Bank of Uganda (BoU) has reduced the Central Bank Rate (CBR) by 0.5 percentage point to 6.5 percent, the Monetary Policy Statement for June 2021 says.
According to the Central Bank, the aim of reducing the CBR is to boost the economy, which has stagnated due to the disruptions presented by the COVID-19 pandemic.
BoU Governor Emmanuel Tumusiime Mutebile, in the statement issued on June 16, 2021, said: “Monetary Policy Committee (MPC) of June 2021, noted that economic developments have been broadly in line with the outlook in the April Monetary Policy Report (MPR). High frequency indicators of economic activity indicate that the momentum of economic activity for the quarter to May 2021 was moderate.”
He added: “Indeed, the Uganda Bureau of Statistics (UBOS) in its June 2021 real GDP estimates indicate economic growth of 3.3 percent in Financial Year (FY) 2020/21, slightly higher than initial projections of 3.1 percent, owing primarily to stronger household consumption. However, contraction in private sector investment is persisting, partly reflecting heightened Covid-19 induced uncertainties. The real GDP growth outlook remains unchanged at 4.0-4.5 percent in FY2021/22.”
The Governor, however, said the recovery is expected to strengthen, with above-trend economic growth in the outer years as vaccine effectiveness increases, which should allow relaxing the current public health measures and a stronger rebound in domestic demand.
How Stanbic Bank CFO Ronald Makata Blends Governance, Technology and Human Leadership to Drive Performance“A high degree of uncertainty surrounds the economic outlook, with many possible upside and downside risks. On the upside, moderate growth in domestic demand is expected over the forecast horizon and the strengthening global recovery is generally supportive of economic growth. Moreover, the vaccination process is expected to gather steam in the coming months, which should help to normalise economic activity quickly,” he says.
The Governor noted that on the downside, the main risk is a resurgence of the Covid-19 pandemic and conceivably more contagious variants. In the near-term (12 months ahead), domestic demand could be dented by still emerging second Covid-19 wave, especially in the sectors that are contact intensive. In addition, there is little space for a fiscal stimulus package to respond to the fragile economic growth and the rising public debt necessitates fiscal consolidation to keep public debt on a firm downward path.
Furthermore, a sizable share of domestic debt held by non-resident investors makes the domestic financial market an important transmitter of external financial shocks to economic growth in the event of intensified global financial volatility. Additionally, private sector credit growth slackened in March-April 2021, and in the months ahead the growth of private sector credit could be unduly deterred by higher non-performing loans (NPLs), as forbearance periods come to an end and the real impact of the Covid-19 pandemic on businesses and individuals becomes clearer. If these developments were to materialise, they would substantially slow economic recovery, he said.
