In Uganda, risks to economic outlook in near term ease amidst growing foreign and domestic demand

The Bank of Uganda Governor Prof. Emmanuel Tumusiime Mutebile said economic growth is expected to remain on a positive trajectory as demand for goods and services both locally and internationally continues to rebound.

According to the Governor, the near-term risks to economic growth have been eased by the recent roll-out of the Covid-19 vaccine.

“Risks to the economic outlook in the near term have eased as a result of signs of a rebound in both foreign and domestic demand which could be bolstered by optimism associated with Covid-19 vaccine development,” the governor said.

However, he went on, the rising Covid-19 cases in Uganda and many other countries, present considerable downside risks.

“In addition, weather-related natural disasters, pro-cyclical private sector credit growth, increasing non-performing loans and high lending interest rates, trade protectionism by Uganda’s trading partners, still pent-up global demand, persistent geopolitical tensions, global trade policy uncertainty and technology fractions pose challenges to domestic economic growth,” he said.

“These coupled with the increasing fiscal financing pressures pose significant downside risks to the growth outlook.”

On the upside, Prof. Mutebile noted, while it could take some time to fully implement worldwide, “the recent news on Covid-19 vaccine development is reassuring and presents positive prospects.”

The Governor made the remarks while releasing the Monetary Policy Statement for December 2020, which shows that the Central Bank Rate (CBR) was maintained at 7 percent.

According to the statement, the economic recovery has gradually gained traction, in line with projection for economic growth of above 3 percent in FY2020/21.

The high-frequency indicators of economic activity in the quarter to October 2020 indicate an annual growth of 3.3 percent in contrast to the sharp contraction of 6 percent in the quarter to June 2020.

However, Prof. Mutebile said, the recovery is proceeding at an uneven pace.

“Social distancing measures continue to weigh heavily on certain activities of the services sector, particularly in hospitality and tourism, while other sectors are still feeling the lagged effects of the economic downturn,” reads the statement.

“Economic activity is expected to take longer to recover and resource utilization to return to normal given the sharp contraction experienced in the quarter to June 2020. Economic growth is therefore projected to remain below its potential until FY2023/24.”

Inflation remains benign reflecting a combination of both global and domestic developments.

Falling food crop and energy prices pushed headline inflation down to 3.7 percent in November 2020 from 4.5 percent in October 2020, according to the statement.

Core inflation also declined to 5.8 percent from 6.3 percent.

According to Prof. Mutebile, there is still considerable uncertainty surrounding economic developments and there is need for monetary policy to remain accommodative until the economy sustainably normalises since inflation is projected to be well contained over the medium-term.

“Against this backdrop, the MPC decided to keep CBR rate unchanged at 7 percent and maintain liquidity support to supervised financial institutions,” he said.

“The band on the CBR has also been maintained at +/-2 percentage points, while the margin on the rediscount rate and bank rate is unchanged at 3 and 4 percentage points on the CBR, respectively. Consequently, the rediscount rate and the bank rate have been maintained at 10 percent and 11 percent, respectively.”