Kampala — Bank of Uganda (BoU) yesterday warned that the unresolved trade tension between the United States and China plus strained regional cross-border relations pose risks to Uganda's economy in the short and medium term that will lower economic growth rate and reduce export earnings.
The trade war tension between the two world's largest economies has caused slower global economic growth thus affecting exports of goods mostly from low developing countries such as Uganda.
At the local scene, BoU is also concerned about slowdown in regional trade which the central bank said had declined by 8 per cent in February following Rwanda's closure of her border with Uganda at Gatuna/Katuna.
The central bank also noted the weak Shilling and delayed implementation of government investment projects, saying they too will negatively impact the economy.
Presenting the Monetary Policy for this month, the BoU Governor, Mr Emmanuel Tumusiime-Mutebile, said the economy is projected to be operating around its potential economic growth of 6-6.5 per cent.
"However, downward risks to the projected economic growth momentum have increased since the previous round of forecasts. The risks largely revolve around unresolved trade tension, which are affecting global and domestic trade and investment activities," Mr Mutebile said.
"Elevated political and policy uncertainty in the global economy in an environment of limited policy space could weigh further on global growth and subsequently on Uganda's economic growth," he added.
Mr Mutebile said a combination of lower global growth, weather-related constraints to agricultural production, delays in implementing public investment programmes and a weaker Shilling could dampen Uganda's growth.
By 3.30pm yesterday, the Uganda Shilling was trading at Shs3,710.08 per US dollar (buying) and Shs3,720.08 (selling).
Although Mr Mutebile said the upturn in the economy since the beginning of 2017 is expected to continue, partly supported by accommodative monetary policy, higher growth in government consumption and investment, strong pick-up in private investment and consumption, and improved agricultural performance, the "economic activity seems to be softening."
He also said inflation has grown in line with the forecast and the conditions for inflation to remain close to 5 per cent in the medium-term (two to three years) have not changed greatly.
Mr Mutebile said the inflation outlook over 12 months has not changed compared to the February forecasts, adding that annual headline and core inflation forecast to peak at 6.3 per cent and 6.4 per cent in the third quarter of 2021.
"The risks to the outlook include the future direction of food crops prices in the wake of uncertain weather conditions; the strength of domestic aggregate demand and path of the exchange rate, the latter being in part contingent on the external economic environment," he said.
Bank of Uganda decided to maintain its policy rate, the Central Bank Rate (CBR) at 10 per cent for April and May. Mr Mutebile said BoU believes that keeping the stance of monetary policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time. "The band on the CBR will remain at +/-3 percentage points and the margin on the re-discount rate at 4 percentage points on the CBR. Consequently, the re discount rate and the bank rate have been set at 14 per cent and 15 per cent, respectively," he said.