Uneven recovery restrains Central Bank from changing 7pc base rate

December 15, 2020 in Business, Finance, Financial Services, Policy by Editor

In 2019, tourism generated just over $1.5 billion for Uganda’s economy, but since late March and the onset of the disease in the country this important source of revenue has largely dried up.

Bank of Uganda (BoU) has kept the benchmark Central Bank Rate (CBR) at 7 percent in light of the slow and uneven recovery of the economy amidst the coronavirus pandemic that has hit notable segments of the services sector, particularly tourism. The CBR is the basis on which Uganda’s financial institutions price their own prime lending rates.

The band on the CBR has also been maintained at +/-2 percentage points while the margin on the rediscount rate and bank rate is unchanged at three and four percentage points on the CBR respectively. Consequently, the rediscount rate and bank rate have been maintained at 10 pc and 11 pc respectively.

In the latest Monetary Policy Statement (MPC), the BoU Governor, Prof. Emmanuel Tumusiime-Mutebile said, “The recovery is proceeding at an uneven pace. Social distancing measures continue to weigh heavily on certain activities of the services sector, particularly in hospitality and tourism while other sectors are still feeling the lagged effects of the economic downturn. Economic activity is expected to take longer to recover and resource utilization to return to normal given the sharp contraction experienced in the quarter to June 2020. Economic growth is therefore projected to remain below its potential until financial year 2023/24 (FY2023/24)”.

In 2019, tourism generated just over $1.5 billion for Uganda’s economy, but since late March and the onset of the disease in the country this important source of revenue has largely dried up. Most of Uganda’s leading tourism markets also have international travel restrictions in place.

Mutebile said the MPC noted that since the last meeting in October 2020, economic recovery has gradually gained traction in line with projections for growth of above three percent in FY2020/21. “Indeed, the high frequency indicators of economic activity in the quarter to October 2020 indicate an annual growth of 3.3 percent in contrast to the sharp contraction of six percent in the quarter to June 2020,” he said.

While inflation remains manageable, (the headline for November running at 3.7 percent and core inflation at 5.8 percent), Mutebile said a more expensive US dollar, higher food prices due to weather related shocks, a rebound in international commodity prices and a faster than anticipated global recovery due to the discovery of Covid-19 vaccines, could put upward pressure on domestic inflation.

He said however risks to the economic outlook in the near term have eased as a result of signs of rebound in both foreign and domestic demand could be bolstered by optimism associated with Covid-19 vaccine development. The Governor said, “Nevertheless, the rising Covid-19 cases in Uganda and many other countries, present considerable downside risks. In addition, weather-related natural disasters, pro-cyclical private sector credit growth, increasing non-performing loans and high lending interests, trade protectionism by Uganda’s trading partners, still pent-up demand, persistent geopolitical tensions, global trade policy uncertainty and technology fractions pose challenges to domestic economic growth.”