The newly released Bank of Uganda (BoU) Monetary Policy Report indicates that economic activity has picked up since the easing of the lockdown in July 2021 however the effects of the lockdown and the remaining restrictions are likely to continue weighing on growth for FY 2021/22.
According to the report, the outlook remains overcast by the future path of the pandemic, especially a major mutation of the virus that could severely undermine vaccine effectiveness and delay both domestic and global economic recovery.
Private sector credit extension remains hesitant due to perceived risk that continues to significantly impair private investment, compromising the quality of financial market information and lenders’ ability to assess the viability of borrowers and investment projects. In addition to spillovers from the rising commodity prices, especially of crude oil and other inputs, global supply chain disruptions could restrain economic growth in the near term.
“Domestic inflation generally remains benign despite higher global inflationary pressures, largely on account of the persistent negative output gaps. Inflation is expected to be lower than projected in the Aug-21 forecast round, but it is anticipated to rise towards the 5% target in the medium-term as the output gap begins to close in 2023 quarter one,” reads in part of the report.
BoU said the upside risks to inflation include a more depreciated exchange rate, higher commodity prices and higher domestic services inflation. The downside risks largely revolve around the possibility of 3rd and 4th waves of the virus outbreaks. Nevertheless, the balance of risks is now tilted to the upside.
Against this backdrop, the Bank of Uganda has maintained 6.5 percent. This decision would be consistent with meeting the inflation target of five percent sustainably in the medium term.
The report shows that Value of loan applications fell, to Shs. 3.86 trillion in the quarter to August 2021 from Shs. 5.41 trillion in the quarter to May 2021, reflecting reduced demand due to the slow pace of economic recovery.
“Value of loan approvals also fell to Shs. 2.26 trillion in the quarter to August 2021 from Shs. 2.36 trillion in the quarter to May 2021 as lenders exerted caution driven by lockdown measures. Wider uptake of vaccines and opening up of some sectors of the economy may increase business activity in turn leading to increased supply and demand for credit in the near-term,” BoU revealed.