What you need to know:
- Increased expenditure on public debt has put pressure on Bank of Uganda’s efforts to build foreign exchange reserves
Bank of Uganda has indicated that government now spends at least $1b (Shs3.77 trillion) on public debt servicing, which is negatively impacting the Central Bank’s efforts to build foreign exchange reserves.
Responding to questions during presentation of the Monetary Policy Statement for December, Bank of Uganda deputy governor Michael Atingi-Ego, said in the last two years debt servicing has significantly increased, putting pressure on the reserves that have already reduced.
“Debt servicing is $1b (Shs3.77 trillion) annually, which affects building of the foreign exchange reserve by the Central Bank. The reserves have reduced from $4.5b in June 2022 to $3.9b,” he said, but noted through a number of prudent measures Bank of Uganda will continue to ensure that it maintain four months of foreign exchange reserve cover as well as limit interventions in the domestic foreign exchange market.
During the National Budget Conference in September, Finance Minister Matia Kasaija, said preliminary estimates indicated that the nominal stock of public debt had increased from Shs78.8 trillion ($21b) as of June 2022 to Shs86.78 trillion ($23.6b) by June.
Mr Kasaija has previously conceded that the rate at which public debt was growing was worrying.
However, government continues to maintain that public debt, whose current gross domestic product ratio stands at 48.2 percent, is still within sustainable levels.
Debt servicing takes one of the largest portions of the budget.
Yesterday, Bank of Uganda indicated it had decided to maintain the Central Bank Rate at 9.5 percent for the second month, citing external risks that continue to threaten economic stability.
Dr Atingi-Ego said the decision had been informed by assessment on a number of economic fundamentals, key among them inflation outlook.
“Although the outlook for both inflation and economic growth is favourable, [we] note that inflation has bottomed out, with significant uncertainties on the horizon. Therefore, keeping the CBR unchanged is necessary to anchor inflation around the target, while at the same time support growth in private sector investment and social-economic transformation,” he said.
Bank of Uganda said the volatility in the global financial markets could increase, triggering increased outflow of capital and exacerbating depreciation of the shilling, while on the other hand, global inflation could decline faster leading to lower imported inflation.
Dr Ating-Ego said the medium-term forecast for December shows that inflation remains unchanged and is likely to remain below 5 percent in the near term.
Bank of Uganda projects inflation to be in the range of 2.5 percent to 3.5 percent in the next financial year, up from 2 percent to 3 percent in the October 2023 forecast round.
The upward revision reflects a higher path for energy prices in the short term .
Dr Atingi-Ego also indicated that the near-term economic growth prospects remain broadly unchanged, noting that although the domestic monetary conditions remain tight, the current investment activities in oil and gas, higher regional demand for exports, resilient remittance and tourism inflows are expected to support economic growth.