Rising Inflation Affects Uganda’s Construction Sector

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Mbarara City Residential House - Rising Inflation Affects Uganda's Construction Sector
The situation has been aggravated by declining investment returns in the construction industry, making it less attractive for financial institutions to provide credit. The economic impact of the Covid-19 pandemic in 2020 further contributed to this decline, as lockdowns hindered consumer spending and business output.
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In a recent report, it has been revealed that the construction and building materials sector in Uganda is experiencing a significant rise in costs. This increase in costs is causing challenges for Ugandans who wish to rent or buy homes. According to economists, the primary reason for this inflation is the soaring prices of fuel.

Data from the Uganda Bureau of Statistics (Ubos) indicates that the rate of cost increase in the construction sector rose by 0.2 percent in August, compared to the 0.1 percent increase the previous month. Specifically, inflation related to demolition and site preparation increased by 0.5 percent in August, contrasting with a 0.1 percent decrease in July.

Additionally, the high costs of establishing civil engineering structures have led to increased monthly changes in building material prices, primarily impacting the construction of residential buildings. Notably, the prices of diesel, iron, steel or aluminum plates, adhesives, seals, nails, bolts, and screws have seen significant increases.



However, electrical, plumbing, and other construction activities saw a decrease of 0.3 percent in inflation in August, compared to a 0.7 percent decrease in July. Mr. Martin Kyeyune, a Ugandan construction economist, attributed these price fluctuations to supply chain disruptions caused by the Ukraine war, which delayed input deliveries to local industries, and the rising fuel prices, which increased logistical expenses for local manufacturing companies.

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The situation has been aggravated by declining investment returns in the construction industry, making it less attractive for financial institutions to provide credit. The economic impact of the Covid-19 pandemic in 2020 further contributed to this decline, as lockdowns hindered consumer spending and business output.

According to data from the Bank of Uganda (BoU), the construction sector has experienced four consecutive years of low revenue growth, decreasing from approximately $1 billion to $500 million in 2021. Consequently, several commercial banks are hesitant to lend to an industry with long-term returns.

The BoU’s fourth quarter Bank Lending Survey Report for the 2022/2023 financial year noted that the tightening in the building, mortgage, and real estate sector was mainly due to low property rates and decreasing occupancy levels. This is because banks primarily rely on short-term deposits, while returns in the real estate sector are long-term.



Low sales volumes were reported by industry players like Hima Cement Ltd in 2022 due to global inflationary pressures and supply chain disruptions. Bamburi Cement Ltd, the parent company of Hima Cement, attributed the decline in sales volumes and turnover to reduced government infrastructure project spending, weakened consumer purchasing power, and limited private sector credit growth.

Energy and power costs are the most significant components in the production and distribution of construction input products. This has led to inflation in the prices of imported raw materials and energy costs, particularly coal, which has eroded profit margins.

When the inflation rate rises, the prices of building materials also increase. Clients not only have to account for rising construction costs but also pay additional charges due to inflation uncertainties.

To address cost overruns caused by inflation, it is essential to develop a budgeting technique that considers inflation before finalizing project estimations, according to a 2023 Ain Shams Engineering journal.

The government is aware of the inflationary pressures affecting the manufacturing industry and is combating them by maintaining the Central Bank rate at 9.5 percent. To support the vulnerable construction, building, and manufacturing sectors, investors are borrowing at low interest rates from overseas to achieve competitive returns on investment.

In its October 2023 Monetary Policy Statement, the BoU stated that despite recent fuel price increases, annual inflation has continued to moderate. This is attributed to appropriate monetary and fiscal policies, reduced impact of drought on food prices, and easing global cost pressures. In September 2023, the annual headline and core inflation rates decreased to 2.7 percent and 2.4 percent, respectively, from 3.5 percent and 3.3 percent in August 2023.

The World Bank Group has supported the BoU’s decision not to tighten monetary policy in response to the country’s improving inflationary conditions. According to the World Bank, inflationary pressures are receding in most East and Southern African countries, with some already close to their medium-term inflation targets.

These findings suggest that countries like Kenya, South Africa, and Uganda may pause their hiking cycles, while others may need to continue fine-tuning their policies to further reduce inflation, as stated in the World Bank’s revised sub-Saharan economic outlook report.



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