Remarks
by
Prof. Emmanuel Tumusiime-Mutebile
Governor, Bank of Uganda
At the
High Level Stakeholders' Engagement on
Building a 21st Century Ugandan Economy
Kampala Serena Hotel
Tuesday, September 3, 2019
The Bank of Uganda (BoU) has not only successfully achieved
its inflation objective of low and stable inflation, but has done
so while supporting economic activity. In the last two
Financial Years (FY), Uganda's economy has grown on
average by 6.1 per cent from a growth of 3.9 per cent in
FY2016/17. Investor surveys suggest that business conditions
and sentiments are strong. Credit to the private sector has
improved; helped by accommodative monetary policy stance.
The economy is expected to maintain this growth momentum
and is projected to grow by between 6.0 and 6.3 per cent in
FY 2019/20, and between 6.5 and 7.0 per cent in the medium
term. The growth prospects are supported by private sector
credit growth; public investment in infrastructure; higher
agricultural output due to favourable weather and positive
government interventions in agriculture; pick-up in activity in
the mineral sector; improved regional security (with peace in
South Sudan and DRC), which are expected to boost
Uganda's exports.
There are downside risks to growth, including:
a) Lower external demand due to a depressed global
economy.
b) Political and policy uncertainty, which are very elevated
in several major economies with global growth
continuing to be biased downwards. Already, the
probability for a global recession is very high.
c) Climate change which will increase uncertainty of
weather patterns and constrain the agricultural sector.
Domestic inflation remains subdued, with the annual
headline and core inflation averaging 2.7 per cent and 3.7 per
cent, respectively, in the quarter to August 2019. The inflation
outlook is favourable, with inflation projected to stabilize
around the 5.0 per cent target in the medium term. Given the
current inflation outlook, BoU has kept the policy rate on hold
since October 2018. Low inflation protects the purchasing
power of Ugandans, especially for the poor households.
BoU has successfully ensured financial sector stability,
including through resolving commercial banks that posed
systemic risks by being very highly interconnected, both by
the number and size of transactions with the other
commencial banks. Currently, commercial banks are
wellcapitalized, liquid, and profitable. Improvements in asset
quality have contributed to an easing of lending standards
and credit recovery. The latest stress tests indicate that the
banking system can withstand shocks.
As the current credit expansion cycle gains momentum, BoU
remains focused on maintaining strong supervision to ensure
that banking sector loans and advances do not drastically
worsen if the economic growth momentum unexpectedly
slows down. Although bank supervision and regulatory
structures broadly follow international best practices, BoU has
stepped up the strengthening of commercial banks' financial
reporting, internal controls, and governance. Weaknesses in
these areas were at the core of the most recent commercial
bank failures.
Despite strong economic performance since the early 1990s,
Uganda's financial sector remains shallow. Private sector
credit could play a bigger role in supporting growth that is
the case at this moment. Private sector credit remains low at
12 per cent of GDP. Although large corporates have access to
credit on more favourable terms, smaller firms in need of
financing have limited options. They often do not meet
financial accounting standards that would facilitate access to
long-term capital. A law to allow movable assets as collateral
has been passed. However, legal uncertainty over property
rights and lengthy proceedings to recover collateral continue
to weigh down on banks' credit risks. The stock market
remains largely untapped with only 9 listings of domestic
companies and rather limited trading in the shares of those
that are listed.
On a more positive note, around 85 per cent of Ugandans
have access to financial services, including through mobile
money. The BoU together with other stakeholders is
implementing a five-year financial inclusion strategy so as to
improve financial literacy, develop the credit infrastructure
and promote formal savings, investment, and insurance while
ensuring consumer protection. In 2018, access to financial
services benefited from the introduction of agency banking.
Uganda has recently issued regulations for Islamic banking
and preparations are underway for the introduction of the
first Islamic financial products. The BoU in collaboration with
other stakeholders is working towards adopting the National
Payments System Act, which will provide a legal basis for
BoU to supervise the mobile money sector and support
modernise of the financial system.
In conclusion, Uganda has made impressive development
gains over the last 3 decades, while maintaining
macroeconomic stability. The prudent approach to fiscal and
monetary policy has served the country well. The challenge is
to build on this momentum so as to achieve economic take-off
in the next few years.