Bank of Uganda revises growth down to 4.5%
May 8— Bank of Uganda (BoU) has revised downwards the country’s GDP growth to 4.5 percent for the FY2016/17, a considerable drop from the 5.5% Matia Kasaija, the finance minister, had projected during the reading of the 2016/17 National Budget proposals last June.
BoU says in its latest ‘State of Economy’ report the causes include delays in public development investment and a sustained weakening of the agricultural sector which had been affected by a prolonged drought just before rains started in early March. Agriculture remains the backbone of Uganda’s economy.
The central bank also points to the inflation levels which are forecast to increase above the targeted 5% in 2017, because of supply-side shocks, including increases in both international oil and food prices. Recently, the World Bank predicted oil will reach $55 per barrel at its peak during 2017 compared to present levels of $45-$49. OPEC, the oil producers cartel, has already begun to implement cut-backs.
However, not all is gloom, BoU states, ‘Overall, the impact of negative external shocks on the economy will be softened going forward and a return to reasonable growth is expected in FY 2017/18, boosted by improved implementation of public infrastructure investments, higher private sector investments in the oil sector and improvement in agricultural production and consumption growth’.
BoU says declining interest rates are expected to support growth in private sector credit and boost investment. However, net exports are not expected to increase significantly. This will continue to have a negative contribution to the economic growth.
The report recommends that the government effectively uses counter-cyclical fiscal policy which are reinforced by structural reforms that encourage both domestic private and FDI if it is to bolster economic growth which is projected to average between 6 percent in the next three years.
BoU says, “For its part, the Central Bank is committed to continue its watchdog role of conducting monetary policy with flexibility to ensure that inflation stands at the projected 5 percent over the horizon.”
The central bank believes with the right policy decisions adopted by the government, Uganda’s economy will navigate safely through the choppy waters ahead. In June, the United Kingdom will hold general elections, followed by Kenya in August. Kenya is Uganda’s leading trading partner and main access to the coast. The UK is yet to begin full scale negotiations for its exit from the European Union and this is grounds to complicate trade between the two in future.
Other risks will involve weaker growth projections for China, vulnerability to tighter global financial conditions in large Emerging Markets and Developing Economies compounded by domestic constraints, which may increase the severity of exchange rate adjustments, geopolitical risks mainly in the Middle East and African countries. All this will come with increased protectionist policies particularly in Advanced Economies led by the United States. These external factors could negatively impact on Uganda’s domestic outlook, the right policy decisions by government would reverse this position.