List of Figures



Bank of UgandaMonetary Policy ReportOctober 2018Table of Contents TOC \o "1-3" \h \z \u List of Figures PAGEREF _Toc530228599 \h iiiList of Tables PAGEREF _Toc530228600 \h iiiAcronyms and Abbreviations PAGEREF _Toc530228601 \h ivExecutive Summary PAGEREF _Toc530228602 \h v1.Reflections of Monetary Policy in the Previous Period PAGEREF _Toc530228603 \h 11.1Monetary Policy Stance PAGEREF _Toc530228604 \h 11.2Monetary Policy Implementation PAGEREF _Toc530228605 \h 12.Money and Financial Markets Developments PAGEREF _Toc530228606 \h 22.1Global Financial Markets PAGEREF _Toc530228607 \h 22.2Domestic Financial Markets PAGEREF _Toc530228608 \h 32.2.1Interbank Money Market PAGEREF _Toc530228609 \h 32.2.2Primary Market for Treasury Securities PAGEREF _Toc530228610 \h 32.2.3Secondary Market for Treasury Securities PAGEREF _Toc530228611 \h 42.2.4Lending and deposit interest rates PAGEREF _Toc530228612 \h 42.2.5Private Sector Credit PAGEREF _Toc530228613 \h 52.2.6Determinants of Money Supply PAGEREF _Toc530228614 \h 73.Economic Activity PAGEREF _Toc530228615 \h 93.1Global Economic Activity PAGEREF _Toc530228616 \h 93.2Domestic Economic Activity PAGEREF _Toc530228617 \h 104.Fiscal Policy and Developments PAGEREF _Toc530228618 \h 124.1Government Expenditure and Revenue PAGEREF _Toc530228619 \h 124.2Public Debt Stock PAGEREF _Toc530228620 \h 135.Balance of Payments and Exchange rate Developments PAGEREF _Toc530228621 \h 145.1Balance of Payments PAGEREF _Toc530228622 \h 145.1.1Current Account Developments PAGEREF _Toc530228623 \h 145.1.2Capital and Financial account PAGEREF _Toc530228624 \h 155.1.3Exchange Rate Developments PAGEREF _Toc530228625 \h 176.Inflation PAGEREF _Toc530228626 \h 196.1Global Inflation and International Commodity Prices PAGEREF _Toc530228627 \h 196.1.1Global Inflation PAGEREF _Toc530228628 \h 196.1.2International Commodity Prices PAGEREF _Toc530228629 \h 206.2Domestic Consumer Price Inflation PAGEREF _Toc530228630 \h 217.Economic Outlook and Risks PAGEREF _Toc530228631 \h 227.1Economic Outlook PAGEREF _Toc530228633 \h 227.2Inflation Outlook and Risks PAGEREF _Toc530228634 \h 238.Conclusion PAGEREF _Toc530228635 \h 24List of Figures TOC \h \z \c "Figure" Figure 1: 7-day Interbank Rate and the Central Bank Rate (CBR) PAGEREF _Toc530228636 \h 3Figure 2: Secondary Market Yields on T-bills and T-bonds PAGEREF _Toc530228637 \h 4Figure 3: Lending Rates by Sector PAGEREF _Toc530228638 \h 5Figure 4: Annual Growth of Private Sector Credit by Currency PAGEREF _Toc530228639 \h 6Figure 5: Sectoral Growth in Private Sector Credit PAGEREF _Toc530228640 \h 7Figure 6: Contribution to M3: Asset versus Liability Side PAGEREF _Toc530228641 \h 8Figure 7: GDP Growth PAGEREF _Toc530228642 \h 11Figure 8: Developments in Overall Balance of Payments and Main Components PAGEREF _Toc530228643 \h 16Figure 9: Stock of Reserves and Months of Import Cover PAGEREF _Toc530228644 \h 16Figure 10: Changes in the NER, Inflation Differential and REER PAGEREF _Toc530228645 \h 17Figure 11: Trends of Selected EAC Partner State Exchange Rates PAGEREF _Toc530228646 \h 18Figure 12:Global Commodity Price Developments PAGEREF _Toc530228647 \h 21Figure 13: Inflation Outlook PAGEREF _Toc530228648 \h 24List of Tables TOC \h \z \c "Table" Table 1: Global Growth Projections PAGEREF _Toc530228710 \h 10Table 2: Fiscal Operations (Shs. Billion) PAGEREF _Toc530228711 \h 12Table 3: Inflation Developments in Selected Countries PAGEREF _Toc530228712 \h 20Table 4: Developments in Domestic Inflation PAGEREF _Toc530228713 \h 22Acronyms and AbbreviationsAEsAdvanced EconomiesBoPBalance of PaymentsBoUBank of UgandaCACurrent AccountCADCurrent Account deficit CBRCentral Bank RateCPIConsumer Price IndexEUEuropean UnionEFUEnergy, Fuel and UtilitiesEMDEs Emerging Market and Developing EconomiesFDIForeign Direct InvestmentGDPGross Domestic ProductIFEMInterbank Foreign Exchange MarketIMFInternational Monetary FundM-o-MMonth-on-MonthNEER Nominal Effective Exchange RateNPLNon- Performing LoansOPECOrganization of Petroleum Exporting CountriesPDMFPublic Debt Management FrameworkPPsPercentage PointsPSCPrivate Sector CreditPSIPolicy Support Instrumentq-o-qQuarter on QuarterREERReal Effective Exchange RateREPOsRepurchase AgreementsSMEsSmall and Medium EnterprisesSSASub- Saharan AfricaT-BillsTreasury billsT-BondsTreasury bondsUKUnited KingdomUSUnited States US$United States DollarWAIWeighted Average Interest rateWALRWeighted Average Lending RateWEOWorld Economic OutlookY-o-YYear-on-YearExecutive SummaryThe Bank of Uganda (BoU) upheld its neutral monetary policy stance, maintaining the Central Bank Rate (CBR) at 9.0 percent in August 2018. The band on the CBR was kept at +/-3 percentage points and the margin on the rediscount rate at 4 percentage points on the CBR. Consequently, the Rediscount rate and the Bank rate remained at 13.0 percent and 14.0 percent respectively.Global financial market conditions were volatile during the quarter to September 2018 agitated by significant currency instability mainly in Argentina and Turkey, and later in Brazil, India and South Africa. Significant currency depreciation in key EMEs has largely been on account of weak economic