BoU revises inflation upwards due to depreciation of shilling 

Bank of Uganda has said the inflation forecast has been revised upwards in the short term due to relatively stronger exchange rate depreciation. 

The January inflation rose to 2.8 percent and is expected to increase further but Bank of Uganda projects it to remain below the medium-term target of 5percent.

The shilling has been under relative pressure, opening yesterday at Shs3,818.25 per dollar, before losing slightly to Shs3,818.75 by midday.  

While presenting the Monetary Policy Statement for February in Kampala yesterday Bank of Uganda Deputy Governor  Michael Atingi-Ego, said the Central Bank had decided that keeping the Central Bank Rate unchanged was necessary to anchor inflation around the target in the medium term. 

Consequently, the Central Bank Rate was maintained at 9.5 percent, which Dr Atingi-Ego said was consistent with the current assessment of inflation and growth prospects and remains supportive of social-economic transformation. 

“BoU monetary policy decisions will continue to be based on the incoming economic and financial data,” he said.     

In the new forecast, inflation is projected to stay around 3 percent through the first half of 2024, broadly reflecting stable demand conditions and the easing in global price pressures, which are expected to continue to flow through to domestic prices over time. 

Dr Atingi-Ego said that risks to inflation remain highly subject to changes in global commodity prices and global financial market developments. 

Instability in the Middle East is creating new supply chain disruptions and the threat of higher oil prices. 

In addition, he said the risk of heightened volatility in the global financial and foreign exchange markets remains, noting that the recent movements in the shilling against the dollar was primarily driven by external factors and, if sustained, could result in higher inflation disruptions which could reverse global disinflation and delay easing of the monetary policy in advanced economies, leading to persistent portfolio outflows and exerting more depreciation pressures on the shilling.  

Economic growth continues to pick up, in part, reflecting the waning drag on growth from previous tight monetary and fiscal policies.

Rising domestic debt risky for businesses 

Bank of Uganda has warned that the increasing appetite for loans in the domestic market by government presents risks, key among them an increase in interest rates. 

Dr Atingi-Ego said the increase in government’s domestic borrowing will crowd out the private sector from the credit market, thus constrain consumption and private sector investment. 

“Increasing government financing from the domestic banking sector could result in higher lending interest rates and crowd out the private sector from the credit market, thereby constraining household consumption and private sector investments. While the economy is evolving largely as projected in the December round of forecasts, considerable uncertainties remain,” he said. 

Interest rates have remained volatile due to a number of factors, among which include an increase in lenders’ risk averseness and a rise in default rates, which has seen the sector return growth in write offs. 

During the year ended December 2023, according to Bank of Uganda, interest rates peaked to 20.14 percent, returning an annual average of 20.1 percent, an indication of high cost of business financing over the period.

Government has also remained an active borrower in the domestic market, despite warnings from experts that the rising appetite for local loans leaves the private sector with limited opitions in regard to accessing credit.

Details in the Auditor General’s report indicate that government’s domestic borrowing has been growing by an average of 5.16 percent in the last five years, with the largest increase recorded at 12.85 percent during the 2020/21 financial year. 

During the five years to June 2023, the Auditor General indicated that domestic debt, which is largely held in Treasury Bonds and Bills, and un-securitised debt had grown to Shs33.25 trillion from just Shs5.5 trillion in the period ended June 2019.  

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