Monetary policy is just one of the many economic policies pursued within an economy to achieve various economic goals, including high economic growth, financial sector stability and maintenance of price stability.
With the rapid growth of the financial market in Uganda and greater integration with the rest of the world, monetary policy has assumed increasing significance in recent years.
The Governor Bank of Uganda (BOU), Prof. Emmanuel Tumusiime Mutebile at the start of this week on Monday 01st April read the monetary policy statement, April 2019 at the banking hall of BOU and declared to the public that the Central Bank Rate (CBR) is 10 per cent.
The CBR which is set once every two months has been maintained at 10 percent since September 2018.
BOU has pursued an expansionary monetary policy to boost production and economic growth seeing as the global economic growth has been visibly slowing and is projected to slow down further to 3.5 percent and 3.6 percent in 2019 and 2020 respectively.
The projections were largely on account of the sustained negative effects of the US-China tariff war, fragile growth in the Euro Area and Emerging economies, as well as concerns about China’s outlook.
The aim for the accommodative policy is to boost private sector credit and investment which eventually creates employment, increased incomes and welfare in terms of consumption.
This eventually translates into economic growth.
As a result, the year on year Quarterly GDP growth for the second quarter (Q2) 2018/19 is at 6.6% compared to a growth of 5.9% in Q2 of the 2017/18 financial year.
The CBR in March 2018 was 9.5% and was further reduced to 09% in April 2018 specifically gearing towards an increase in growth that was eventually attained at the start of Q1 2018/19 as growth rates of 5.5 per cent were registered.
However, on the unseen economic side of the coin, due to the slow growth of the shilling against the dollar on an annual basis, the current account position has remained relatively weak, widening from US$1,272 million in 2017 to US$ 2,465 million in 2018 largely driven by a 40% increase in the trade deficit.
In addition, the slow global growth as a result of trade clashes between the United States of America and China has negatively impacted low developing countries like Uganda by worsening the trade deficit.
Climate changes have been and may continue to affect the rain fed production in the agricultural sector.
Especially the recent exceedingly hot temperature in Q2 2018/19.
Recent and ongoing regional border closure of the Cyanika and Gatuna trade border points by Rwanda in February has also affected the balance of trade with a reduction on trade by 08% which will eventually affect overall growth.
The monetary policy mechanism uses inflation targeting (IT-LITE) policy framework to maintain price stability which is the primary role of the central bank.
The aim is to maintain a stable annual core inflation rate at around 05%.
Currently, inflation stands at 4.6% from 3.6% in February which is in line with BoU’s policy stance.
The stability of inflation can be attributed to international declining oil prices and the stabilizing exchange rate.
Implementation of IT-LITE by BOU is mainly driven by interest rates.
The Central Bank therefore tries to control the long-term commercial lending rates by maintaining the 7-day interbank lending rate within a defined threshold above and below the CBR.
Currently, majority of the Commercial Banks are lending to the public at a weighted index of 20.1% which is slightly lower than the average rate of 21.4% from the previous quarter, but this still remains unfair.
The question on the minds of every investor and business person is; why are lending rates still so high?
This has continuously been a challenge for the economists at the central bank.
Governor Mutebile while in Fort Portal recently noted, “We have experienced a major problem where the interest rates charged by financial institutions remain stubbornly high.
"Commercial banks’ lending rates have remained high even when the BoU successfully keeps the rate of general price increases tightly controlled and goes further to reduce the official interest rate – the Central Bank Rate - that should influence the direction and level of lending interest rates in a bid to make loans from banks cheaper.”
Nonetheless, alternative measures have been taken to try and avail low cost loans to the investment sector of Uganda.
For Instance, the Agricultural Credit Facility (ACF) was established by Government to support farmers who significantly improve their yields, keep records and have a sound financial relationship with their banks.
This fund is disbursed by BOU at 12 per cent per annum but interested farmers have to apply for the loan through their commercial banks.
Efforts have also been in place to introduce Islamic Banking in the Ugandan financial sector.
Islamic banking will provide capital to investors at low cost and will also foster country wide financial inclusion.
BOU in conjunction with Parliament have amended the Financial Act, 2004 to provide for bancassurance, agent banking, Islamic banking among other financial products.
These and many more efforts have been put in place to create stability in the investment environment.
In this light, I feel Bank of Uganda continues to steadily move Uganda’s economy forward as it is evident that Uganda’s economy and financial welfare is at the heart of BOU as it strives to ensure price stability and a sound financial system.