The Bank of Uganda has lowered the Central Bank Rate (CBR) to 9.5 percent, an indicator of its intention to bring down the cost of credit, for the first time since June 2021.
The rate, which the Monetary Policy Committee uses to control the amount of money that circulates and to affect interest rates, increased sharply from 6.5 percent in April 2022 to 10 percent in October 2022, a rate that was then maintained through the Monetary Policy Committee’s final statement in June 2023.
According to the Uganda Bureau of Statistics, the bank claims that the decrease was motivated by the steady decline in inflation, which went from 10.8 percent at the start of this year to 3.8 percent in July 2023, the lowest level in 15 months.
Lower inflation is due to lower agricultural and imported goods prices, a slowdown in global economic activity, and decreased domestic demand, according to Deputy Governor Michael Atingi-Ego.
Despite lowering the CBR, the Bank remains concerned about the global and domestic risks that remain.
However, Atingi-Ego believes that global inflation, demand, and economic recovery will remain subdued for some time, implying that inflation may remain suppressed.
The global economy appears to be in poor shape, according to Dr. Atingi-Ego, and the economic outlook for the next two years calls for support to boost economic activity.
The World Bank’s decision to halt new credit to Uganda has also raised concerns because it may have an impact on economic projections.
Until the Ministry of Finance compiles a list of potential projects affected, it is difficult to predict the impact, according to Atingi-Ego, who added that they need to know how the ministry will respond.
The Deputy Governor also discussed potential outcomes, or what might occur if one of the largest lenders suspended loans to a country like Uganda.
He says whatever the case, the options could be costly, for example, if the government decided to increase domestic borrowing, cut the budget, or make reallocations of resources, and there is a likelihood of affecting the foreign reserves of the country.
According to the Bank, Uganda’s economy has demonstrated resilience and has been recovering well despite the uneven global growth environment, with estimated annual growth of 5.3 percent in 2022–23.
However, it highlights the fact that low domestic demand appears to be slowing down economic growth.
The Uganda Bureau of Statistics reported that in the second and third quarters of 2022–2023, there was an average economic growth of -6.5 percent from quarter to quarter.
Agriculture experienced a slowdown that reached a negative growth rate of 21.6 percent, and the industries and services sectors also experienced negative growth rates of 2.3 and 1.39 percent, respectively.
In the coming years, economic growth is anticipated to gradually improve and range between 5.0 percent and 6.0 percent in the fiscal year 2023–2024.
The Bank of Uganda forecasts that the growth will be fueled by increased exports, private sector consumption, and investments in the extractive industries.
