A slowdown in global economic activity and subdued domestic demand has weakened the economy and made clear the need for monetary and fiscal stimulus to support stronger growth, the Bank of Uganda has said.
The central bank said its policy interest rate would remain at 9%, a level that “remains accommodative and supportive of economic activity”.
In a statement explaining its decision, the Bank said its monthly leading economic indicators show that economic activity has slowed since the beginning of 2019, driven by weaker global activity and domestic factors.
“Indeed, in the first 10 months of 2019, tourism receipts are estimated to have grown at a lower rate and merchandise exports, excluding gold and reexports, contracted reflecting moderating external demand. On the domestic scene, moderation of domestic demand conditions could also have contributed to the slowing of economic activity,” the statement said.
Continuing global geopolitical tensions and rising trade tensions, combined with a decline in domestic business investment are likely to weigh on economic growth in future, the Bank said. It also warned that a rise in domestic borrowing to meet the increase in the government’s financing needs could raise borrowing costs for the private sector.
Economic growth this year is projected to range between 5.5% and 6.0%, a pace that will be sustained into 2020, the statement said. It noted that fiscal and monetary stimulus measures are expected to support growth in the medium term.
The statement said the Bank’s inflation outlook is unchanged from that announced after October’s Monetary Policy Committee meeting — it is “projected to remain below the 5% target until the fourth quarter of 2020” — but added a cautious note on rising inflationary pressures.
“Due to unpredictable weather patterns, food price inflation remains uncertain. A further upside risk to the inflation outlook is capital flow volatility which could put pressure on the exchange rate. On the downside, demand pressures remain subdued.”
Uganda’s consumer prices measure of inflation increased for the second straight month in November to a five-month high of 3% year on year, up from 2.5% the previous month. “A relatively stronger shilling and subdued domestic demand contributed to moderation of the increase in inflation,” the statement said.
Core inflation rose 2.9% from a year earlier, up from 2.6% in October, and increases were also recorded for energy, fuels and utilities inflation and inflation for food crops and related items.