fundamentals including large current account deficits coupled with large external debt obligations in era of AE interest rate hikes that triggered capital outflows from EMEs.Average interbank money market rates edged up in the quarter to September 2018 on account of tight liquidity conditions observed in the 1st half of the quarter. The weighted 7-day interbank money market rate rose to 9.5 per cent from 9.3 per cent recorded in the quarter ended June 2018. Yields on Government securities rose further in the Quarter to September 2018 compared to the previous quarter largely on account of anticipated increases in domestic financing of Government. The weighted average lending rates on shilling-denominated loans declined in the quarter ended August 2018. The weighted average lending rate on shilling denominated loans averaged at 18.6 per cent compared to 20.11 per cent in the quarter ended May 2018 and 12.28 percent in the corresponding quarter of the previous year.Private sector credit (PSC), a leading indicator of the financial sector’s contribution to economic activity, continued to strengthen, largely driven by a reduction in supply side constraints and improving economic conditions. In nominal terms, average annual PSC growth rose to 10.4 per cent in the Quarter to August 2018, up from 8.0 per cent in Quarter to May 2018. PSC growth continues to strengthen, largely driven by improvements in economic activity and eased credit standards. The average annual growth in shilling-denominated loans grew by 18.1 per cent percent in August 2018 relative to 13.1 percent in May 2018, while forex denominated lending contracted by 0.8 per cent relative to growth of 0.9 percent over the same periodGlobal economic activity remains favourable, even though 2017’s high growth rates have been followed by more subdued developments during the first half of this year. Global growth projections have been revised downwards for 2018 and 2019 to 3.7 percent and 3.6 percent respectively compared to 3.7 percent realised in 2017 owing to increased concerns over the escalating global trade disputes, instability in key emerging market economies currencies.Bank of Uganda’s early warning indicator of economic activity, the composite index of economic activity (CIEA) indicates that economic activity has continued to strengthen. The CIEA grew at a rate of 1.9 percent in the quarter to August 2018, higher than the 1.6 percent registered in the quarter to May 2018. During the 12 months to August 2018; the economy is estimated to have grown at 7.1 percent higher than 5.0 percent in the 12 months to August 2017. Gross Domestic Product (GDP) growth for FY2017/18 has been revised upwards to 6.1percent from 5.8 percent Total Government revenue (including grants) in July and August 2018 amounted to Shs. 2,551.8 billion, which was Shs. 46.1 billion lower than the projected amount in the approved budget due to an under performance in grants revenue, specifically project support grants. While Grant receipts during the period amounted to Shs. 98.0 billion, domestic revenue amounted to UGX 2,453.7 billion, which was UGX 132.5 billion higher than the programmed amount.The balance of payments (BoP) position remained weak with a deficit of US$ 68.6 million during the quarter ended August 2018, compared to a surplus of US$ 181.4 million recorded in a similar quarter in 2017. The continued weakness in the BoP position during this period could largely be attributed to a further deterioration in the current account that is mainly reflected in the widening of the trade balance. The current account balance (CAB) remained fragile in the quarter to August 2018, registering a 10.0 percent increase in the deficit to US$ 565.3 million, from a deficit of USD 513.6 million in the quarter ended May 2018. The increasing current account deficit was largely driven by the expansion in the services deficit and the trade deficit.The Uganda Shilling had been relatively volatile since April 2018. However in the quarter ended September, the Uganda Shilling had stabilized to about to Shs. 3,763.55 per US$ from Shs. 3754.85 per US$ in the previous quarter. Nevertheless, demand pressures have persisted in the foreign exchange market over the year emanating from oil, manufacturing and the construction sectors. The demand for foreign exchange has been partly ameliorated by inflows from NGOs and coffee receipts.Core inflation edged up in September 2018, with annual core inflation increasing to 3.9 percent from 3.5 percent in August 2018. The rise in inflation was supported by other goods inflation and non-food inflation, reflecting partly the pass through effects of the exchange rate depreciation. Annual other goods inflation increased to 3.4 percent, from 2.3 percent in August 2018. Annual non-food inflation increased to 3.3 per cent from 2.9 per cent during the same period. On the other hand, Annual headline inflation declined marginally by 0.1 percentage point to 3.7 percent in the same period. This is mainly attributed to a decrease in food crops and Energy, Fuel and Utilities (EFU) inflation.The inflation outlook is projected to rise faster than previously projected but to remain