Mutebile says the economy is recovering

By Samuel Sanya

The Bank of Uganda (BOU) has predicted higher than expected economic growth of 6.8% as it held the benchmark Central Bank Rate (CBR) for a fifth straight month.

The CBR is at 12%, the same as the 7-day reverse repo rate at which commercial banks borrow. This provides sufficient room for rates to descend from the current of highs of 24%.

Governor Emmanuel Mutebile noted that there are signs of increased buoyancy in the economy, driven by strong growth in the services, construction, and manufacturing sectors.

“Clearly, we are seeing an economic recovery from the 2011/2012 period. We believe that the short term prospects of economic growth have now improved. Annual economic growth should reach between 6% and 7% this financial year,” he said.

“I’m still concerned about the high lending rates because they reduce aggregate demand,” Mutebile added.

Average commercial bank lending rates are gradually falling to 21%, from highs of 30% at the peak of annual headline inflation in October 2011. Some banks have slashed rates to lows of 19.5%.

Annual headline inflation rose at the end of March to 4%, with core inflation coming higher at 6.8% due to rising fuel, and food crop prices.

The recent GDP estimates show improved GDP growth for 2012-13 of about 5-6%, higher than the earlier projections of 4.3% driven by the services sector (7.3% growth), industry (6.8%) and agriculture (2.4%.)

The economy grew by 4.1%, according to half year GDP surveys.

“Even if the economy was to grow by zero for the next months, we could still surpass earlier economic growth forecasts,” Adam Mugume, the BOU executive director for research, said.

He noted that the closure of the land registry, as it goes online, has significantly affected shilling loan applications as more than 400 loan applications were still pending approval at the end of February.

Exports to Sudan, Kenya, DR Congo, South Sudan and Rwanda have continued to do well with the Common Market for East and Southern Africa (COMESA) taking up 48.2% of all Uganda’s exports.

Base metals, cement, sorghum, tea and sugar dominate the country’s exports slightly improving Uganda’s trading account.

National reserves hit $3,046m (sh8 trillion) at the end of February this year before the Central Bank suspended a dollar build up exercise.

This is sufficient cover for 4.4 months of future imports of goods and services.

“The cautious approach that we see in the formulation of monetary policy is fitting given Uganda’s current challenges. We expect the shilling to be supported by this decision,” said Standard Chartered Bank’s Razia Khan.

Stephen Kaboyo of Alpha Capital Partners notes: “Looking at the bigger picture, lending to the private sector is still skewed towards dollar loans, a scenario that is primarily driven by persistently high domestic lending rates.”
CBR held, economic growth to hit 7% - BOU