Uganda’s central bank on Monday held its key policy rate at its current all-time low, citing “the heightened uncertainties” around economic growth.
Following its latest monetary policy meeting, the Bank of Uganda said it was keeping its central bank rate unchanged at 7% and extending its credit relief and liquidity assistance measures for businesses and financial institutions, respectively, for six months starting 1 April.
The band on the CBR was maintained at [-/+]2%, the rediscount rate at 10%, and the bank rate at 11%.
The moves look to be part of a broader strategy to support private sector activity — and economic activity, as a result — through affordable credit and ensure that inflation stays within the Bank’s target of 5%.
BoU’s first rate cut of the Covid-19 pandemic was in April last year when the CBR was reduced by 1% to 8% in response to a “severe contraction” in economic activity. It was later cut to 7% in June, the lowest it has been since the Bank adopted an inflation targeting monetary policy in July 2011, and has stayed there since.
The central bank also announced debt relief and liquidity assistance measures to support businesses and financial institutions in March. The measures went into effect on 1 April 2020 and were to run for one year.
In the statement usually released after the meeting, the Bank’s monetary policy committee noted that economic recovery has slowed since its last meeting in December as coronavirus infections increased. This underlined the economy’s “uneven pace” since the start of the current fiscal year as “social distancing measures continue to weigh heavily on certain activities in the service sector, particular education, hospitality, and tourism.”
It added that the central bank’s high frequency indicators of economic activity showed a growth of 2.6% in the quarter to December, down from 9.2% in the previous quarter. In addition, private sector activity also declined in the last quarter of 2020 compared to the previous quarter, according to the Bank’s Business Confidence Index and the IHS Markit Purchasing Managers’ Index (PMI).
The Bank makes it clear that the path of the economy will depend on how well the coronavirus is handled in the country and across the world. The tourism sub-sector is expected recover once an effective Covid-19 vaccine becomes widely available in Uganda and infections are contained.
Externally, stronger demand, global investment and a reduction in coronavirus-related uncertainty will lead to higher export receipts. Because a substantial amount of Uganda’s exports are to countries in the Common Market for Eastern and Southern Africa bloc “where the vaccine rollout is likely to be sluggish”, the committee is worried that the Covid-19-induced slump will persist in the region and harm growth in the medium and long term.
The BoU expects that Uganda’s gross domestic product will grow between 3% and 3.5% in the fiscal year to June 2021. It is set to increase to between 4% and 4.5% in the twelve months to June 2022, and to between 6% and 7% in the following years.
Other than a protracted pandemic, other downside risks to growth include “adverse weather-related shocks, feeble private sector credit growth, increasing non-performing loans that could result in higher lending interest rates, public investment financing challenges that could slow implementation of public investments, global trade frictions and the still repressed global demand,” said the statement.
The central bank strikes a more optimistic tone on inflation whose outlook it says is “benign”. In January, the year on year headline inflation rate climbed slightly to 3.7% from 3.6% while core inflation declined to 5.5% from 5.9% the previous month.
“As the effects of public transport measures to contain Covid-19 dissipate over the coming four months, and in combination with considerable spare capacity in the economy, core inflation is projected to decline to about 4.5% in 2021,” the statement reads.
“Inflation is expected to return sustainably to the 5% target as excess capacity is absorbed in the medium term.”
