CBR drops: Why Central Bank says Uganda’s economy is slowing down

Tuesday October 22 2019

A woman counts cash in a banking hall . The

A woman counts cash in a banking hall . The banking sector held sufficient liquidity buffers, with the industry liquid assets to total deposits ratio being 45.5 per cent in the year to June 2019. PHOTO BY ERONIE KAMUKAMA 

By Martin Luther Oketch

Global growth has continued softening, reflecting decelerating economic activity in advanced economies and emerging markets and developing economies (EMDEs). Global trade and manufacturing have slowed down tremendously. A continued deterioration in the global manufacturing Purchasing Managers’ Index (PMI) and business confidence suggests that industrial activity will remain subdued for the rest of 2019.

Amid rising policy uncertainty, due to the renewed intensification of trade tensions in the world economy, global growth prospects have weakened, commodity prices have declined, and capital flows to EMDEs have slowed. These headwinds are expected to weigh on activity in Sub-Saharan Africa.

Globalisation has allowed many emerging countries to compete in world markets. Globalisation encompasses several phenomena and trends that have led to a growing interdependence of most economies throughout the world. It displays its effects through a strong increase in cross-border transactions in goods and services, capital, labour and natural resources.

In an interview with Prosper Magazine recently, the Deputy governor Bank of Uganda (BoU), Dr Louis Kasekende, said quarterly Gross Domestic Product (GDP) figures recently released by Uganda Bureau of Statistics (UBOS) indicate average GDP growth of 5.5 per cent year-on year for second half of Financial Year 2018/19 relative to 6.6 per cent in the first half of that year, Financial Year 2018/19.

Why slowdown?
“The slowdown should be short-lived with a stronger rebound in economic activity expected in part due to the expected lagged impact of monetary policy easing, which should boost private sector credit coupled with an expected increase in private sector demand,” he said.

Dr Kasekende said with respect to external developments, the heightened global tensions and uncertainty coupled with the deceleration of world growth, mean that the boost the Ugandan economy gets from abroad shall be lower.

“However, the stable international oil prices mean that the external push to domestic inflation is also benign,” he said.


Liquidity is fundamental to the wellbeing of financial institutions particularly banking. It determines the growth and development of banks as it ensures the proper functioning of financial markets. Banks act as liquidity providers and financial intermediaries in a financial system.

With respect to the liquidity of the commercial banks at the moment; Dr Kasekende said: “The banking sector held sufficient liquidity buffers, with the industry liquid assets to total deposits ratio being 45.5 per cent in the year to June 2019 and all banks were above the minimum requirement of 20 per cent.”

The highlights in BoU monetary policy report for October reveals that Private Sector Credit (PSC) growth remains strong despite a slowdown in the quarter to August 2019; lower cost of borrow ing and better asset quality.

The average year on year (y-o-y) growth in PSC was 13.9 per cent for the quarter to August 2019 relative to 14 .8 per cent for the quarter that ended May 2019.

The adequate level of liquidity in the banking sector has seen banks extending Shs16.12 trillion as of the end of August 2019 to the general public.

During the period, shilling denominated loans grew by 17 .6 per cent compared to 20.6 per cent while foreign-denominated loans grew by 7.0 per cent relative to 4.9 per cent. The quality of loans extended by commercial banks remains low with NPLs at 3.8 per cent in June 2019.

An International Monetary Fund (IMF) team visited Kampala from September 30 to October 4, 2019, led by Dr Axel Schimmelpfennig who said growth could remain at around 6 per cent in 2019/20, if oil investments are not significantly delayed.

Dr Schimmelpfenning said the current account deficit widened to 11 per cent of GDP in 2018/19 largely due to investment-related imports. The Ugandan shilling has remained broadly stable.

“After last year’s strong performance in domestic revenue collection, execution of the current budget (fiscal year 2019/20) is challenging. Delays in the implementation of some revenue measures and shortfalls in non-tax revenues are likely to widen the overall fiscal deficit. The authorities need to adopt measures of around 1 per cent of GDP to safeguard their budget targets and prevent a recurrence of domestic arrears,” he said.

