The Observer (Kampala)

17 August 2014

Uganda: Unrest in Iraq, Libya Could Impact Fuel Prices - BoU

Bank of Uganda has ruled out an increase in taxes as one of the threats that could push up prices of some goods and services this financial year.

While presenting the monetary statement for August to September, BOU Governor Emmanuel Tumusiime-Mutebile said the real threat could be external due to unrests in countries such as Iraq and Libya, both of which are huge global oil producers.

"Prospects for global economic activity in 2014 are weaker than earlier anticipated, but are expected to gather momentum in 2015. Financial and commodity markets remain vulnerable to instability as geopolitical risks remain elevated," Mutebile said.

Fighting in Libya and Iraq could see a drop in the supply of oil on the global market, which could lead to an increase in the price of fuel. Higher fuel prices could feed into the local market and place more pressure on fuel prices. Already, there has been a slight increase in fuel prices of between Shs 50 and Shs 100, although many experts point to the recent Shs 50 excise levy that government slapped on every litre of diesel and petrol for this financial year.

Adam Mugume, BOU's director for research, said while new tax measures, which were announced in the 2014/15 national budget, could have impact on prices, it won't be very significant. Over the past two months, core inflation, which measures changes in the prices of goods and services minus food and utilities, increased to 3.1 per cent for July, up from 2.9 per cent in May.

The increment, according to BOU, was due to the depreciation of the shilling against the dollar. This meant that importers needed more money to buy dollars to import some of the products, which pushed the prices higher to cover for the increased costs.

The shilling broke the Shs 2,600 mark in June, and it sometimes traded as high as 2,670. This forced the central bank to intervene into the market with $40m in July to stabilize the currency. In the first week of August, however, the bank bought $14m as the market showed signs of stabilization. Food prices, on the other hand, continue to fall because of the improved harvests in May and June.

BOU projects that core inflation will remain in the range of four to five per cent in the third quarter of 2014. Consequently, BOU saw no need to change the central bank rate, which influences interest rates in the market. BOU maintained the CBR at 11 per cent for the months of August and September.

James Mutuku, head of financial markets at Standard Chartered bank Uganda, said that based on the central bank's decision to keep its central bank rate at 11 per cent, they expected the local currency to hold on its gains and trade between Shs 2,600 and Shs 2,620 this week the above mentioned. Some experts hope for a drop in policy rate in October.

"Given the wide differential between the policy rate and inflation, we believe that there is more room for easing in this cycle. A further 50 bps reduction at the BOU's October MPC meeting in two months, is difficult to rule out," said Razia Khan, the managing director for Africa Macro Research at Standard Chartered bank.

Mutebile expects a rebound in the growth of the economy after two years of depressing numbers.

"Going forward, I expect economic growth momentum to be sustained, anchored by domestic demand with additional support from the improved external environment," he said.

BOU says more private businesses are taking loans, an indicator of buoyancy in economic activity. Private credit uptake has increased to 14 per cent from just eight per cent at the start of the year, BOU said. Trade, construction, and personal loans lead in credit uptake.

Average lending rates have, however, remained fairly high by regional standards, at 21 per cent.

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