Inflation worries dampen 2006 positive outlook
Dec 26, 2005
A SERIES of cut-backs in donor budgetary support and projected big spending by the Government during elections will pause a major threat to the inflation rate next year that had eased to 5%, experts have warned.
By Sylvia Juuko
A SERIES of cut-backs in donor budgetary support and projected big spending by the Government during elections will pause a major threat to the inflation rate next year that had eased to 5%, experts have warned.
A Stanbic Investment Management Services (SIMS) economic update for the end of this year notes that while inflation dipped to its lowest level in 15 months due to improved rains, remaining at single digits would be a big challenge given high global oil prices and looming elections.
“The risks to our view of a positive low inflation outlook for 2006 are declines in budgetary support, fiscal spending ahead of the 2006 elections and energy price pressures,†the SIMS report said.
Easing of inflation has partly triggered a decline in interest rates with Treasury bill rates falling to 7.56% in November from 7.81% in October.
On the other hand, the prime average lending rate also declined marginally to 18.77% in November from 18.8% in the preceding month.
The report says although inflationary pressures during the middle of 2005 were largely due to seasonal increases in food prices, the central bank eased its monetary policy stance.
The SIMS report predicts that a decline in TB issuances to withdraw liquidity should translate into lower interest rate pressures.
The report matches foreign exchange dealer projection of weakening of the shilling at the beginning of next year due to cut-backs in donor spending and election related imports.
“The shilling is expected to stabilise around 1,800 to the US dollar at the end of December as donor inflows continue to support the value of the currency. Election-related imports and rising international interest rates are expected to weaken the shilling as we go into 2006,†the report said.
The central bank is likely to step in with foreign currency sales to mitigate the projected weakening of the currency next year, according to the report.
The shilling has been bullish in the last quarter of the year on account of muted corporate demand and increased end year inflows from exports and remittances from Ugandans in the Diaspora, dealers said.
In October, the private sector credit growth rate returned to high levels last seen in 2003.
Quoting central bank figures, the report said at the end of October this year, private sector credit growth rose to 34.5% year on year from 29.1% year on year in September, bringing the private credit stock to sh1,428.5b.
The increase was mainly registered at the commercial bank level.
“The coincident increases in private credit growth as the Ugandan shilling weakens suggest that a significant part of the increase in credit growth is due to a currency translation effect. Expenditure related to forthcoming presidential elections could explain part of the growth in credit extension,†said the report.
Ends
A SERIES of cut-backs in donor budgetary support and projected big spending by the Government during elections will pause a major threat to the inflation rate next year that had eased to 5%, experts have warned.
A Stanbic Investment Management Services (SIMS) economic update for the end of this year notes that while inflation dipped to its lowest level in 15 months due to improved rains, remaining at single digits would be a big challenge given high global oil prices and looming elections.
“The risks to our view of a positive low inflation outlook for 2006 are declines in budgetary support, fiscal spending ahead of the 2006 elections and energy price pressures,†the SIMS report said.
Easing of inflation has partly triggered a decline in interest rates with Treasury bill rates falling to 7.56% in November from 7.81% in October.
On the other hand, the prime average lending rate also declined marginally to 18.77% in November from 18.8% in the preceding month.
The report says although inflationary pressures during the middle of 2005 were largely due to seasonal increases in food prices, the central bank eased its monetary policy stance.
The SIMS report predicts that a decline in TB issuances to withdraw liquidity should translate into lower interest rate pressures.
The report matches foreign exchange dealer projection of weakening of the shilling at the beginning of next year due to cut-backs in donor spending and election related imports.
“The shilling is expected to stabilise around 1,800 to the US dollar at the end of December as donor inflows continue to support the value of the currency. Election-related imports and rising international interest rates are expected to weaken the shilling as we go into 2006,†the report said.
The central bank is likely to step in with foreign currency sales to mitigate the projected weakening of the currency next year, according to the report.
The shilling has been bullish in the last quarter of the year on account of muted corporate demand and increased end year inflows from exports and remittances from Ugandans in the Diaspora, dealers said.
In October, the private sector credit growth rate returned to high levels last seen in 2003.
Quoting central bank figures, the report said at the end of October this year, private sector credit growth rose to 34.5% year on year from 29.1% year on year in September, bringing the private credit stock to sh1,428.5b.
The increase was mainly registered at the commercial bank level.
“The coincident increases in private credit growth as the Ugandan shilling weakens suggest that a significant part of the increase in credit growth is due to a currency translation effect. Expenditure related to forthcoming presidential elections could explain part of the growth in credit extension,†said the report.
Ends