Uganda’s central bank left its key interest rate unchanged for the fourth time but extended credit relief measures and liquidity assistance to financial institutions as the economic recovery has lost momentum since mid-December due to a surge in COVID-19 infection rates.
The Bank of Uganda (BOU) kept its Central Bank Rate (CBR) at 7.0 percent, unchanged since June 2020 when it cut it for the second time in 2020 to cushion the hit to the economy from the pandemic.
Since October 2019, when BOU began easing its monetary policy stance, CBR has been cut 300 basis points, including 200 points last year.
“Given the inflation outlook and the heightened uncertainties surrounding the economic growth path, the MPC (monetary policy committee) decided to maintain the current policy stance until the economy normalizes sustainably,” the central bank said.
BOU’s high frequency indicators of economic activity indicate growth of about 2.6 percent in the quarter to December, down from growth of 9.2 percent in the quarter to September.
“Nonetheless, economic indicators still suggest some recovery from the sharp contractions of 6 percent and 2.2 percent in the quarters to June 2020 and September 2020, respectively,” BOU said.
BOU maintained its forecast for growth in the current 2020/21 financial year, which ends June 30, of 3.0-3.5 percent, and forecast growth would accelerate to 4.0-4.5 percent in 2021/22 and 6.0-7.0 percent in following years.
“The medium-term economic outlook continues to be highly conditional on the timeline of the world-wide vaccines rollout and the course of the virus and its new variants,” BOU said, noting most of its exports go to Eastern and Southern Africa (COMESA) where the vaccine rollout is likely to be sluggish.
“Thus, whereas advanced economies are expecting a rapid vaccine-fueled recovery, the damaging effects of the pandemic could persist in the region, which could be detrimental to domestic economic growth prospects in the medium to long-term,” the bank said.
While BOU still expects the output gap to close in FY2023/24, it said the adverse impact of the pandemic on potential growth could be more profound if it turns out to be longer or harsher than assumed.
On the upside, economic activity could be stronger than projected if the COVID-19 scarring effects become more limited in scope, adding a faster rollout of mass vaccines globally could allow for a quicker unwinding of social distancing measures and result in a more robust increase in economic activity.
Inflation in Uganda remains benign – it rose to 3.7 percent in January from 3.6 percent in December – and BOU expects inflation to return to its 5.0 percent target as excess capacity is absorbed.
BOU said it would extend for six months from April 1 the Credit Relief Measures (CRM) and the Covid-19 Liquidity Assistance Program (CLAP) to supervised financial institutions and review CLAP as the pandemic evolves to ensure financial institutions that come under liquidity stress remain solvent so they can support credit extension.
