Bank of Uganda
Remarks by
Prof. Emmanuel Tumusiime-Mutebile
Governor, Bank of Uganda
Uganda Banker's Association
Informal Dinner
Piato Restaurant
2nd December, 2016
Good evening Ladies and Gentlemen,
Thank you all for coming here this evening for our
informal UBA dinner.
I spoke last week at the Institute of Banking and
Financial Services annual banking dinner about the
current challenges facing the banking industry. Tonight
I would like to make a few brief remarks about the
current macroeconomic situation and prospects, notably
as regards economic growth, the exchange rate and
inflation.
Real economic growth, over the last five years, has
averaged about five percent per annum. This is very
to the economy's sustainable potential
likely close
growth rate, given growth of the labour force, capital
stock and productivity. In the last fiscal year, which
ended in June 2016, real GDP growth was 4.8 percent,
which is slightly below potential, but is far from being a
recession as some people have claimed, although I
appreciate that trading conditions have been difficult for
many businesses.
There were factors which probably depressed economic
growth in FY 2015/16, such as the increase in market
interest rates, the exchange rate volatility in the first
half of the fiscal year and the election in the third
quarter. Without an election, and with probably lower
interest rates and hopefully less volatile exchange rates
(although that is hard to predict) I would expect that
conditions in the current fiscal year will be more
conducive to growth and so I would expect that we will
experience a small rise in the real GDP growth, to five
percent or even slightly higher.
Let me now turn to the exchange rate, which has
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depreciated in recent weeks, after a long period nearly
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11 months of stability. Against the US dollar, the
Shilling has depreciated by 4.7 percent since the end of
October. However, more than half of that depreciation
is attributable to the strengthening of the US dollar
against major currencies since the Presidential election
in the US, which has led to expectations of higher
interest rates in that country.
My staff calculates an index of the Uganda Shilling
against a weighted basket of Uganda's
trading partners.
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This index called the nominal effective exchange rate
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index has depreciated by only 2.3 percent since the
end of October. Furthermore, a nominal depreciation of
the exchange rate has been necessary to ensure that
Uganda remains competitive against its trading
partners. Our exchange rate policy, which entails a
flexible, market determined exchange rate, is motivated
by the need to ensure that our balance of payments is
sustainable. Our interventions in the foreign exchange
market, such as that which we carried out last week, are
intended only to dampen volatility in the exchange rate,
and not to impede adjustments in the exchange rate
which are necessary to maintain external balance.
Finally, I want to address the issue of inflation. The
outturn for inflation in 2016 has been better than we had
feared it would be at this time last year, when
inflationary pressures were building up. Annual core
inflation declined during the first half of 2016 and for
the last four months it has settled down at an average of
approximately 5 percent, which is in line with our
policy target for inflation.
The better than expected inflation outturn in 2016 is
attributable to a combination of the tightening of
monetary policy by the BOU in mid 2015, when we
raised interest rates, and the relatively stable exchange
rate since October of last year. When we look at core
inflation outturns over a longer horizon, we can see that
they have been very close to our policy target. Over the
last four years, annual inflation has sometimes been
above 5 percent and sometimes been below, but it has
averaged 4.9 percent. I hope that you will agree that this
demonstrates the effectiveness of our inflation targeting
monetary policy framework.
To conclude, ladies and gentlemen, I believe that the
prospects for macroeconomic stability in the near to
medium term are currently very good. In 2017 we can
look forward to real GDP growth which is close to the
economy's medium term potential growth of around 5
percent per annum. With inflationary pressures firmly
under control we can also be confident that annual core
inflation will continue to trend around our medium term
target of 5 percent.
Thank you for listening.