Central bank drops growth projections

The Central Bank has lowered Uganda’s economic growth, projecting it in the range of 2.5 to 3.0 percent for 2022 to reflect the high cost of production.

Dr Michael Atingi-Ego, the Central Bank deputy governor, made the revelation while announcing a new Central Bank Rate on Friday. 

Dr Atingi-Ego said economic growth prospects have been dimmed further with increasing risks of global recession and weak consumer and business sentiments as higher inflation and commodity prices continue to erode households and business incomes and the financial conditions are tightening. 

Consequently, the Bank of Uganda (BoU) on Friday hiked its policy rate by 50 basis points (0.5 percent) from 8.5 percent to nine percent. 

This is the third time in as many months that the Central Bank has raised the policy rate, revising the position of accommodative monetary (lose monetary) it had executed over the years to revamp Uganda’s high economic growth that had been weakened by the pandemic. 

In the special monetary policy meeting of July 5, the BoU’s Monetary Policy Committee said economic growth is still projected in the range of 4.5 percent to 5.0 percent in 2022 and rising slightly to 5.0 percent to 5.5 percent in 2023.

The new projection of 2.5 to 3.0 percent comes barely weeks after Uganda Bureau of Statistics (Ubos) revealed that annual headline and core inflation rose to 7.9 percent and 6.3 percent in July from 6.8 percent and 5.5 percent in June, respectively. 

Annual food crop inflation continued to rise from 14.5 percent in June to 16.4 percent in July and annual Energy Fuel and Utilities (EFU) inflation rose from 14.2 percent to 17.2 percent in the respective months. 

Dr Atingi-Ego said the central bank’s hawkish stance is intended to “bring back inflation to its medium term objective of five percent.” The BoU projects inflation for 2022 to remain in the range of 7.0 to 7.4 percent. The inflation outlook is driven by the lagged impact of higher exchange rate depreciation, dry weather that has resulted in the sharp rise in food prices and a complete pass-through of global inflationary pressures. 

A couple of weeks ago, Ubos indicated that the consumer price index (CPI) increased to 7.8 percent in July. The average price of selected retail commodities increased between June and July. A kilogramme of maize flour, for one, increased from Shs2,889 (June) to Shs3,343 (July). Elsewhere, a litre of petrol soared from Shs5,857 to Shs6,267. 

Bittersweet developments

The Producer Price Index for Manufactured Goods and Utilities (PPI M&U) also increased to 22.8 percent. Millers have for instance asked the government to heavily tax imported industrial sugar to encourage growth of the sector locally.

Refined sugar is majorly used in the production of soft drinks, confectionaries and pharmaceuticals, among others. Uganda’s current annual demand for refined sugar ranges from between 78,000 and 90,000 metric tonnes.

Currently, two millers—Kinyara Sugar and GM Sugar—produce industrial sugar. Uganda is estimated to lose about $50m through importation of refined sugar. Kinyara Sugar produces over 100 tonnes per day. 

Mr Francis Mwebesa, the Trade, Industry and Cooperatives minister, says “manufacturing of refined industrial sugar will save us a lot of forex as we shall now be buying it from here.”

However, Mr Magan Patel, the chairperson MMP Group of Companies, which has under its wing more than 35 manufacturing facilities, notes that they are currently facing a shortage of sugarcane due to high demand created by new sugar-manufacturing firms.

Sugar price inflation has in recent times been pronounced. Dr Atingi-Ego noted that inflation could be “tilted to the upside” with “higher domestic food prices [persisting] should the dry weather conditions become more pronounced.” He also acknowledged the possibility of “downside risks” such as “weaker domestic household consumption and investment expenditure as tighter financial conditions and higher inflation reduce disposable incomes.”

But Dr Atingi-Ego was quick to state that Uganda’s economic growth will rise to 5.5 percent to 6.0 percent in 2023, in part supported by public investments and recovery in demand as inflation pressure begins to wane.

“In the medium term, the economy is projected to grow in the range of 6.5 to seven percent, supported by public and private investments in the oil sector,” he said, noting that the Composite Index of Economic Activity (CIEA) has continued to signal a slowdown in economic activity. 

He added: “The growth of the CIEA reduced from a quarter-on-quarter growth of 2.1 percent in December 2021 to 1.4 percent in March and June 2022. The growth of the CIEA slowed down to 3.9 percent year on year in June 2022 from 4.6 percent in March.”    

While reading the National Budget for the fiscal year 2022/2023, Finance minister Matia Kasaija said: “Economic Outlook future prospects for our economy are positive, with medium term growth projected at 6.5 percent per annum.” 

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