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BoU Paints Gloomy Picture For Uganda’s Economy

BoU Governor, Prof. Emmanuel Tumusiime-Mutebile

The Bank of Uganda, at the Monetary Policy Committee (MPC) meeting of August 2020 has maintained the Central Bank Rate (CBR) at 7 percent and remained committed to providing liquidity support to Supervised Financial Institutions(SFIs).

Releasing the Monetary Policy7 Statement for August today,  Prof. Emmanuel Tumusiime-Mutebile, economic  growth  is expected to remain below the potential growth rate until FY2022/23.

“The economic outlook is extremely uncertain, largely because of the unpredictable intensity and duration of the pandemic. The downside risks to the economic growth projection include the possibility of a widespread and  possibly  more  severe  second  wave  of  the  virus,  requiring  a  complete  lockdown,  as  well  as, the  locust invasion,” Mutebile said.

He added: “Moreover,  Uganda remains  highly  vulnerable  to recurring spouts of  global  financial volatility, stemming  either  from  continued  global  economic weakness  or the  uncontrolled  spread  of  the  COVID-19 pandemic. In addition, increasing Non-Performing Loans (NPLs) and high lending interest rates could delay recovery  of  Private  Sector  Credit  (PSC)extensions to  pre-COVID  levels.”

 Furthermore,  he said, low exports of goods and subdued tourism receipts are projected to continue to weigh on economic growth given weaker global demand.

“Therefore, economic growth in Financial Year (FY) 2020/21 is projected in the range of  3.0-4.0  percent, further  increasing  to  5.0-6.0  percent  in  FY  2021/22,” he said.

BoU says economic activity is estimated to have contracted by 3.2 percent in the second quarter of 2020as a result of a  combination  of COVID-19  containment  measures and floods.

Mutebile however said that the  complementary fiscal  and  monetary policy actions have provided a foundation for the recovery of economic activity as the lockdown is relaxed.

The  Composite  Index  of  Economic  Activity(CIEA)grew by 5.7 percent  month-on-month  in June2020, indicating a  pickup  in economic  activity relative  to the contraction registered in the three  months  to May2020. The Purchasing Managers’ Index (PMI) also continued to register improvements since May 2020 and slightly crossed the 50 mark, indicating improvements in the business environment.

“The  COVID-19  pandemic  has  affected  both  the  demand and  supply  side  of  the  economy. Whereas  supply will initially recover in line with the easing of containment measures, demand will benefit only gradually from improvements  in  foreign  demand  and  confidence levels ,as  well  as continued support  from  fiscal  and monetary  policies. Eventually aggregate demand is  likely  to increase  faster  than  supply, thereby absorbing excess capacity,” he said.

As the easing of the lockdown continues, Mutebile said that the economy is expected to slowly recover, reflecting the effects of a  slow  rebound  in both foreign and  domestic demand  and, subdued  confidence  on  the  part  of  households and  firms.

“In  addition, many consumers  are  expected  to  be  hesitant  to  resume  their  previous  spending patterns,  partly  due  to fears  of  contracting  the  virus and  uncertainty  about earnings. Moreover,  even  those whose  incomes  were  not affected may increase their  need  for  precautionary  savings,” he said.

On  the  upside, Mutebile said economic  growth could turn  out stronger than  projected if the  spread  of  the  virus  is  contained,  or  if  a  vaccine  or  effective treatment is available earlier than is currently being assumed. Such a scenario could lead to greater business and consumer confidence, factors which would likely lead to stronger economic growth.

 Annual headline  and  core  inflation rose to 4.7percent  and 5.8percent,  respectively,  in July 2020,  from corresponding levels of 4.1percent and 4.9percent in June 2020.

The path for CPI inflation over the next 12 months largely reflects the influence of containment measures particularly on public transport and increases in  prices  of  imported  consumer  goods  as  a  result  of higher taxes  to  support  import  substitution.

However, the  decline  in  food  crop  and  energy  prices and subdued  demand could  partly  hold  inflation  down.

BoU says core inflation is expected to peak at 6.1 percent in the first quarter of 2021,while headline inflation could peak at 6.2 percent. In the medium term, the inflation outlook depends primarily on the speed and strength at which demand and supply recover. Risks to the inflation outlook include a higher fiscal deficit and a more depreciated exchange rate due to the weakening  external  position. 

“On  the  downside,  domestic  demand  may  take  longer  to  recover  despite  the gradual  easing of the  lockdown.  Moreover, food  crop  prices  and  external  sources  of  inflation  are  likely  to remain weak in the near-term amid the global economic downturn,” Mutebile said.

He added that the balance of risks to the inflation forecast are assessed to be on the upside with core inflation expected to rise above the 5 percent target within 12 months, even though GDP growth is expected to remain below its potential levels.

Against the above background, BoU decided to maintain the CBR at 7 percent.

Taddewo William Senyonyi
William is a seasoned business and finance journalist. He is also an agripreneur and a coffee enthusiast.

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