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Bank of Uganda Governor Prof. Emmanuel Mutebile

CBR maintained at 7%, BoU says ‘economic growth still fragile’

“economic growth is tepid, uneven, and still fragile and projected to contract in the range of 0.2 and 0.5 percent in 2020.”
posted onOctober 22, 2020

The Bank of Uganda (BoU), at the Monetary Policy Committee (MPC) meeting of October 2020 maintained the Central Bank Rate (CBR) at 7 percent, Prof. Emmanuel Tumusiime-Mutebile, the central bank governor, announced Thursday, noting that “economic growth is tepid, uneven, and still fragile and projected to contract in the range of 0.2 and 0.5 percent in 2020.”

CBR is the rate charged by the central bank for lending funds to commercial banks and it influences lending rates of commercial banks.

The governor also revealed that high-frequency indicators for economic activity in the quarter to September 2020 point to a mild recovery of economic activity with an estimated growth of 2 percent from a sharp contraction of 6 percent in the quarter to June 2020.

“The simultaneous fiscal, monetary, and financial stimuli have been effective in avoiding the most negative economic consequences of the COVID-19 shock,” he said.

“The easing of the lockdown, the stability of the exchange rate, as well as a feeble improvement in both foreign and domestic demand are supporting economic growth recovery.”

Barring a renewed worsening of the course of the COVID-19 pandemic, the governor explained, GDP growth momentum in 12 to 24 months ahead is likely to be modest against sluggish external demand, subdued consumer expenditure, the weak performance of the service sector, commercial banks’ cautious lending, and uncertain economic outlook.

Economic growth in Financial Year (FY) 2020/21 is projected at 2.0-3.0 percent and is expected to increase to 5.0-6.0 percent in FY 2021/22 and to 6- 7 percent in the outer years.

In the October Monetary Policy Statement, BoU says the economic outlook is extremely uncertain, largely because of the unpredictable course of the virus and the wide range of shocks hitting the economy.

“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. Moreover, Uganda remains highly vulnerable to periodic spouts of global financial volatility, stemming from continued global economic weakness and geopolitical tensions, and increasing protectionism,” reads the statement.

“In addition, the flow of Private Sector Credit (PSC) could remain subdued due to commercial banks facing 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.”

On the upside, officials say, economic growth could recover swiftly than currently projected if the threat from Covid-19 fades more quickly than currently envisaged and global economic growth strengthens.

“Such a scenario could lead to greater business and consumer confidence, which factors would likely lead to a stronger domestic economic growth,” further reads the statement.

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