notably increased.

However, inflation in electrical, plumbing, and other construction activities decreased by 0.3 percent in August, compared to a 0.7 percent decrease in July.

Mr. Martin Kyeyune, a Ugandan construction economist, explained that supply chain disruptions caused by the Ukraine war and the rise in fuel prices have affected the prices of construction materials.

The construction industry’s declining investment returns have made it less attractive for financial institutions to provide credit. The impact of the Covid-19 pandemic on economic activity, including consumer spending and business output, played a significant role in this decline.

Data from the Bank of Uganda (BoU) reveals that the construction sector has experienced low revenue growth for four consecutive years, dropping from about $1 billion to $500 million in 2021. Many commercial banks are now hesitant to lend to an industry with long-term returns.

In addition, low property rates and decreasing occupancy levels have contributed to the tightening in the real estate sector, according to BoU.

Industry players such as Hima Cement Ltd reported low sales volumes in 2022 due to global inflationary pressures and supply chain disruptions. Energy and power costs have become major components of construction input product costs.

When inflation rates rise, the prices of building materials and labor also increase. The government has been combating these inflationary pressures by freezing the Central Bank rate at 9.5 percent.

To support the vulnerable construction, building, and manufacturing sectors, investors are borrowing overseas at low interest rates to achieve competitive returns on their investments.

According to the BoU’s October 2023 Monetary Policy Statement, annual inflation has been moderating due to appropriate monetary and fiscal policies, the easing of global cost pressures, and the waning impact of drought on food prices. In September 2023, the annual headline and core inflation rates fell to 2.7 percent and 2.4 percent, respectively.

The World Bank Group has supported the BoU’s decision to hold off on tightening monetary policy in light of Uganda’s easing inflationary pressures. In most East and Southern African countries, inflationary pressures are receding or close to medium-term targets.