at 5 per cent in the medium term. The outlook is shaped by a number of factors which include expected stronger domestic economic activity, higher exchange rate depreciation, favourable weather conditions, higher foreign in?ation, increase in international oil prices and associated increase in domestic fuel pump prices and relatively stable food prices and the increasing uncertainty in the global economy following the uncertainty of Brexit and the tight global financial conditions. Inflation is projected to remain within the 5 percent target in the medium term. In line with the objective of keeping inflation close to the target and given the assessment of the current and evolving macroeconomic situation, the Central Bank Rate (CBR) was increased to 10 percent. The band on the CBR was maintained at +/-3 percentage points and the margin on the rediscount rate at 4 percentage points on the CBR. Consequently, the rediscount rate and the bank rate were increased to 14 percent and 15 percent, respectively. Reflections of Monetary Policy in the Previous Period1.1Monetary Policy Stance The Bank of Uganda (BoU) upheld its neutral monetary policy stance, maintaining the Central Bank Rate (CBR) at 9.0 percent in August 2018. The band on the CBR was kept at +/-3 percentage points and the margin on the rediscount rate at 4 percentage points on the CBR. Consequently, the Rediscount rate and the Bank rate remained at 13.0 percent and 14.0 percent respectively.The neutral monetary policy stance was warranted by the forecast inflation trajectory which, although rising due to a combination of increasing fuel prices, closure of the negative output gap and increased taxes, was projected to remain within the 5 percent target in the medium term. Furthermore, there were downside risks to the anticipated pick up of growth to above 6 percent in 2018/19 and in the medium term. These included the slow recovery of private sector credit, fragile recovery in consumption, increased uncertainty of global trade and financial flows, and delayed growth benefits of public investments.1.2Monetary Policy ImplementationBank of Uganda continued to use Repurchase Agreements (REPOs)/reverse REPOs, deposit auctions to align domestic liquidity conditions with the desired monetary policy stance. As at end September 2018, the outstanding stock of REPOs and Deposit Auctions stood at Shs. 892.5 billion and Shs. 513.7 billion respectively, compared to July 2018 when the stock stood at a respective Shs. 465.5 billion and Shs. 266.6 billion. By end September 2018, there were no recapitalization securities for structural liquidity management.53975429895A well-functioning money or financial market is a crucial component of the financial system as it contributes to market efficiency and discipline, impacts on financial stability and on financing conditions in the economy at large. It plays an important part in information aggregation and price discovery, and is an initial channel of monetary policy transmission. However, financial markets particularly in an open economy are very susceptible to sudden changes in investor sentiments emanating from global and domestic conditions which generate financial market volatility. 00A well-functioning money or financial market is a crucial component of the financial system as it contributes to market efficiency and discipline, impacts on financial stability and on financing conditions in the economy at large. It plays an important part in information aggregation and price discovery, and is an initial channel of monetary policy transmission. However, financial markets particularly in an open economy are very susceptible to sudden changes in investor sentiments emanating from global and domestic conditions which generate financial market volatility. Money and Financial Markets Developments2.1Global Financial MarketsGlobal financial market conditions were volatile during the quarter to September 2018 agitated by significant currency instability mainly in Argentina and Turkey, and later in Brazil, India and South Africa. As at end of the quarter, the Argentina Peso had depreciated by over 100% compared to its January 2018 level, to Pesos 38/US$, while the Turkish Lira had depreciated by almost 70% over the same period. Consequently, Argentina authorities sought and were granted a 36-month enhanced standby budget support facility amounting US$57.1Bn by the IMF and also agreed on a set of strengthened economic policies to be undertaken in order to stabilize the economy. Large currency depreciations were also recorded in key EMEs, with the Brazilian Real, South African Rand and Indian Rupee weakening by 28.4%, 21.2% and 13.5%, respectively over the same 9 month period. Significant currency depreciation in key EMEs has largely been on account of weak economic fundamentals including large current account deficits coupled with large external debt obligations in era of AE interest rate hikes that triggered capital outflows from EMEs. Among AEs, the US Dollar weakened by 0.9 per cent against the Euro, 1.4 per cent against the British Pound and by 2.1 per cent against the Swiss Franc, among others. In line with interest rate tightening