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Bank of Uganda Alarmed by Escalating Fuel Costs and Currency Depreciation

bank of uganda alarmed by escalating fuel costs and currency depreciation
bank of uganda alarmed by escalating fuel costs and currency depreciation
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Bank of Uganda has voiced its worries over the recent increase in fuel prices and the depreciation of the exchange rate. These developments pose new risks to the economy, which has shown resilience amidst global instability.

During the release of the Monetary Policy Committee’s report, Bank of Uganda’s deputy governor, Michael Ating-Ego, explained that due to the surge in fuel prices and the instability in the foreign exchange market, the Central Bank has decided to maintain the Central Bank Rate at 9.5 percent, a slight reduction from its previous rate of 10 percent.

Fuel prices have been steadily rising, reaching approximately UGX 5,400 per liter for petrol and UGX 5,200 per liter for diesel.

These increases in fuel prices, which impact other commodity costs, have been ongoing for the past two months, starting from an average of UGX 4,900 for petrol and UGX 4,850 for diesel. Simultaneously, the Ugandan shilling has weakened against the US dollar, averaging UGX 3,730.

To safeguard the economy, Bank of Uganda has opted to maintain the Central Bank Rate, a critical factor in determining credit costs in the market.

Dr. Ating-Ego also noted that the current downward trend in inflation is expected to persist due to lower imported inflation, decreased food crop prices, and subdued overall demand. Bank of Uganda projects inflation to drop to a range of 3 percent to 4 percent in the fourth quarter of 2024.

However, these projections carry certain risks, such as a faster-than-anticipated decline in global inflation. Conversely, sustained high inflation in advanced economies might result in higher interest rates, potentially leading to further capital outflows and exacerbating exchange rate depreciation.

Dr. Atingi-Ego additionally highlighted that while there have been economic improvements in the past two years, banks have maintained a cautious approach to extending credit to the private sector. This has resulted in a decline in private sector loans.

Data from the Uganda Bureau of Statistics indicates that the economy is expected to remain stable at its 5.2 percent growth rate, driven by the swift recovery of the services and industry sectors.

Economic growth is projected to stay robust, thanks to continued investments in extractive industries financed by foreign direct investment, as well as increased export earnings. Nevertheless, this outlook remains subject to uncertainties, including potential disruptions in the supply chain, stricter fiscal policies due to unfavorable global financial conditions, uncertainty in household expenditure moderation, and reduced agricultural output due to adverse weather conditions.

Dr. Atingi-Ego affirmed that the Central Bank will maintain a tight monetary stance to help keep inflation around the 5 percent target in the medium term. This strategy aims to support economic stability by encouraging saving, investment, competitiveness, and socioeconomic transformation.

Furthermore, Bank of Uganda has expanded the number of primary dealers from six to eight in an effort to bolster the fixed income market. These dealers, including Absa, Centenary, Citibank, dfcu, Equity, Housing Finance Bank, Stanbic, and Standard Chartered Bank, will play a vital role in driving the development of the debt market, which currently lags behind other financial markets.

Kenneth Egesa, the Director of Communications at Bank of Uganda, explained that the selection of these eight banks followed a thorough evaluation based on specific criteria and pricing mechanisms.

Bank of Uganda had previously introduced the primary dealership with Primary Dealer Market Makers in October 2020, giving banks exclusive access to the primary market for government securities. This system has successfully increased liquidity in government securities and attracted institutional and offshore investors, contributing to Uganda’s recognition on global finance markets and improved rankings in financial market indices.