The Bank of Uganda (BoU) has reduced the Central Bank Rate (CBR) by 50 basis points to 9.0 percent. The band on the CBR will be maintained at +/-3 percentage points and the margin on the rediscount rate at 4 percentage points on the CBR, the bank says.
‘Given the objective of keeping inflation close to the target and the estimated spare capacity in the economy, a cautious easing of monetary policy is warranted to further boost private sector credit growth and to strengthen the economic growth momentum’, the Governor Bank of Uganda, Professor Emmanuel Tumusiime-Mutebile, wrote in the Monetary Policy Statement for February 2018 issued to the press in Kampala.
Further, Prof. Mutebile said the Bank has consequently reduced the rediscount rate and the bank rate to 13.0 percent and 14.0 percent, respectively.
Mutebile said there are indicators of a revival in private investment activity as reflected by the recovery of Foreign Direct Investment, which grew by 18.5 percent in 2017 compared to a decline of 30.5 percent in 2016. He added that shilling credit extended by 10.8 percent in December 2017 compared to 7.9 percent in December 2016.
There was also an increase of imports of raw materials and capital goods, which grew by 17.4 percent in 2017 compared to a decline of 21.1 percent in 2016.
‘These developments, coupled with an improving global economic outlook, could strengthen domestic economic activity,’ he noted.
Economic growth for Financial Year 2017/18 is now projected in the range of 5.0-5.5 percent, a positive payoff for the current stimulatory monetary policy,” he said.
Prof. Mutebile said non-performing loans as a percentage of gross loans have declined from a peak of 10.5 percent in December 2016 to 5.6 percent in December 2017, which he said should support credit extension.
However, he said that although public investment programmes could substantially raise output and be self-financing in the long run, ‘transitional challenges of funding these investments can be formidable, and may crowd out private sector borrowing, thus delaying the growth benefits of public investment’.
According to Prof. Mutebile, in the next five years, economic growth is projected to average 6.3 percent, boosted by public investments, increasing growth in consumption, and improved agricultural productivity.
There are nonetheless downside risks to this outlook, he says adding that the growth of private sector credit remains below historic levels and that the cost of credit remains relatively high for micro and small loans while the cost to ‘corporates’ have declined.