Cash in a money counting machine. Movement of cash in form of notes and coins is an indicator of the country’s economic activity among households. PHOTO/ EDGAR R. BATTE
Whether in advanced, emerging, or developing economies, the exclusive right to issue local currency banknotes is commonly vested with the Central Bank.
The amount of currency in circulation represents those banknotes and coins that have been produced and issued for use in the economy.
However, notes and coins held in the Central Bank’s vault, including those returned to the Central Bank by banks, are not considered part of the currency in circulation. The notes are non-interest-bearing liabilities and are due on demand.
Between May 2024 and June, the amount of currency in circulation in Uganda has been increasing due to expansion/growth in the economy, which requires the availability of currency to facilitate the purchase of goods and services.
In response to Prosper Magazine on August 19, the executive director of research at the Bank of Uganda, Dr Adam Mugume said currency means the stock of coins and notes outside the Bank of Uganda (BoU).
In June, the stock of notes and coins issued by BoU rose to Shs8.134 trillion, up from Shs7.940 trillion in May 2024, an increase in currency in circulation of Shs194 billion.
“Increase in currency outside BoU is an increase in its liability. It should be equal to an increase in its assets which is a sum of increase in foreign currency reserves and loans to its customers, namely the government and banks,” Dr Mugume explained.
Dr Mugume said broadly, that a currency increase is a normal development in an economy as it is a lubricant to the functioning of the economy.
“Currency growth enhances transactions in an economy and that is why growth in currency shouldn't exceed growth in nominal GDP [Gross Domestic Product]. For instance, in the year ended June 2024, nominal GDP growth was about 11 percent which is about the same growth as in currency for the year. If currency growth exceeds the growth in economic activity, then BoU would be inflating the economy,” he explained.
The Finance Ministry argues that Uganda’s economic activity has remained on a recovery path despite recent global challenges like tighter financial conditions and increased global tensions which disrupt supply chains.
Preliminary estimates indicate that the size of the economy increased to Shs202.1 trillion in FY2023/24, up from Shs183. 004 trillion registered in FY2022/23. In real terms, the economy grew by 6 percent, compared to a revised growth rate of 5.3 percent in FY 2022/23.
Economic growth
Uganda’s economic growth has been attributed to increased production in agriculture, industry, and services sectors of the economy, supported by continued implementation of growth-supportive government programmes and infrastructure; increase in private sector activity supported by the recovery in household consumption and investments as prices remained stable within the Central Bank target; and higher exports on account of growth in regional trade.
Uganda’s economy also benefited from global recovery which remains slow but steady with global growth estimated at 3.2 percent in 2023 and forecast to remain at that same pace in 2024 and 2025. In addition, economic growth in Sub-Saharan Africa is estimated to increase to 3.7 percent and 4 percent in 2024 and 2025, respectively, which supports trade in Uganda’s economy.
All three sectors of the economy registered growth in FY2023/24. The services sector grew by 6.6 percent, accounting for 42.8 percent of total GDP while the industry sector grew by 5.8 percent with a GDP share of 25.2 percent. The agriculture, forestry, and fishing sectors grew by 5.1 percent with a share of 24.6 percent in total GDP.
As a result of this growth, Finance Minister Matia Kasaija says the size of the economy is estimated at Shs202 trillion ($53.3 billion) up from Shs184.3 trillion ($48.8 billion) in nominal terms. If Ugandans agreed to share this GDP equally, each citizen would enjoy a GDP per capita of $1,146 (Shs4.3 million) compared to $1,081(Shs4 million) registered last Financial Year 2022/23.)
Responding to Prosper Magazine’s inquiry on August 20, the development economist, who is a senior lecturer at the School of Economics at Makerere University and a director of Makerere University Business Economic Forum, Fred Muhumuza said: “Bank notes and coins are increased to match the growing demand for cash as the economy grows. Sometimes, the bank must print to lend to the government although that is not recommended practice as it can trigger inflation.”
The International Monetary Fund (IMF) states, " Central banks use monetary policy to manage economic fluctuations and achieve price stability, which means that inflation is low and stable.”
The IMF says the central banks in many advanced economies set explicit inflation targets. Likewise, many developing countries including Uganda have moved to inflation targeting.
Explaining to Prosper Magazine on August 20, what the increase in currency in circulation means, Mr Corti Paul Lakuma, a senior research fellow and head of the macroeconomic department at the Economic Policy Research Centre (EPRC) said: “Economic activity and demand has increased in recent time, which calls for an increase in money supply. The economy is now north of $50 billion. If that were not the case, then the additional flow to the existing stock of money would be inflationary.”
“Inflation erodes the purchasing power of the existing money supply, hurts business prospects, decreases household welfare, and causes cost outruns in many ongoing private and public projects,” he added.
