Why Bank of Uganda has increased its lending rate

by Musa Hashim Kasibante
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Uganda’s central bank and financial sector regulator, the Bank of Uganda (BoU) has increased its lending strategy rate by 50 points to nine per cent (9%) for the third consecutive time.

This is in a reaction to the earlier predictions by the central bank which had forecast that inflation for this year (2022) will remain within 7.0% to 7.4%.

Bank of Uganda’s Deputy Governor, Dr Micheal Atingi-Ego in a recent statement released on Friday, August 12, 2022, said:

 “The inflation outlook is driven by the lagged impact of higher exchange rate depreciation, dry weather that has resulted in the sharp rise of food crop prices and a complete pass-through of global inflationary pressures.”

The Deputy Governor also acknowledged that Uganda’s weaker domestic household consumption coupled with investment expenditure in lean financial conditions that are dominated by higher inflation has significantly reduced disposable incomes in the economy.

“The annual headline and core inflation rose to 7.9% and 6.3% in July 2022 from 6.8% and 5.5% in June 2022, respectively,” he said.

Adding that; “ Annual food crop inflation continued to rise from 14.5% in June 2022 to 1.6.4% in July 2022 and annual Electricity, Fuel and Utilities (EFU) inflation rose from 14.2% to 17.2% in the respective months,” said Dr Atingi-Ego.

The Deputy Governor has also announced that the Bank of Uganda forecasts that inflation pressures will continue to rise in the near term which is within the next twelve (12) months ahead.

“While the current increases in the CBR are meant to bring back inflation to its medium-term objective of 5%, these have had the indirect effect in lowering the pace of depreciation of the exchange rate, which is expected to cushion the inflation pressures,” notes Dr Michael Atingi-Ego

Deputy Governor Bank Of Uganda Dr Micheal Atingi-Ego
Deputy Governor Bank Of Uganda Dr Micheal Atingi-Ego

The 50 basis points rate increment implies that Uganda has one of the highest discrepancies between inflation and policy rates in comparison to more than 50 global economies that were tracked by Bloomberg.

This makes Uganda’s assets much more attractive to investors who may be scouting for a country in which they should invest.

In conclusion, the Governor suggested that the Monetary Policy Committee (MPC) considers that the monetary policy stance will have to be tightened even further if inflationary pressures persist in a bid to ensure that inflation regresses to its medium-term target of 5%.

Effects of inflation on the economy:

The rising inflation has hit hard several sectors like the entertainment and media industry.

 DSTV Uganda has also increased its monthly subscription fees on all its pay TV packages with effect from September 2022

Prompted by the ongoing global financial effects that have propelled an increase in prices of basic commodities around the world, numerous companies, including multinationals operating in Uganda are now revising various tactics to stay afloat in business.

In response to the above economic trend, DStv Uganda has increased its monthly subscription fees on all its bouquets.

With effect from next month, on September 1, 2022, DSTV subscribers will start paying up to a 7% increment on most MultiChoice television packages which include; DStv Access, Dstv family, Dstv Compact and Compact Plus among others.

 According to the South African-based digital satellite television provider, the price increment is due to inflation and a difficult business environment that is currently dominating the global and local economy.

 “Due to the rise in the cost of doing business, we need to adjust the price of our packages so as to continue providing you with unrivalled entertainment,” DSTV Uganda stated on its official Twitter page on Monday, August 1, 2022.

The DSTV Premium package was revised upwards by 6% from Ush239,000 up to Ush255,000.

DStv Compact+ and Compact Bouquets will increase by 5% and 6% respectively and will now cost Ush150,000 and Ush95,000 from Ush142,000 and Ush89,000 respectively.

The Ugandan Shilling’s value has continued to depreciate against the dollar in recent months amid the persistent deterioration of terms of trade induced by the global economic crisis.

Bank of Uganda’s performance report for June 2022, indicates that the Shilling made a monthly unit loss of 2.6% against the US dollar in May 2022.

Between the months of May and June in 2022, the Ugandan shilling has continued to exhibit volatility.

The official foreign exchange rate by the Bank of Uganda put the dollar at 3,750.91 buying, while it was selling at 3,760.91. At commercial banks, the shilling was often at the 3725/3735 trading levels.