Dr Schimmelpfennig explained that the government’s medium-term fiscal policy the framework rests on the assumptions that oil sector investments proceed as planned, implementation of the domestic revenue mobilisation strategy yields ½ per cent of GDP in additional revenue collection per year.

“Bank of Uganda’s October 7 decision to lower its policy rate by 100 basis points to 9 per cent was appropriate, with core inflation at 2.5 per cent year-on-year in September and projected to stay below 5 per cent over the next 12–18 months. The financial sector remains healthy based on the latest reported financial soundness indicators. The regulatory framework and Bank of Uganda’s strong supervision have been instrumental in this regard,” he said.

On the sidelines of the visit, the African Development Bank, the Government and the IMF co-organised a workshop to discuss balancing infrastructure and human capital investments.
Participants agreed that achieving sustained high and inclusive growth will require a mix of physical and human capital investment that complement each other. In addition, allocating more resources to maintenance is essential to maximising the return on infrastructure investment.

Boosting growth
There have been several initiatives that have been undertaken by the government to spur Uganda’s economic growth and development. But the results of various initiatives have not been positive as expected.

An Economics lecturer at Makerere University School of Economic, Dr Fred Muhumuza said in an interview: “The possibility is our public investment in stock that is not being used by the very productive units due to low demand (partly due to poverty and depressed power of incomes), cost of doing business remains high despite the investments intended to reduce it, corruption, the persistent inflow of imports implying Uganda has not gained competitiveness.”

Every year, the Ministry of Finance plan forecasts economic growth. Economic forecasts build confidence and certainty in the economy as they influence the decisions of the government and private sector. Individuals feel more optimistic about the economy when the growth rate is high.

The Commissioner macroeconomic department at the Ministry of Finance, Dr Albert Musisi in an interview with Prosper On October 10 said the Central Bank’s concern on the economy slowing down could be seen from the consumption perspectives of low inflation which could signify that there could be slow down in the aggregate demand.

Dr Musisi said although there are vulnerabilities/risks the economy is facing, the ministry of Finance which always comes up with economic forecasts still maintains its growth focus of 6.3 per cent for the fiscal year 2019/20.

“We have not changed the growth project of 6.3 per cent for this financial year. We still see robust growth,” he said.

Dr Musisi said the inflation rate has been relatively low with downward trend movements and at the same time the exchange has also been low which has an impact of commodity exports such as coffee.

However, Dr Musisi said what could happen is the world economy, which is slowing down, which affects the domestic economy with a lag.

“There is a cause to be conscious of what is happening in the global economy especially the ongoing trade war between the United States and China, which has affected the global growth,” he said.

Dr Musisi said following the attack on the Saudi Arabia oil facilitie,s there was a worry of international oil prices going up.

Finance Minister Matia Kasaija said the revision of Uganda’s economy upwards is good news. “We believe that when the various infrastructure projects going on in the country gets completed our economic growth level will be higher than it is now,” he said.

Softening global growth, falling commodity prices, increased trade tensions, and heightened uncertainty, compounded by the slow pace of reforms domestically, are weighing on activity across the region. The slowdown in economic activity mainly reflected weaker fixed investment and net exports.

Rebasing uganda’s measure of economy: GDP

On October 10, Uganda Bureau of Statistic (UBOS) published the rebased Gross Domestic Product (GDP) for Uganda using the 2016/17 base year which revealed that the size of Uganda’s economy is now Shs122.694 trillion, which translated into economic growth of 6.5 per cent for the financial year 2018/19.

Rebasing of GDP means replacing the old base period with a more recent base year for computing constant price estimates.

As relative prices and the structure of the economy change over time, it is necessary to update the base year regularly, preferably after every five years.

Presenting the rebased GDP estimates at Statistics House, director macroeconomic statistics UBOS, Ms Aliziki Kaudha Lubega said: “The economy was revised upward by 18.3 per cent from the published estimates of Shs91.718 trillion to Shs108.518 trillion.”

This is the third time UBOS rebased Uganda’s GDP the second one was done in 2009/10 Uganda Bureau of Statistic (UBOS) which then revealed that the size of Uganda’s economy was Shs76.626 trillion based on the new estimate published by UBOS on October 10 instead of Shs40.966 trillion which was published earlier.