and general financial market jitteriness, long-term bond yields in both key Advanced and Emerging economies increased in September 2018, although more moderately in the former. Yields on 10-year government bonds increased slightly to 3.00 per cent and 1.52 percent in the US and the UK compared to respective rates of 2.91 and 1.32 per cent in June 2018. Going forward, continued global financial market volatility is expected driven by continued nervousness over emerging market currency developments and tighter global monetary conditions and elevated capital outflows from EMEs. Global financial market instability is expected to sustain net capital outflows and trigger Shilling depreciation pressures, with likely pass-through to domestic inflation.2.2Domestic Financial Markets2.2.1Interbank Money MarketAverage interbank money market rates edged up in the Quarter to September 2018 on account of tight liquidity conditions observed in the 1st half of the quarter. The weighted 7-day interbank money market rate rose to 9.5 per cent from 9.3 per cent recorded in the quarter ended June 2018 but remained lower than the 10.4 per cent in the quarter ended September 2017. The rates however started to ease mid-August 2018 closing at 9.4 percent at end September 2018. The movements in commercial bank reserves were driven by policy and autonomous factors which included mid-month taxes and Government expenditure. The 7-day rate trended within the CBR band during this period (Figure 1). Figure SEQ Figure \* ARABIC 1: 7-day Interbank Rate and the Central Bank Rate (CBR)Source: Bank of Uganda 2.2.2Primary Market for Treasury SecuritiesYields on Government securities rose further in the Quarter to September 2018 compared to the previous quarter largely on account of anticipated increases in domestic financing of Government. Average yields on the 91-day, 182-day and 364-day Treasury bills (T-bills) rose to 10.4, 11.96, and 13.64 per cent, respectively in the quarter ended September 2018, up from 9.1, 9.9, and 10.8 per cent in the quarter to June 2018.The yields in the bond market rose even faster. This is an indication of rising inflation and stronger growth in the longer term. The average yields on the 2-year, 3-year, 5-year, 10-year, and 15-year Treasury bonds (T-bonds) rose to a range of 15.2 – 17.2 per cent in quarter ended September 2018 from a range of 11.9 – 14.8 per cent quarter ended June 2018. 2.2.3Secondary Market for Treasury SecuritiesIn the secondary market, yields on Treasury Securities rose in the quarter ended September 2018 thus widening the yield spread and further steepening the yield curve. Average yields on short term securities rose to 10.1, 11.5, and 13.6 per cent for the 91-day, 182-day and 364-day T-bills respectively from 8.7, 9.3, and 10.0 per cent during the quarter ended June 2018. Similarly, average yields on the longer dated securities increased to a range of 15.6 – 17.3 per cent for the 2-year, 3-year, 5-year, 10-year and 15-year T-bonds, during the quarter ended September 2018. Average yields on the same securities ranged from 11.5 – 14.9 per cent in the quarter ended June-2018. The rise in secondary market yields was reflective of the higher primary market yields. Figure 2 shows the trend in the secondary market yields on government securities since March 2018.Figure SEQ Figure \* ARABIC 2: Secondary Market Yields on T-bills and T-bonds Source: Bank of Uganda2.2.4Lending and deposit interest rates The weighted average lending rates on shilling-denominated loans declined in the quarter ended August 2018. The weighted average lending rate on shilling denominated loans averaged at 18.6 per cent compared to 20.11 per cent in the quarter ended May 2018 and 12.28 percent in the corresponding quarter of the previous year.The average lending rate on dollar denominated loans fell to 7.6 per cent from 7.9 per cent during the same period. The deposit rates on the Shilling-deposits on the other hand, rose to 9.3 per cent in the quarter to August 2018 from 8.9 percent in the quarter ended May 2018. Consequently, the spread for Shilling denominated loans fell to 9.4 percent from 11.2 percent, respectively, during the quarter ended August 2018.A decomposition of lending rates by sector shows (See Figure 3) lower rates registered for the sectors of Agriculture (21.5%), Mortgage & Land Purchase (19.5%), Business Services (17.2%) and Mining & Quarrying (16.8%). The Bank Lending Survey also indicates that banks largely expect the rates to remain unchanged over the Quarter to December 2018 given their efforts to remain competitive in the market. Figure SEQ Figure \* ARABIC 3: Lending Rates by SectorSource: Bank of Uganda2.2.5Private Sector CreditPrivate sector credit (PSC), a leading indicator of the financial sector’s contribution to economic activity, continued to strengthen, largely driven by a reduction in supply side constraints and improving economic conditions. In nominal terms, average annual PSC growth rose to 10.4 per cent in the Quarter to August 2018, up from 8.0 per cent in Quarter to May 2018. PSC growth continues to strengthen, largely driven by improvements in economic activity and eased credit