According to the most recent statistics from the Uganda Bureau of Statistics published in August, the country’s inflation has surged to 9.0 per cent from 7.9 per cent.
The increase, according to UBOS, was by an upward trend in commodity prices under core inflation, which rose to 9.0 per cent in August 2022.
Also, according to the Central Bank Deputy Governor Michael Atingi-Ego, although inflation was initially supply-driven, other components of inflation which were demand driven began to increase, making inflation more broad-based and persistent. This was an early sign showing that inflation expectations had begun shifting upwards.
According to Dr. Atingi-Ego, in June, BoU began tightening monetary policy and increased the Central Bank Rate by 1 percentage point to 7.5 per cent, to anchor inflation expectations at levels consistent with the medium-term target of 5 per cent.
BoU also increased the Cash Reserve Requirement (CRR) on commercial banks’ deposits from 8 per cent to 10 per cent on June 23, 2022, to minimize the spillover effect of excess shilling liquidity to the foreign exchange market.
“Throughout the year, the banking sector maintained strong capital buffers, reinforcing the banks’ solvency and resilience to risks. All banks remained adequately capitalized, with both core capital and total capital to risk-weighted assets well above the statutory requirements of 10.0 per cent and 12.0 per cent respectively,” highlighted the recent Bank of Uganda annual report 2022 published on Thursday.
Dr. Atingi-Ego however noted that asset quality has remained a concern, mostly reflecting loans permanently impaired by the pandemic and the emerging adverse macroeconomic conditions that were affecting borrowers’ ability to honour their credit obligations.
“The ratio of non-performing loans to gross loans (NPL ratio) for the banking sector increased from 4.8 per cent in FY2020/21 to 5.3 per cent during the year. The Bank continued to make strides in promoting digital payments in support of the financial inclusion agenda. As of June 30, 2022,” he said.
Dr. Etingi-Ego, also revealed that the Bank’s ability to take advantage of rising interest rates was curtailed by increased government foreign expenditure and intervention in the domestic markets to stem foreign exchange volatility. “On the side of expenses, high domestic demand for currency contributed to an increase in currency costs. Therefore, in the coming year, the Bank will need to navigate the challenges of uncertain economic conditions, climate change, and the rapidly changing payments ecosystem to ensure we meet our key mandates of price and financial sector stability.”
Nevertheless, the Central Bank through its report cautioned that the threat of looming global stagflation does not augur well for the Ugandan economy because a slump in global output is expected to constrain demand for Uganda’s exports of goods and services as a number of advanced economies to turn inward, to boost their economies.
The report also revealed that China’s zero-tolerance to Covid-19 has caused a reduction in production in the country which could drive up the prices of goods. China being a major source of Uganda’s imports, means importing into the country at a higher cost. The combination of reduced export earnings with the higher cost of imports if the price effect dominates, implies a reduction in net exports and thus lower domestic growth.
“Moreover, as China continues to grow much slower than expected, its authorities could reduce the amount of financial aid available to developing countries including Uganda. This would constrain growth in developing countries (Uganda inclusive) as the Chinese loans have been the main boost to infrastructural growth. As commodity prices remain elevated, the rise in global inflation means higher imported inflation going forward for Uganda…” reads the part of the report.
Nevertheless, the report also noted despite the attempts by BoU to reduce inflation, Core and headline inflation is projected to rise above the 5 per cent target in the near term before returning to the target in the medium target.
The expected rise in inflation is due to increases in energy prices, the persistence of the supply chain disruptions, and increases in food prices due to scattered rains around the country, weakening of the Uganda shilling as well as the intensification of a second-round effect of the energy prices to other commodities prices.
Therefore BoU assesses that the balance of risks to the inflation outlook is tilted to the upside.
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