Bank of Uganda (BoU)yesterday reduced its Central Bank Rate (CBR) from 10 per cent to 9 per cent in a stimulant move to encourage borrowing from commercial banks and boost the economy.
The CBR is the rate at which BoU lends to commercial banks which in turn lend to the public on interest.
The move is intended to tackle pressing issues in the economy such as high lending rates and reviving economic growth, which has been slowing down in the past quarters.
Speaking to journalists yesterday, Mr Emmanuel Tumusiime-Mutebile, the governor of BoU, said the central bank believes that the mild inflation outlook provides room for a reduction in the policy rate to support economic growth.
"The economy still has spare capacity and lower interest rate will help reduce the output gap. Against this backdrop, BoU has decided to reduce the Central Bank Rate by 100 basis points to 9 per cent," he said.
Mr Mutebile said the economy continues to grow but at a slow rate.
"Economic activity seems to have slackened in the first half of 2019 compared to the second half of 2018. The recently released quarterly GDP estimates by Uganda Bureau of Statistics indicates that GDP growth slowed in the second quarter of the Financial Year 2018/19," he said.
"The outlook is uncertain, particularly as a result of the unfavourable global economy," Mr Mutebile added.
According to the BoU governor, the widening fiscal and current account deficits, coupled with public sector domestic financing needs, could exert pressure on the lending interest rates leading to further reduction of economic growth.
Mr Mutebile said the inflation outlook has been revised downwards compared to the August forecast, pointing out that annual inflation is now projected to remain below the 5 per cent target until the fourth quarter of 2020.
"The risks to the inflation outlook in the near term (12 months ahead) are assessed to be largely on the downside and inflation is forecast to converge to the target of 5 per cent in the medium- term (2-3 years). Demand side pressure remain subdued. In the absence of shocks, the relative stability of the exchange rate is expected to continue," he said.
Commercial banks lending rate
Dr Adam Mugume, the executive director of research at BoU, said the average lending rate in commercial banks rose to 20.2 per cent in the quarter under review from 19.7 per cent.
Uganda has always had a problem of large current deficit because it imports more than it exports. A current account deficit occurs when a country spends more on imports than it receives on exports.
Dr Mugume said Uganda's current account deficit stands at $3 billion (about Shs11 trillion), which means that the country's import bill is high compared to what it earns from exports.
"The GDP growth rate was 6.5 in the last quarter of 2018/19 quarter and dropped to 5.4 per cent in the first quarter of 2019/20," he said.
Dr Mugume said the fiscal deficit, based on the 2019/2020 budget, is 8.7 per cent, which puts government in financial need to close the gap.
In August, BoU noted that the country had already seen a decline of 9 per cent in export receipts resulting, in a drop in coffee, beans and maize exports. However, it received the highest volume of foreign direct investment for the 2018/19 financial year. Much of Uganda's foreign direct investment, according Bank of Uganda data, comes from Europe, US, China and India.