The economy recorded modest growth in the first half of the year as signaled by softening economic indicators. The Composite Index of Economic Activity (CIEA) exhibited lethargic expansion while the Business Tendency Index (BTI) slowed signaling some slack in economic activity. The softening trend may be attributed to constrained performance of the agriculture sector, which as well dragged down the performance of industries. Even then, the government remains optimistic that overall growth will remain robust owing to the reaped multiplier benefits from accommodative monetary policy and expansionary fiscal policy coupled with improved prospects for agriculture as weather conditions improve.
In August, the central bank retained its policy rate at 10.00% citing a favorable macroeconomic environment and the need for caution in an evolving global landscape. Even then, a potential pickup in overall inflation owing to stronger domestic demand could cause the BoU to flirt with the idea of reversing its accommodative stance. A gradual reversal of the easing cycle may be supported by the evident success of accommodative monetary policy in stimulation private sector credit growth and the ‘stabilization’ of the banking sector through various central bank measures. That said, the risk of slowing global growth spilling over into the domestic economy might curb the need to shift its policy stance.
Meanwhile, overall consumer prices decelerated to 2.10% in August compared to 2.60% in July. The decline was mostly attributed to muted core inflation, which decelerated to 2.70% from 3.50% over the same period. The decline, for the second consecutive month, coupled with the stability in the exchange rate substantially reduces odds of tightening by the monetary authority. That said, the BoU revised their 12-month inflation forecast higher given rising domestic price pressures. The central bank expects core inflation to accelerate to around 6.40%, above its 5.00% medium term target.
Private sector credit continues to accelerate supported by accommodative monetary policy, improved stability and liquidity in the banking sector coupled with the increased demand for loans as economic activity keeps up momentum, and government pays off outstanding bills. However, in the last two months, private sector credit growth decelerated sharply to 13.71% in July compared to a peak growth this year of 17.37% in April. The slowdown in private sector growth has been attributed to sticky lending rates currently at 21.44% as at July 2019 and legal uncertainty over property rights which continues to weigh down on banks’ credit risks thus their appetite for private debt.
The Uganda Revenue Authority (URA) is seeking to cast a wider tax net through proposed tax changes to the NSSF Act of 1985 where members who choose to withdraw their savings before reaching retirement age (60) will be subjected to income tax. This is motivated by the desire to bridge the revenue gap whilst also attracting more people to save with NSSF. Even then, it may also be a strategic move for the government to borrow directly from NSSF for longer periods thus lengthening its maturity profile. Further, this will be at a lower cost thus reducing the need of expensive (shorter-term) commercial loans to finance public infrastructure investments. This comes at a time when parliament voiced concerns over the country’s growing debt particularly with China.
Meanwhile, the interbank market remained liquid albeit with the overnight rate oscillating around the CBR. The central bank remained proactive in its liquidity management in an effort to steer off any negative pass through to the shilling while also ensuring durable interest rate stability that is aligned to its policy guidance.
Balanced activity on the supply and demand counters held the shilling within a tight trading range in August. While, proactive regulatory intervention especially on the liquidity front has helped to anchor the local currency, buying interest at current attractive levels could portend some pressure for the local currency.