standards. The average annual growth in shilling-denominated loans grew by 18.1 per cent percent in August 2018 relative to 13.1 percent in May 2018, while forex denominated lending contracted by 0.8 per cent relative to growth of 0.9 percent over the same period. Net of valuation changes – on account of exchange rate movements, annual forex denominated loans contracted by 5.7 per cent compared to the previous quarter. This was largely on account of the substitution of forex loans in part due to the impact of exchange rate depreciation. Developments in private sector credit are shown in Figure 4.Figure SEQ Figure \* ARABIC 4: Annual Growth of Private Sector Credit by CurrencySource: Bank of UgandaA sectoral decomposition shows robust credit growth across all sectors, albeit at a slower pace compared to July 2018. (see Figure 5). Going forward, PSC is projected to improve even further on account of continued pick-up in economic activity expected to lead to an increase in demand for credit. This increase in credit growth if sustained is likely to boost private investment & consumption, which in turn should support growth. Figure SEQ Figure \* ARABIC 5: Sectoral Growth in Private Sector CreditSource: Bank of Uganda2.2.6Determinants of Money SupplyMonetary Aggregates registered a general slowdown in growth in the Quarter to August compared to the previous period. On average, annual M1, M2 and M3 grew by 12.6, 10.2 and ,10.7 percent respectively in the quarter ended August 2018 compared to growth of 16.7, 13.7 and 11.9 percent in the quarter ended May 2018. Growth in M1 was largely driven by 12.8 percent growth in currency in circulation (CIC) up from 12.1 percent in the previous quarter. Average annual growth in Demand, Time and savings deposits decelerated to 12.5 percent and 6.9 percent in the quarter ended August 2018 from respective growth rates of 19.8 and 9.5 percent in the quarter ended May 2018. Over the same period, the growth in foreign currency deposits grew by 11.9 percent, up from 7.9 percent. Figure SEQ Figure \* ARABIC 6: Contribution to M3: Asset versus Liability SideSource: Bank of UgandaOn the asset side, growth in Net Domestic Assets (NDA) continued to recover in the quarter to August 2018, averaging at 12.0 percent, compared to 7.5 percent growth in the previous quarter. The increase in NDA was largely on account of an increase in claims of ODCs on the Central government and private sector. While the contribution of NDA to growth in M3 improved (Figure 6), NFA’s contribution grew at a slower rate, averaging at 10.1 percent compared to 14.2 percent recorded in the quarter ended May 2018. On the liability side, the pickup in M3 was driven by higher growth in foreign deposits of 12.0 per cent, from 8 per cent. Growth in shilling deposits slowed to 9.4 per cent from 14.2 per cent during the same period.0371475Although monetary policy has lived under many guises, it generally boils down to adjusting the supply of money in the economy to achieve non-inflationary growth. It is generally agreed that in the long run, output is fixed and any changes in money supply only leads to increases in prices. Nonetheless because prices and wages are sticky in the short run, changes in money supply affect the actual production of goods and services and aggregate demand in the economy.00Although monetary policy has lived under many guises, it generally boils down to adjusting the supply of money in the economy to achieve non-inflationary growth. It is generally agreed that in the long run, output is fixed and any changes in money supply only leads to increases in prices. Nonetheless because prices and wages are sticky in the short run, changes in money supply affect the actual production of goods and services and aggregate demand in the economy.Economic Activity3.1Global Economic ActivityGlobal economic activity remains favourable, even though 2017’s high growth rates have been followed by more subdued developments during the first half of this year. Global growth projections have been revised downwards for 2018 and 2019 to 3.7 percent and 3.6 percent respectively compared to 3.7 percent realised in 2017 owing to increased concerns over the escalating global trade disputes, instability in key emerging market economies currencies. Indeed, world trade has also slowed down since the beginning of 2018 and growth in the US and China could decline further in 2019 as a result of the trade war. Growth projections were significantly reduced in emerging markets such as Turkey and Argentina that were experiencing a currency crisis. Sub-Saharan Africa’s growth remained strong and unchanged from earlier forecasts, however there is the potential for negative headwinds from weaker than anticipated global growth that cannot be underestimated and could subdue export trade going forward. Growth projections are presented in Table 1.Risks remain tilted to the downside in the short and medium term, arising from the escalating trade disputes between China and USA which could hinder business confidence and disrupt investment. In addition, the sustained volatility in the financial markets, external debt risks and instability in key Emerging