19 November 2012

Uganda: Is the Economy Back to Business?

Kampala — In recent months, Uganda's inflation has steadily declined, currently at 4.5% and the Central Bank Rate (CBR) is also currently at 12.5% as per the November 2012 Monetary policy Statement.

This would ideally mean that commercial banks will also lower their Prime Lending Rates thereby stimulating aggregate demand which in turn spurs economic growth.

To the common man, these are telltale signs that the economy is recovering and that the worst is over signaling better times.

However earlier concerns were that despite the reductions in the CBR, the benefits were not feeding through to borrowers.

Some banks like Centenary Bank, Standard Chartered Bank, Stanbic, among others have marginally reduced their base lending rates.

However, sections of the public have expressed concerns as to whether the recent decline in inflation and the reduction of the CBR show an economy that has fully recovered. This is because, whereas inflation has steadily declined, the prices of some commodities have remained high.

Hon. Gabriel Ajedra, the Minister of State for Finance, Planning and Economic Development in charge of Investments

"It is good that inflation has gone down but it is not yet time for us to celebrate. I think what we need to do is sustain that by increasing production in the agricultural sector. Inflation went up mainly because production had slowed in the agricultural sector. This year the rains have been very good and I think there's need to double the production," he told this newspaper.

While announcing the Monetary Policy Statement for November, Bank of Uganda Governor, Emmanuel Mutebile said that Real GDP growth is predicted to rise to 5% for the fiscal year 2012-13, up from 3.4% the previous year. He however said that this is well below the economy's potential of 6.5-7% per year.

Mr. Silver Ojakol, the Commissioner for Trade at Uganda's Ministry of Trade and Cooperatives says that it is not yet time to celebrate but that rather it was time to get to work.

"There are still many challenges. These are not the only factors (inflation and lending rates) that determine good times... there are wider factors like how much are we producing, the transport infrastructure, among others" Ojakol said, adding, "In my personal opinion I wouldn't say it is time to celebrate because some roads are still impassable. What would be the inflation rate in those (impassable) areas when the goods finally reach them?"

Mr. Everest Kayondo, the Chairperson of the Kampala City Traders' Association (KACITA) says that the problem is much more expansive and that a lot of issues need to be ironed out before the population can think of celebrating a recovery.

"The problem is fundamentally bigger than what meets the eye. Most of the banks which operate here are foreign owned, hence their ultimate goal is profit maximization other than your stories of economic growth, employment of more resources and other macroeconomical issues," Kayondo said.

He added, "Last year these banks made an average of 67% profit growth for their stockholders! Some of them might have earned a salary increase or a bonus; and if this year they experience a reverse, it would impact negatively on their 'management skills'."

He said that as a result the Central Bank will continue reducing the CBR while these banks may take awhile to react hence credit shall remain costly, economic growth will slow; loss of collateral among others.

"This explains why even the government initiative of agro-processing fund which would have benefited the farmers is yet to be fully utilized. So as for the celebrations, please hold on," Kayondo added.

Mr. James Mulwana, proprietor of Nice House of Plastics and Patron of the Uganda manufacturers' Association (UMA) on his part says that reduced inflation is good for the business community because high inflation is dangerous to the economy.

"What we are however waiting to see is the reduced interest rates. In many countries the interest rate is low and so they produce cheaply and yet ours makes business expensive," Mulwana said.

Mr. Lawrence Bategeka, a Senior Research Fellow, Public Sector Policy at the Economic Policy Research Center says that by inflation easing, it gives the Central Bank space to exercise its monetary instruments.

"Commercial Banks have been reluctant to ease the lending rates that would make credit accessible and thus improving the aggregate demand and reviving economic activity," Bategeka said in a telephone interview.

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