The Observer (Kampala)

Uganda: Economy Shows Recovery Signs

The Bank of Uganda has intervened in the currency market with an unspecified amount of dollars in a move aimed at stabilizing the shilling. ( Resource: Uganda's Central Bank Intervenes On Currency Stability

Although inflation has risen for the second consecutive month, Bank of Uganda has kept its key monetary rate, the Central Bank Rate, at 12%, in yet another indication that boosting private sector credit to stimulate economic growth remains a key priority for the Bank.

In keeping the CBR at 12%, the Central Bank is sending out a message to the market that the current rate of inflation - at 5.5% for headline - is not that serious to warrant a drastic tweak of the CBR. Dr Adam Mugume, the executive director (Research), says the public shouldn't read too much into the increase in inflation.

"Prices picked up in December due to largely seasonal factors, the festivity; so, we don't think this will be maintained."

Jane Bagyenda, Bank of Uganda executive director for supervision, standing in for the Governor, pointed out that inflation will stabilize around the 5% target for much of 2013. Ramping up private sector credit has been a critical concern for Bank of Uganda as it tries to turn around the economy's grim outlook. That assignment has been made harder by commercial banks reluctant to reduce lending rates.

Gross Domestic Product growth is expected to remain below 5% for the current fiscal year, far below the expected standards, as businesses struggle to stay afloat due to the high lending rates. For now, Bank of Uganda sees some light at the end of the tunnel. Bagyenda says that "available real economic indicators show economic activity has started to pick up with quarterly GDP expanding by 2% in the first quarter of 2012/2013."

Much of this growth is driven by the construction industry, which has been a big consumer of credit, according to Mugume. The global recovery especially in Europe, a key export market for Uganda, is also contributing to the country's economic growth. Investors in the government securities market - a goldmine for commercial banks - are not expected to be overly excited about BoU's move to keep the CBR at 12%.

Foreign investors looking for a good yield on government treasuries are usually attracted by a raised CBR as that pushes up the yield. With foreign investors staying away, the strength of the shilling then comes into question. Less dollar inflows into the market lead to the depreciation of the shilling. At the moment, the shilling is floating around the Shs 2,700 mark, the lowest mark in five weeks.

The technocrats are not shaken by how far the dollar has battered the shilling over the last one month.

"The currency hasn't reached a worrying state," said Mugume.

Bank analysts have already predicted that the shilling will depreciate further this year. Dickson Magecha, a forex trader, Financial Markets in Standard Chartered bank, points to the massive aid cut as a result of the corruption scandals, the decline in yields on government debt, and the drying up of foreign exchange reserves at Bank of Uganda, as some of the reasons that are bound to leave the shilling weaker. The foreign exchange reserves currently stand at $2.9bn.

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