Market Economies currencies could hinder economic growth going forward.Table SEQ Table \* ARABIC 1: Global Growth Projections?Sep-18 Forecasts??Jul-18 Forecasts???201720182019201720182019World (Real GDP Growth (PPP Ex. Rates)3.73.73.63.73.83.8World (Real GDP Growth (Market Ex. Rates)332.8332.9US2.22.82.22.32.72.5Euro Area2.62.11.82.62.11.8China6.96.66.26.96.76.4Europe2.72.222.72.22Asia & Australasia4.54.54.34.54.54.4Latin America1.21.121.21.52.3Middle East & North Africa1.72.42.21.72.22.8Sub-Saharan Africa2.52.932.62.93World Inflation (%; Avg)4.45.95.14.565.1World trade growth (%)5.343.74.643.8Source: The Economist Intelligence Unit.Domestic Economic ActivityBank of Uganda’s early warning indicator of economic activity, the composite index of economic activity (CIEA) indicates that economic activity has continued to strengthen. The CIEA grew at a rate of 1.9 percent in the quarter to August 2018, higher than the 1.6 percent registered in the quarter to May 2018, as depicted in Figure 7. Economic growth was generated from all the sectors during the quarter to August 2018. During the 12 months to August 2018; the economy is estimated to have grown at 7.1 percent higher than 5.0 percent in the 12 months to August 2017. Gross Domestic Product (GDP) growth for FY2017/18 has been revised upwards to 6.1percent from 5.8 percent driven by the services sector which is estimated to have grown by 7.7percent with industry and agriculture following closely at 6.3 percent and 3.7 percent, respectively. However, manufacturing grew at a slow pace of 1.7 percent.The Stanbic Bank Uganda’s Purchasing Managers’ (PMI) index released in September 2018 indicates further improvement business activity and in the private sector. The PMI has averaged about 53.2 over the last two (2) quarters.Figure SEQ Figure \* ARABIC 7: GDP GrowthSource: Uganda Bureau of Statistics and Bank of UgandaEconomic growth is forecast to strengthen further over the medium term, to above 6 percent the FY 2018/19, supported by the expected multiplier effects of public infrastructure investments, improved agricultural productivity arising out of the deliberate and intended Government measures towards agriculture. Additional contributions to growth include the recovery in foreign direct investments, as well as continued increase in Private Sector Credit (PSC) as the full impact of previous monetary policy easing filters through to the economy. However, risks to economic growth still exist in the form of sustained global trade wars which could constrain global and domestic growth and the uncertain weather patterns which could affect productivity in the agricultural sector.115570313690Fiscal policy plays a significant role, both as a stabilization tool and in influencing the short- and long-term growth prospects of an economy. In the short term, counter-cyclical fiscal expansion can help support aggregate demand and growth during downturns. Conversely, fiscal contraction can help cool down an economy that is growing at an unsustainable pace and could face the risk of overheating. Effective coordination of a country’s fiscal policy with its monetary policy, rather than a subservience of the latter to the former, plays an important role in the overall macroeconomic management and achievement of the long-term growth target. 00Fiscal policy plays a significant role, both as a stabilization tool and in influencing the short- and long-term growth prospects of an economy. In the short term, counter-cyclical fiscal expansion can help support aggregate demand and growth during downturns. Conversely, fiscal contraction can help cool down an economy that is growing at an unsustainable pace and could face the risk of overheating. Effective coordination of a country’s fiscal policy with its monetary policy, rather than a subservience of the latter to the former, plays an important role in the overall macroeconomic management and achievement of the long-term growth target. Fiscal Policy and Developments 4.1Government Expenditure and RevenueTotal Government revenue (including grants) in July and August 2018 amounted to Shs. 2,551.8 billion, which was Shs. 46.1 billion lower than the projected amount in the approved budget due to an under performance in grants revenue, specifically project support grants. While Grant receipts during the period amounted to Shs. 98.0 billion, domestic revenue amounted to UGX 2,453.7 billion, which was UGX 132.5 billion higher than the programmed amount as shown in Table 2.Table SEQ Table \* ARABIC 2: Fiscal Operations (Shs. Billion) Source: Ministry of Finance, Planning and Economic Development (MFPED)Total government expenditure in the two months to August 2018 amounted to Shs. 3,595.2 billion, Shs. 2,119.9 billion lower than the projected expenditure, mainly due to an under performance of Shs. 1,505.2 billion in development expenditure. Current expenditure and government net lending (majorly made up of government expenditure on the Hydro Power Projects), were also lower than programmed by Shs. 394.6 billion and Shs. 248.3 billion, respectively. The developments in government revenue and expenditure resulted in a fiscal deficit of Shs. 1,043.4 