BoU Governor Prof. Emmanuel Tumusiime-Mutebile
Risks to the economic outlook in the near term have brightened with the progress on the Covid-19 vaccines, signs of recovery in private demand and the additional boost to growth expected from fiscal policy, according to the Bank of Uganda Monetary Policy Report December 2020
“The economic outlook is extremely uncertain, due to the unpredictable course of the virus, election related factors, continued weakness in global economic activity, weather-related natural disasters and escalation of geopolitical tensions, trade policy uncertainty and technology fractions.
The downside risks to the economic growth projection include the possibility of an increase in new infections and a longer period to get the virus under control, periodic spouts of global financial market volatility, and increasing protectionism by trading partners,” the report reads in part.
The private sector credit extensions could remain subdued due to increasing Non-Performing Loans (NPLs), high lending interest rates in the face of weak economic activity and increase in domestic financing of the fiscal deficit, according to the December 2020 Monetary Policy Report.
“On the upside, however, economic growth could recover swiftly if global economic growth strengthens, private sector credit recovery is sustained, and the vaccine is widely distributed.”
According to the report, economic growth is projected to increase to 3.5-4.5 percent in FY2020/21, further to 5.0-6.0 percent in FY 2021/22 and to between 6.5-7.5 percent beyond.
According to the report, monetary and fiscal policy stimuli as well as rebound in both foreign and domestic demand will support growth albeit could weighed down by, reduced consumption due to voluntary social distancing in response to rising COVID-19 infections, increased precautionary savings and the weak performance of the tourism sector.
“In addition, pro-cyclical private sector credit growth, increasing non-performing loans, high lending interest rates, increasing trade protectionism, volatile international financial markets and the subdued global demand still pose challenges to domestic growth. This coupled by the increasing fiscal financing pressures could pose significant downside risks to the growth outlook,” the report says.
It adds: “However, the recent developments surrounding the Covid-19 vaccines present a positive picture to the outlook. The outlook for Uganda’s economy is uncertain and depends on a wide range of developments. GDP is expected to recover gradually over coming years. However, the pandemic will have long lasting effects on the economy.”
It adds that many businesses in the service sectors, such as transport, entertainment and leisure, could become insolvent if demand does not recover, triggering large-scale job losses.
“Rising unemployment is also likely to worsen the risk of poverty and deprivation for millions of informal workers, particularly. Overall, risks to the economic outlook in the near term have brightened with the progress on the Covid-19 vaccines, signs of recovery in private demand and the additional boost to growth expected from fiscal policy. Nevertheless, the medium-term outlook remains highly uncertain and there are a number of risks,” the report says.
The report says economic growth slowed in FY2019/20.
“Indeed, the most recent data from UBOS depicts that the economy only grew by 2.9 percent in FY2019/20 from 6.8 percent in FY2018/19 The slowdown in economic growth was largely on account of the mitigation measures taken to curb the COVID-19 pandemic. The most affected sectors were the industry and services sectors that each grew by 2.2 percent and 2.9 percent respectively, lower than 10.1 percent and 5.7 percent in FY2018/19,” the report says.
It adds that although a recovery in economic activity is underway across the country, it is proceeding at an uneven pace.
“Some industries remain constrained by mandated and voluntary social distancing, particularly in hospitality and tourism, while some other industries are feeling the effects of the broader economic downturn. The high frequency indicators of economic activity point to continued recovery in economic activity in the quarter to October 2020,” the report says.