“The foreign exchange market came under pressure in the three months from March 2022 and the pressure intensified in May 2022. The volatility of the shilling-dollar exchange rate deepened on a depreciation path in May 2022 and was the highest in the EAC region,” reads an excerpt from a BoU report.

The central bank report says this tightening of monetary policy is a consequential result of the Fed and other advanced economy’s central banks, leading to offshore investors adjusting their portfolio holdings in Uganda.

“In addition, the deteriorating terms of trade that has caused the demand for dollars to increase amongst the energy companies and other importers have also added to the pressure,” states the BoU report.

Bank of Uganda in its bid to stem the volatility intervened by selling US dollars and continued reserve accumulation purchases.

At the onset of the second quarter of the year in April of 2022, the shilling remained strong in real effective terms, appreciating by 1.2% year on year reflecting both declining foreign inflation relative to domestic inflation and the continued strengthening of the Ugandan shilling against the US dollar.

BoU warns that the Ugandan shilling may continue to weaken in the near-term, (within 12 months or so) as the US dollar strengthens on a global scale.

According to the BoU report;

“This view is underpinned by the Fed’s more hawkish monetary policy stance and the impact of the deteriorating terms of trade on the current account of the balance of payments.”

According to Dr Adam Mugume, the Executive Director of research at the Bank of Uganda, the decline of the Shilling is due to rising inflation.

“Money is a bad store of value. It is a good medium of exchange. Money’s loss of value largely reflects the effect of inflation. If inflation averaged 2.2% in 2021, ideally money lost value by the same magnitude,” Dr Mugume notes.

He added that:

“Therefore, one ought to minimize holding cash. Instead, you should hold money in an account that earns an interest rate that is higher than inflation. Almost 50% of deposits in banks are demand deposits that earn almost zero interest rate.”

Mr Daniel Birungi, the Executive Director of Uganda Manufacturers’ Association (UMA) says the problem is largely macro- and is determined by several factors; a case in point is our dependency on imports, the constantly varying interest rates and risk aversion among investors among others.

In recent weeks, Ugandans have been advised to brace themselves for further disruptions as Kenya, the trade route used to transport more than 80% of Uganda’s fuel and other imports, is in election season this month of August 2022.

Ugandan traders and consumers are generally worried about potential supply disruptions that can easily be caused by election and post-election violence which characterized an election cycle that occurred in 2007/8 when cargo destined to Uganda was blocked and massively destroyed. This left a vivid imprint in the minds of many Ugandan traders who were victimized in the political process.

Hon Henry Musasizi, the State Minister for Finance, has already revealed plans that the government is preparing to ship imports through Tanzania, despite it being a longer and more expensive route, which would subsequently increase the cost of products bought via that trade route.

“We are not saying there will be violence, we are saying there is a political risk because of the August elections in Kenya and how do we ensure that we don’t get supply disruptions? We are saying that should it happen, there should be an alternative,” said Hon Musasizi.

The Minister recently revealed that procurement of water vessels is in the pipeline which will be used to connect port Mwanza to the marine ports located in both Jinja and Kampala.

“We have procured vessels which can be used to transport fuel to Kampala just in case. Even when there is no political risk, we feel it is better management to have options,” Musasizi stated.

As the dollar rate increases upwards to the Ush3,900 mark, BoU has predicted a persistent deterioration in the foreign exchange rate. Forecasting a gloomy financial picture shortly; this trend will heap more pressure on the price of imported fuel products. Considering that it will demand spending more shillings to get the required dollars to enable the purchase of imports. The Bank of Uganda now predicts a continued worsening foreign exchange rate.

Kenya, Tanzania, Rwanda, the Democratic Republic of Congo and Ethiopia have all either introduced or increased subsidies on fuel product costs to help contain the rising prices.

Uganda maintains its stance that it will neither offer subsidies nor reduce taxes saying it is dangerous for the economy.

Earlier this month, (August 2022) Tanzania announced subsidies worth $43 million (Ush160 billion), the East African nation has had to announce a reduction in prices effective this week.