billion, which was lower than the projected deficit by Shs. 2,073.7 billion.4.2Public Debt StockThe stock of public debt (in shillings terms) decreased by 0.7 percent to Shs.41,774 billion in August relative to June 2018 largely on account of the 1.7 percent decline in the public external debt (in Shillings) reflecting strengthening of the shilling between the two periods. The external debt maintained a dominant share of 66.3 percent of the total public debt. The stock of public debt was Shs.41.8 trillion in August (42% of GDP). With the exception of debt stock/PSC, all the public debt risk indicators were within the PDMF 2013 benchmarks. However, the risks to higher debt remain and these include capital outflows attracted by interest rate hikes in advanced economies and the tightening of global financial conditions that could make future debt expensive.Balance of Payments and Exchange rate Developments0362585A large current account (CA) deficit usually implies an external imbalance in the economy, which in a flexible exchange rate regime might be corrected by a depreciation of the exchange rate. Persistent CA deficits may, however, require structural changes in the economy aimed at enhancing productivity and growth and consequently minimizing the CA deficit. 00A large current account (CA) deficit usually implies an external imbalance in the economy, which in a flexible exchange rate regime might be corrected by a depreciation of the exchange rate. Persistent CA deficits may, however, require structural changes in the economy aimed at enhancing productivity and growth and consequently minimizing the CA deficit. 5.1Balance of Payments5.1.1Current Account DevelopmentsThe balance of payments (BoP) position remained weak with a deficit of US$ 68.6 million during the quarter ended August 2018, compared to a surplus of US$ 181.4 million recorded in a similar quarter in 2017. The continued weakness in the BoP position during this period could largely be attributed to a further deterioration in the current account that is mainly reflected in the widening of the trade balance. The current account balance (CAB) remained fragile in the quarter to August 2018, registering a 10.0 percent increase in the deficit to US$ 565.3 million, from a deficit of USD 513.6 million in the quarter ended May 2018. The increasing current account deficit was largely driven by the expansion in the services deficit and the trade deficit. The services deficit worsened by US$ 33 million to US$ 138.5 million, largely on account of higher payments of government services (technical expertise) for infrastructure projects. The trade deficit deteriorated by 7 percent to US$ 576 million, compared to US$ 536.7 million in the quarter ended May 2018. The worsening trade deficit was mainly attributed to a 9 percent increase in the expenditure on non-oil imports, to US$ 1051.4 million in the quarter to August 2018 from US$ 965.5 million in the previous quarter, arising from higher imports for investment (machinery equipment) by the private sector. While, at the same time the export receipts remained relatively flat.Notably, during the same period, the surplus on the secondary income account registered a 9 percent increase from the previous quarter on account of a rebound in the personal transfers, which increased by 23 percent from US$ 187.7 million to US$ 231.3 million.5.1.2Capital and Financial accountThe net inflows in the financial account decreased by US$52 million to US$255 million in the quarter ending August 2018 compared to the previous quarter. This is largely attributed to a significant decline in transactions in other investments which decreased from US$142.7 million to US$44.4 million, driven mainly by a build-up of foreign assets of resident deposit taking corporations. On the other hand, a further increase in foreign direct investment (FDI) was registered during the quarter ended August 2018. FDI increased to US$258 million, up from US$ 219.3 million and US$183.9 million in the quarters ended May 2018 and February 2018, respectively. This improvement in FDI was mainly on account of improved performance of equity investment by foreign owned enterprises that registered an increase of US$ 37.4 million in this period. In addition, the increase in FDI was attributed to increased capital investment by a tune of US$ 47.41 million in the quarter ended August 2018. Net portfolio investment outflows, however, declined by US$7 million to US$49 million in the same period. This was largely on account of reduction in volume of purchases of foreign debt and equity securities by Ugandan residents from US$47Mn million in the previous quarter to US$43 million in the quarter ended August 2018, and lower exit of offshore investors from the Uganda debt securities market, from net exit of US$8.2 million to net exit of US$6.7 million.The developments in the external sector led to a deterioration in the overall balance and consequently a drawdown in stock of reserves to a tune of US$ 69 million in the quarter ended August 2018, compared to a drawdown of reserves of US$ 294.9 million in the previous quarter. Figure 8 provides a detailed quarterly evolution of the overall