Kampala. Economists and bankers have applauded the continued easing of the monetary policy by the Central Bank saying the move will create money needed to rejuvenate the economy from continuous slowdown being experienced.
On Wednesday, Bank of Uganda (BoU) reduced the Central Bank Rate (CBR) by 0.5 percentage points to 11.5 per cent, saying the move is meant to stimulate economic activities in the country which have persistently remained low.
Though Uganda’s economic growth remains sound, the country has been registering slower Gross Domestic Product (GDP) growth below its potential rate, which economists and bankers say are structural.
Lending to private sector
In an interview with Daily Monitor on Wednesday, Centenary Bank managing director, also the chairperson of Uganda Bankers Association (UBA), Mr Fabian Kasi, said: “The action by Bank of Uganda to reduce the CBR is a good move because it will encourage banks though not very soon to lend more to the private sector at a reduced interest rate and in that, it will create more money needed in the economy.”
Lower interest rates make the cost of borrowing cheaper in both the short and long run. This encourages consumers and firms to take out loans to finance greater spending and investment.
Mr Kasi said the Central Bank wants to stimulate economic activities which have been low by making the cost of available credits cheaper for firms and the general public to borrow from the commercial banks.
“I am optimistic that commercial lending rates will come down in the near future. The importance of this is that many people will be borrowing and more economic activities will be generated,” he said.
Last year, the economy experienced difficulties in form of high lending rates, increase in the non-performing loans/high default rates and low economic activities due to low aggregate demand in the economy.
Dr Fred Muhumuza, a development research economist and a lecturer at Makerere University told Daily Monitor that the Central Bank is realising that controlling inflation is not only by increasing interest rates.
“It is bad to keep interest rates because the current problem in Uganda’s economy is structural and the move by the BoU to reduce policy rate is good because it will sober up economic activities but it won’t work because there are structural problems in the entire economy,” he said.
The Central Bank expects growth going forward to be supported by high public investment, however, Dr Muhumuza said large public investment being done by the government is part of the problem because the returns are not visible.
In his monetary policy presentation, the Governor Bank of Uganda, Mr Emmanuel Tumusiime Mutebile, said economic growth estimates for the first half of FY 2016/17 indicated that GDP growth was weaker than expected, largely reflecting temporary adverse weather related factors.
“The Bank of Uganda’s (BoU) Composite Index of Economic activity for December 2016 indicates a slowdown in economic activity in the quarter to December 2016. While the slowdown is due to temporary factors, economic growth could remain weak in the remaining part of FY 2016/17, reflecting a combination of domestic and external factors,” he said.
Mr Mutebile added: “Consequently, GDP growth projection for FY 2016/17 has been revised downwards to 4.5 per cent from the 5 per cent that we had at the previous Monetary Policy Committee meeting.
“The economic prospects are more optimistic for FY 2017/18, with GDP expected to grow at 5.5 per cent, driven by improved public infrastructure investment, a recovery in private sector investment and improvements in agricultural production and consumption.”
Mr Mutebile said global conditions remain uncertain though tentatively improving. “Bank of Uganda, therefore, expects the impact of negative external shocks on the economy to be softened going forward,” he said.
Since the previous meeting of the Monetary Policy Committee, the near-term inflation outlook has deteriorated, but the medium-term outlook is unchanged.
The BoU’s short term forecasts indicate that inflation will temporarily increase but remain within the target band of 5 per cent plus/minus 3 percentage points.
Mr Mutebile explained that inflation is expected to return to the target of 5 per cent in 12 months as potential growth is achieved.
The near term increase in inflation is attributed to the increasing international oil and food prices though it may be constrained by weak aggregate demand.
He further stressed that the more favourable Shilling exchange rate has been an important factor in offsetting some of the upward pressures on inflation.
“Nevertheless, the exchange rate remains vulnerable to both domestic and external shocks. Bank of Uganda judges that a further cautious easing of monetary policy is warranted to support economic activity. The easing will also be consistent with achieving the annual core inflation target of 5 per cent over the medium term,” he said.
The managing director Alpha Capital, Mr Stephen Kaboyo, said: “It is a long while since BoU cut by 50 basis points. This action speaks volumes on the cautious approach. Reading between the lines, the action suggests that BoU believes that the risks to a further downside to the real economy are more immediate than the risks to the side of inflation.”
Mr Kaboyo said the CBR deems that the contraction of economic activity is still visible without any signs yet that recovery is taking shape.
The executive director of research at BoU, Dr Adam Mugume, said Uganda’s economic growth of 4.5 per cent is still good enough because regional economic growth for sub-Saharan Africa 2016 is 1.4 per cent.
Speaking to Daily Monitor on February 15, a senior economist at the World Bank Uganda country office, Ms Racheal K. Sebudde, said Uganda’s economy needs more stimulus.
“Though inflation rate has been rising due to droughts that have hit the country to the level at which it is now, it is still within the control range of the Central Bank. So reducing the Central Bank Rate at this point is a welcome move in order to support economic growth and simulate activities,” she said.
Ms Sebudde added: “The level of aggregate demand in the economy is very low amidst low economic activities so there is need for policy support.”