Banks relieved with BoU new rate, but its bad news for economy

The Monetary Policy Committee uses the CBR to influence interest rates and control the flow of money. But in April 2022 said rate rose sharply from 6.5 to 10 per cent in October 2022, which was maintained till the last statement in June 2023.

The bank says the new rate reduction was informed by the steady decline in inflation from 10.8 per cent at the beginning of this year, to 3.8 per cent in July 2023, the lowest in 15 months, according to the Uganda Bureau of Statistics.

However, Deputy Governor BoU, Michael Atingi-Ego says the lower inflation is due to reduced domestic demand, the slowdown in global economic activities and the reduction in prices of agricultural and imported products.

Positive and negative outlooks

Despite the reduced CBR, the Bank remains cautious about the global and domestic risks that remain in place.

On the other hand, Atingi-Ego says there is higher certainty that global inflation, demand and economic recovery will remain subdued for some time, meaning inflation could remain suppressed.

He also notes that the economic outlook over the next two years calls for support to increase economic activity as the global situation looks weak.

Another fact that has caused discomfort is the World Bank’s suspension of new credit to Uganda, as it could affect the economic forecasts.

Atingi-Ego says that for now, it’s hard to predict the impact, until the Ministry of Finance compiles the list of possible projects affected, adding that they need to know how the ministry will react.

World Bank withdraw shocks

He says whatever the case, the options could be costly following the suspension of such big loans, for example, if the government decided to increase domestic borrowing, cut the budget or make reallocations of resources and there is a likelihood of affecting the foreign reserves of the country.

According to the Bank, Uganda’s economy has demonstrated resilience and has been recovering well despite the uneven global growth environment with estimated annual growth of 5.3 per cent in 2022/23.

However, it notes that economic growth seems to be slowing due to weak domestic demand.

Data from the Uganda Bureau of Statistics showed quarter-on-quarter average economic growth of -6.5 per cent in the second and third quarters of 2022/23.

This was mainly because of a slowdown in agriculture to -21.6 per cent, while industry and services sectors also posted negative growths of 2.3 and 1.39 per cent respectively.

Looking ahead, economic growth is expected to recover gradually, ranging from 5.0 per cent to 6.0 per cent in the fiscal year 2023/24.

This growth is expected to be driven by private sector consumption, investments in extractive industries, and improved exports, according to the Bank.