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BoU concerned over rising fuel prices
Fuel prices have been volatile in the last two months, thus presenting an increase in inflationary pressures. Photo / Edgar R Batte
What you need to know:
- Bank of Uganda says the rise in fuel prices and exchange rate depreciation presents new risks to an otherwise fragile economic environment that had been recovering from the impact Covid-19
Bank of Uganda has said it is concerned about the high foreign exchange depreciation and rising fuel prices, both of which present new risks to the economy that has remained resilient amid global fragility.
While releasing the report of the Monetary Policy Committee, Bank of Uganda deputy governor Michael Ating-Ego, said fuel prices and the volatility in the foreign exchange market had forced the Central Bank to maintain the Central Bank Rate at 9.5 percent, which had been relaxed from 10 percent.
Fuel prices have been rising, increasing to about Shs5,400 and 5,200 per litre of petrol and diesel, respectively.
Fuel prices, which feed into other commodity prices, have been rising for two months now from an average of Shs4,900 and Shs4,850 for petrol and diesel, respectively. On the other hand, the shilling weakened against the dollar, falling to an average of Shs3,730.
Therefore, to insulate the economy, Bank of Uganda maintained the Central Bank Rate, which is key in determining the cost of credit in the market.
Dr Ating-Ego, said the current downward trend in inflation is projected to continue due to lower imported inflation, further easing of food crop prices and subdued aggregate demand.
Bank of Uganda projects inflation to drop to a range of 3 percent to 4 percent in the fourth quarter of 2024.
The projections are, however, subject to risks, among which include a faster than projected fall in global inflation, while at the same time, a prolonged higher inflation in the advanced economies could lead to higher interest rates, which might trigger further capital outflows, further worsening the exchange rate depreciation.”
Dr Atingi-Ego also indicated that whereas there has been improvements in the economy over the last two years, banks have remained risk averse while extending credit to the private sector, which has resulted into a drop in private sector loans.
Data from Uganda Bureau of Statistics indicates that the economy is expected to remain unchanged from the 5.2 percent growth, supported by fast recovery in the services and industry sectors.
Economic growth is projected to remain strong due to continued investment in the extractive industries - financed by foreign direct investment - and higher export earnings.
However, this will be subject to a range of uncertainties, among which include resurgence of supply chain distortions, tighter fiscal policy due to unfavourable global financial markets, uncertainty in moderation of household expenditure and reduction in agricultural output due to bad weather.
Dr Atingi-Ego said the Central Bank will continue to implement a tight monetary stance with the aim of keeping inflation around the 5 percent in the medium term target to support economic stability through saving, investment, competitiveness and social economic transformation.
Central bank increases number of primary dealer
Bank of Uganda has increased the number of primary dealers from six to eight as it seeks to develop the fixed income market.
The dealers, among which include Absa, Centenary, Citibank, dfcu, Equity, Housing Finance Bank, Stanbic, and Standard Chartered Bank, will be charged with driving the development of the debt market, which remains low compared to others.
Mr Kenneth Egesa, the Bank of Uganda director communications, said appointment of the eight banks had come after an evaluation, from which they were chosen based on required criteria and pricing mechanism,”
Earlier the Central Bank had indicated that in October 2020, it had adopted the primary dealership with Primary Dealer Market Makers, in which banks had been given exclusive access to the primary market for government securities.
“Banks are responsible for providing liquidity and pricing government securities. The system has been successful in increasing liquidity in government securities and attracting institutional and offshore investors,” Bank of Uganda said.
They have also been key in elevating Uganda’s presence on the global finance market, helping the country to earn notable listing on FTSE and Russell Frontiers Index.
The systems has further influenced reforms thus improving Uganda’s ranking in the Absa African Financial Markets Index, in which it was ranked 10th in 2020 but improved to 4th in 2022 out of 26 African countries.
