BoU policy action speaks to lingering Covid-19 risk to economy

June 9, 2020 in Business, Finance, Financial Services, Markets, Policy by Editor

The Bank of Uganda’s decision to slash the CBR to 7pc, points to the near term risks facing the Ugandan economy even as inflation remained muted at a low 2.8pc during May.

The central banker also downgraded the growth forecast to between 2.5 and 3.5pc from the initial hopes of 3-4pc as a result of the disruptions by the Covi-19 pandemic to the domestic and external sectors. Consumption, investment, exports and imports are all projected to decline. Recovery is predicted to be gradual, partly because of a slump in external demand.

During its broadcast on Monday, the bank’s monetary policy committee observed that external pressures on the economy such as imported inflation, currency depreciation as well as local drivers such as food crop inflation remained weak. But key internal indicators pointed to a steady contraction in the economy.

“The BoU’s Composite Index of Economic Activity, contracted by 4.0 percent month-on -month in April 2020, indicating continuous shrinkage of economic activity heading into May 2020. Also, the Purchasing Managers’ Index (PMI) remained below the 50 mark for the third consecutive month in May,” the MPC said.

Growth is expected to rebound to 4-5pc in 2021 and 6-6.5pc in 2022. Governor Emmanuel Tumusiime-Mutebile says the combination of the fiscal stimulus that will be announced in the coming days and a liberal monetary policy should support economic recovery.

Combined with a 12-month restructuring of the debt held by commercial banks that the regulator sanctioned in April, the new policy rate, the lowest since the benchmark rate was introduced nine years ago, is expected to raise the appetite for credit.

Mutebile however cautions that despite the gradual easing of a 78-day lockdown that was imposed to contain the spread of Covid-19, “the adverse consequences of the global and domestic supply chain disruptions could persist through the remaining part of 2020.”

The economic slowdown is expected to reach a peak 2020 Q2, with a gradual recovery setting in during the third and fourth quarters. All that is contingent on a safe reopening of the economy without falling into a relapse that would force another closure the bank warns.