BoU tells Ugandans to bear short-term pains of tight monetary policy
Ugandans will have to live with the short-term pains of interventionist monetary policy, as lender of last resort Bank of Uganda BoU- fights to dampen the effects of stagnant growth, surging inflation, a negative trade balance and widening current account deficit.
Observers fear that the measures, among them a rapid upward adjustment in the central bank rate to 9pc over a three-month window, will hurt consumption, raise the cost of capital, stifling investment and job creation.
Headline inflation has spiked to 9pc at the end of August while headline inflation was 2.5 pc above the 5pc BoU target. Headline inflation had been trending at 3.6pc in January 2022 while at 2.3pc, core inflation was well within the 5pc target band.
Portfolio reversals peaked at USD 291m as offshore investors took a flight to safer havens amidst a rapid depreciation of the local unit against the USD, Uganda’s major trading foreign currency.
“Bringing down inflation has costs. We are taking unpopular steps to keep inflation well-anchored until we are confident that the job is done. The long-term price of inflation is low growth and you cannot fight inflation without bringing price stability which is the core goal of our policy actions,” Jimmy Apaa, BoU’s acting director for research told a high-level meeting on the economy convened by civil society watchdog CSBAG September 29.
Apaa said failure to synchronise domestic interest rates with global markets would precipitate a spike in outflows with attendant pressure on the exchange rate. The central bank had also noticed an increase in deposits placed by local banks in western jurisdictions, prompting it to increase the cash reserve ratio for commercial banks from 8 to 10pc.
“Inaction would simply prolong the pain. Our moves have already slowed depreciation and averted the destructive wage and price spiral that was setting in. Second round effects of inflation will also be contained,” he added.
CSBAG convened the meeting on the back of growing concerns over government policy responses to a spike in inflation, an increase in the CBR which has taken prime lending rates to 19.5pc, a 1.5pc fall in the value of the local unit relative to the greenback and persistent revenue shortfalls amidst galloping debt.
In a ground-laying presentation, Sophie Nampewo, a senior economist at CSBAG, had presented chilling numbers that the budget deficit topped 9pc in fiscal 2020/21, public debt to GDP ratio had bust the ceiling to reach 51.6pc last fiscal year and was projected to hit 52-54pc in 2022/23. Debt service as a proportion of revenue worsened from 21.7pc in fiscal 2019/20 to 30.6pc in 2021/22.
Economic growth was a paltry 1.6pc during Q1/2022 while imports – driven by high international prices for petroleum rose to USD 818.54 million against exports of just USD 279.16 million in the quarter to July 2022.
Forex reserves were down USD3.84bn equal to 3.8 months of import cover in July compared to from USD5.33bn or 4.4 months of import cover in March 2022.
Nampewo said inflation was hitting the poor hard following a dry spell that impacted output resulting in a 70pc increase in the price of maize over the reference period.
BoU’s actions, among them a raise in the CBR had resulted in a rise in short-term real interest rates, reduced borrowing, low aggregate demand, investment and job creation. Only 25pc of the government budget for development expenditure had been disbursed in Q1.
“So, we are here to discuss the implications of a tight monetary policy on Uganda’s economy and to see if there are alternative policy options,” Nampewo said.
Reacting, Wilbrod Owor, the executive director of Uganda Bankers Association, applauded the BoU’s monetary policy stance but observed that in needed to be complimented by a more cautious fiscal policy that claws back on expenditure and focuses on facilitating a few enabling sectors in the short term.
Owor added that even without high interest rates, bank lending was challenged by the high ratio of non-performing assets, which have eroded their capital position. The Bank of Uganda which requires lenders to make provisions for bad loans from their capital, says is ending the moratorium on unpaid loans at the end of this month.