At the April 14 Monetary Policy Committte (MPC) meeting, it was observed that Uganda’s economy was recovering faster than earlier anticipated, but the Bank of Uganda (BoU) maintained the Central Bank Rate (CBR) at 7%, citing a high degree of uncertainty surrounds economic outlook.
“The MPC noted that economic recovery is proceeding and is stronger than was projected at its last meeting in February 2021,” the BoU governor said, adding that while the Uganda Bureau of Statistics (UBoS) had estimated real GDP contraction at 2% in 2020, it had instead reduced by 1.1 percent.
"Economic growth in the quarter to December 2020 is estimated to have picked up 1.6 percent from a year earlier, a significant improvement compared to the revised contractions of 6.1 percent and 0.1 percent, respectively in the quarters to June 2020 and September 2020,” Prof. Emmanuel Mutebile, the governor, said.
"The economic upturn is, however, less sanguine in certain activities of the service sector, particularly education, hospitality and tourism. Indeed, the service sector is estimated to have contracted by 2.6% in the quarter to December 2020.”
According to the governor, high-frequency economic indicators for the first quarter of 2021 indicate a gradual strengthening of economic activity but still at a subdued pace.
The GDP growth outlook remains unchanged at 4.0-4.5 percent in FY2021/22, he went on.
The continued strengthening of the economy is going to be possible with increase in vaccine effectiveness that will in turn allow for reduced social distancing and a rebound in consumption.
However, there are still many risks to the economy, for instance, the new variants that keep emerging and infection could also take off again despite the ongoing Covid-19 inoculations.
Prof. Mutebile also noted that there is a limited fiscal policy space to respond to fragile economic growth.
“With the rising public debt, fiscal adjustments through higher taxes, lower expenditure or both might be required in the coming years to avoid a persistent increase in indebtedness and this could constrain demand,” he said.
“Public investments, which is key for infrastructure development could be curtailed by paucity of funding, yet it would have revived the broader economy by directly enhancing capital stock and productivity, and by attracting private investment,” he explained.
While the growth of private sector credit gathered pace in February 2021, BoU says, banks could see rising non-performing loans (NPLs) this year, as forbearance periods sputter out and the real impact of the Covid-19 pandemic on businesses and individuals becomes clearer.