The retail petrol price is Tsh2,994 Tanzania shillings (4,820 Uganda shillings), while the price of diesel now drops to an equivalent 5040 Uganda shillings, according to the Energy and Water Utilities Regulatory Authority (EWURA).

The sharp increase in petroleum product prices is also leading to record inflation rates, with the latest at the end of May 2022, being recorded at 6.3%.

The price of diesel according to the Uganda Bureau of Statistics, increased by 54% by end of May 2022, while petrol recorded an increase of 30%.

Apart from the local and regional factors, prices of fuel are mainly driven by the changes in the prices of crude oil in the international market.

“Every 10-dollar increase in the cost of a barrel of crude adds almost a quarter to the price of a gallon (3.78 litres) at the pump,” according to US magazine CNET while explaining the effect of the Russia-Ukraine conflict on global prices.

“Even though the US doesn’t import much crude from Russia, oil is traded on a global market, and any ripple affects prices all over the world,” the report says.

The new increments in global crude prices resulted from the European Union’s proposal last week to cut off dependence on Russian oil.

The current crisis has become more complex because of the several factors that have contributed to the current price increases.

The war in Ukraine started when the demand for petroleum had already outstripped the supply.

Oil companies were reducing investments in new projects, under pressure from falling prices on one hand, and shareholders demanding higher returns on the other.

Demand plummeted during the Covid-19 pandemic period, causing oil producers to stop production, as crude prices fell.

When economies started to reopen, refineries around the world under-estimated how quickly demand would pick up and therefore, did not plan accordingly.

Since then, even as demand has been rising sharply, the crude producers have been reluctant to increase output to bridge the deficit, and experts say this might continue even beyond the Ukraine conflict.

In most countries, at least in Africa, diesel is known to be cheaper than petrol, but recently there is a shift from the norm, with diesel prices rising seemingly faster than those of petrol.

Internationally, the United States and the United Kingdom, as well as some other countries in the west, rely more on diesel that is produced by Russia than they do rely on petrol.

But with the newly imposed sanctions on Russia, these countries are increasingly looking for other markets elsewhere for diesel purchases, which have subsequently heaped pressure on the demand for diesel.

The Tanzanian route has become increasingly popular as more Ugandan fuel traders and importers have embraced it in a bid to avoid over-dependence on the Kenyan route which is inclined to violence and other forms of disruptions, especially during election season.

Whereas the Tanzanian route is longer, hence making transportation costs compared to the Kenyan route, the government says at least 20 per cent of fuel importers are now using the route.

The Spokesman for the Ministry of Energy, Mr Solomon Muyita said in an interview on August 9, 2022, that;

“Currently, 20% of all our petroleum products are transported through Tanzania. In case of an emergency, we will be able to increase the capacity on the Tanzania route.”

According to Mr Muyita, Tanzania’s government has agreed to reduce the road toll rates for trucks travelling to Uganda from $16 to $10 for each vehicle.

Uganda’s fuel prices are already extremely high and there was fear that this could be worsened by the ongoing political and electoral events in neighbouring Kenya.

On the bright side, the movement of fuel trucks between Uganda and Kenya has continued without any major interruption even after Kenyans cast their ballots during their elections on August 9, 2022.

Uganda’s daily fuel consumption stands at five million (5,000,000) litres that is according to fresh data from the Uganda Bureau of Statistics (UBOS).  

The enormous amount of this much-needed fuel is transported into Uganda by way of oil tankers which depend on the northern corridor route for these vital imports that stimulate the economy.

The government has made significant efforts to improve its fuel reservoirs.

Backup plan

Prime Minister Robinah Nabbanja said recently that the Ugandan government has enough fuel reserves to keep the country in operation in the event of any crisis that may arise from the Kenyan elections to handle any fuel scarcity.

She assured the public recently as she was responding to a matter of national importance raised by Hoima City Woman Member of Parliament, Hon. Anansi Nyakato during the sitting of the House on 4th August 2022.

Energy Ministry Spokesman Muyita admitted that both private and public fuel storages are full of fuel that can cover Ugandan motorists for at least 10 days.

 “We have 100 million litres of storage in the country and there are many trucks that are on the way to Uganda,” Mr Muyita Solomon said.

Business Times Uganda

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