Perhaps a reflection of how tough business has become, Bank of Uganda has said economic growth decelerated in the month of October as the private sector’s spending power remained largely weak.
A combination of the volatility in the exchange rate and a build-up of bad debts has created an aura of caution among the private sector – usually the engine of growth – as many business people hold back on committing more funds.
In the monetary policy statement that it issued for November, Bank of Uganda did not say how far growth had dropped, but predicted that “the outlook for private sector investment remains subdued, although measures of business sentiment remain above average.”
To spur private sector investment, Bank of Uganda has lowered the Central Bank Rate by a percentage point to 12 per cent in order to entice banks, whose interest rates average 24 per cent, to follow a similar trend. Bank of Uganda, however, usually says that the impact of the reduction in the CBR takes months for consumers to feel its impact.
For now, the private businesses have to battle with a spike in fuel prices, while homes have to deal with an increase in such vital commodities like sugar. Annual headline inflation, a measure of the changes in the prices of goods and services, rose to 4.6 per cent in November from 4.1 per cent.
An increase in inflation increases the costs of production, distorts the pricing of products in a market that craves for uniformity and few price adjustments, and also weakens the spending power of consumers.
There are other risks that could emerge from across the borders, Bank of Uganda warns.
“There are downside risks to the projected growth path largely emanating from the uncertain global economic developments. The economies of some of our trading partners are expected to grow at a slower rate than previously assessed, which will continue to weigh on Uganda’s exports,” BOU warned.
Uganda’s real gross domestic product is expected to grow at five per cent this financial year, 5.5 per cent in financial year 2017/2018, and six per cent 2018/2019.
This growth is expected to be boosted by the construction in the transport and energy sectors.
jeff@observer.ug