Economic recovery to remain subdued, BoU maintains CBR

A customer counts money in a banking hall. Banks have been sitting on plenty of liquidity for more than 12 months because of lock down. PHOTO/Eronie Kamukama

What you need to know:

  • Whereas the economy has had some good recovery in the first quarter of 2021, the Central Bank says there are still a number of threats that might dampen growth.

Bank of Uganda has said the economy will remain subdued even as there has been gradual recovery in the first quarter of 2021.

Speaking during the release of the April Monetary Policy report in Kampala yesterday, Bank of Uganda said the Central Bank Rate would be maintained at 7 per cent, for the fourth month, to support economic recovery and encourage a reduction in commercial bank lending rate.

Mr Emmanuel Tumusiime Mutebile, the Bank of Uganda governor, said: “Nonetheless the recovery is expected to strengthen, with above trend growth …. as vaccine effectiveness increases.”

However, he noted, the high degree of uncertainty surrounding the economic outlook, remains a challenge, threatening demand and a feared delay of the return to normal.  

Mr Mutebile also noted that there was need to slow down the growth of the country’s debt through fiscal adjustment. Debt remains a challenge, which continues to dampen growth prospects with a lot of money spent to debt and interest repayment.

The Monetary Policy report noted a stronger recovery than projected.
Growth in the last quarter to December 2020 is estimated to have picked by 1.6 per cent from a year earlier, a significant improvement compared to the revised contraction of 6.1 per cent and 0.1 per cent, respectively, in the quarter to June 2020 to September 2020.

The Central Bank noted that the economic upturn is, however, less optimistic in certain activities of the service sectors, particularly education, hospitality and tourism.  The service sector is estimated to have contracted by 2.6 per cent in the quarter to December 2020.

Mr Mutebile also showed concern, noting that public investment, which is key for infrastructure development, could be curtailed by scarcity of funding yet it would have revived the broader economy by directly enhancing capital stock and productivity, and by attracting private investment.

The report also noted that although private sector credit had gathered pace in February, banks could see rising non-performing loans this year due to the impact of Covid-19 on businesses and individuals.

However, the Central Bank also noted the economy is expected to benefit from a bounce back in the global economy, which is expected to stimulate growth through recovery of exports, foreign direct investment, personal transfers and tourism.

Other fundamentals       
Other economic fundamentals such as inflation, Mr Mutebile said remain favourable but there are fears, which going forward could present temporarily interruptions in the near term.
Mr Mutebile also said the projected rise in some taxes combined with international oil prices may push up input price pressures across all sectors of the economy.

“Looking through this, with the economy still operating with considerable spare, capacity, inflation is projected to fluctuate around the 5 per cent target in the remaining part of 2021 and in the medium- term,” he said.   

Mr Mutebile also noted the challenges of depreciation in the exchange rate, adverse weather related shocks and stronger gain in international commodity prices.


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