Remarks by
Prof. Emmanuel Tumusiime-Mutebile,
Governor, Bank of Uganda
UBA Informal Dinner
Residence of the CEO, Stanbic Bank
Kyadondo Road, Nakasero
12 May 2017
Let me begin by thanking you all for coming to
this informal dinner. As always on these
occasions I am delighted to see you all here. I
want to make a few brief remarks about the
current state of the economy and the prospects
for the near and medium term.
When we open our newspapers in the morning
we often read articles about how the economy is
performing badly. But much of what is written
is either exaggerated or misconstrued.
It is true that real growth in the current fiscal
year will be lower than was initially projected,
but that does not mean that the economy is in
recession - which entails a contraction of output.
There is a slowdown in economic growth but
this should prove to be only temporary.
As we discussed at the last UBA meeting in
April, real economic growth in the current fiscal
year has been pulled down by the supply side
shock to agriculture, caused by the drought.
The quarterly GDP data from UBOS indicate
that real output was about 1.5 percent below its
trend - which is a proxy for the equilibrium
level of output - in the first half of 2016/17, with
most of the shortfall due to lower than trend
agricultural output.
We do not yet have the quarterly GDP data for
the third quarter of 2016/17, but the BOU's
composite indicator of economic activity -
which is a high frequency indicator - shows that
there was a rebound in economic activity in that
quarter, with an acceleration of growth in both
the industrial and services sectors.
Given the trends in the third quarter of the fiscal
year and the fact that we are now enjoying
better weather for agriculture, I expect that in
the second half of the fiscal year, the economy
should claw back some of the output losses
which it suffered in the first half.
However, we are forecasting that real growth
for the full fiscal year will be only about 4
percent, which is one percentage point below
potential.
Nevertheless, the supply side shock to
agriculture should be reversed in the next fiscal
year, which will enable real output to revert to
its medium term trend. This means that we
should experience growth of more than 5
percent in 2017/18.
I also want to refute the claim that the economy
is suffering from a lack of demand. Of course,
some individual industries may not have
sufficient demand to sell all of their output -
that will always be the case in any economy -
but at the aggregate level there is little evidence
to indicate that a lack of demand has depressed
real economic growth. If that were the case, we
would expect to see that the sectors most badly
affected would be the non-traded goods sectors
of the economy, because these sectors are
dependent fully on domestic demand.
In fact the very opposite is the case. The services
sector, which consists predominantly of
nontraded goods industries, did much better than
both industry and agriculture in the first half of
the fiscal year, while our composite indicator of
economic activity indicates that services also
grew faster than the other sectors in the third
quarter. That suggests that a shortage of
aggregate demand is not the cause of the
slowdown in growth in 2016/17.
A sustained deficiency of aggregate demand
would also lead to disinflation (i.e. falling
inflation). But there is no evidence of this
occurring. Core inflation has been quite stable,
at around 5 percent, for the last 9 months, which
suggests that the level of aggregate demand is
about right, given the economy's capacity to
supply goods and services, which as I noted
earlier, has been temporarily depressed by the
supply side shock to agriculture.
On the subject of inflation, our forecasts indicate
that core inflation should be in line with our 5
percent policy target in 12 months' time, which
is the time horizon for our monetary policy
decisions. Our 12 month forecast for inflation
has remained largely unchanged since the end
of last year. However, some of the upside risks
to core inflation, which we had identified six
months ago, notably the rising food and fuel
prices, and the risk of further exchange rate
depreciation, have abated somewhat.
Food crop prices have risen steeply - annual
food crop inflation was nearly 22 percent in
April - but the pass-through to core inflation has
been muted. The exchange rate has also been
relatively stable in the first half of 2017. The
nominal effective exchange rate, which takes
into account exchange rate movements of the
Shilling against all our trading partners, has
only depreciated by 1.6 percent since the end of
2016.
We also expect that the current food price shock
should have started to ease by the third quarter
of this calendar year, as the better weather that
we are now experiencing boosts harvests, and
that will help to lower headline inflation.
At the last informal UBA dinner I said that,
provided that the outlook for inflation did not
deteriorate, the BOU hoped to further lower the
policy interest rate gradually during the course
of 2017.
Accordingly we reduced the Central Bank Rate
by 50 basis points at our Monetary Policy
Committee meeting last month. Given the
relatively benign outlook for core inflation, I
believe that we should have scope to implement
further modest reductions in the CBR in the near
term, although again I want to stress the caveat
that any further reductions are contingent on
there being no worsening of the core inflation
forecast.
Finally, I would like to re-emphasise my desire
to see the reductions that we are effecting to the
policy interest rate being passed through to
bank borrowers.
The data on Shilling lending rates for March
indicate that the average lending rate was still
22.5 percent, which means that the average
lending rate had fallen by less than 3 percentage
points from its most recent peak in February of
last year.
I hope that we will be able to achieve more
substantial reductions in bank lending rates in
the next few months.
Thank you for listening.