balance of payments in the last two years.Figure SEQ Figure \* ARABIC 8: Developments in Overall Balance of Payments and Main Components Source: Bank of UgandaThe stock of reserves as at end August 2018 stood at US$ 3.1 billion, equivalent to 4.3 months of future imports of goods and services, compared to reserves of US$ 3.3 billion, equivalent to 4.6 months of future imports of goods and services in the quarter to May 2018. The details of the evolution in the stock of reserves and months of import cover are shown in Figure 9. Figure SEQ Figure \* ARABIC 9: Stock of Reserves and Months of Import Cover Source: Bank of UgandaThe current account is expected to remain weak over the short to medium term, on account of an increase in government and private sector imports. In addition, the oil and gas sector is likely to attract substantial capital inflows through FDI. As a result, the overall balance is expected to further deteriorate in FY 2018/19.5.1.3Exchange Rate DevelopmentsThe Uganda Shilling had been relatively volatile since April 2018. However in the quarter ended September, the Uganda Shilling had stabilized to about to Shs. 3,763.55 per US$ from Shs. 3754.85 per US$ in the previous quarter. Nevertheless, demand pressures have persisted in the foreign exchange market over the year emanating from oil, manufacturing and the construction sectors. The demand for foreign exchange has been partly ameliorated by inflows from NGOs and coffee receipts. In line with the bilateral US$/UGX movement, the trade weighted nominal exchange rate (NEER) depreciated by 0.3 percent and 1.4 percent year on year in August and September 2018 respectively. The NEER, even though at a lower level remains positive. Similarly, the Real Effective Exchange Rate (REER) depreciated by 0.7 percent year on year driven by both the NEER and lower inflation differential as depicted in Figure 10.Figure SEQ Figure \* ARABIC 10: Changes in the NER, Inflation Differential and REER Source: Bank of UgandaFigure 11 shows the relative movement of the Uganda shilling’s comparable growth rates with the currencies of major regional trading partners up to September 2018 which have in the past two (2) months registered relative stability. The Kenya Shilling, Rwandan Franc and Tanzanian Shilling all depreciated month-on-month by 0.22, 0.39 and 0.1 percent, respectively, compared to depreciations of almost similar magnitudes in the previous month, save for the Kenyan shilling that recorded an appreciation of 0.05 percent during the month of August 2018. The Ugandan shilling however seems to have oscillated away from this equilibrium over the same period.Figure SEQ Figure \* ARABIC 11: Trends of Selected EAC Partner State Exchange RatesSource: Bank of UgandaThe BoU participated in the Interbank Foreign Exchange Market (IFEM) by carrying out purchases for reserve build up and interventions in periods of high volatility of the exchange rate. For the quarter to September 2018, however, the BoU purchased US$ 187.9 million for reserve build up compared to US$ 17.9 million purchased in the previous quarter. Over the same period, the BoU intervened by buying from the market US$ 34 million, offset by US$ 35.7 million in targeted sales. Therefore, the net BoU action in the IFEM for the quarter to September 2018 amounted to a net foreign exchange purchase of US$ 186.2 million.Going forward, the shilling may come under pressure on account of the weak current account position owing to higher import growth that is likely to continue outpacing the growth in exports and the volatile international economic environment.Inflation0272415Domestic inflation is contingent on both domestic and external economic factors. The importance of the external economic environment in determining domestic inflation dynamics depends on the economic linkages between the domestic and global economy. A careful assessment of the evolution and outlook of both domestic and external factors is therefore critical in the design of an effective monetary policy stance, which in Uganda is formulated to deliver a medium term core inflation target of 5 per cent and to ensure that output is not only as close to potential as possible, but also consistent with the inflation objective.00Domestic inflation is contingent on both domestic and external economic factors. The importance of the external economic environment in determining domestic inflation dynamics depends on the economic linkages between the domestic and global economy. A careful assessment of the evolution and outlook of both domestic and external factors is therefore critical in the design of an effective monetary policy stance, which in Uganda is formulated to deliver a medium term core inflation target of 5 per cent and to ensure that output is not only as close to potential as possible, but also consistent with the inflation objective.Global Inflation and International Commodity PricesGlobal InflationGlobal inflation remained on a moderate upward path largely due to the rising oil prices and elevated currency depreciations in some economies. In August 2018, inflation in most advanced economies remained above central bank targets of 2 percent, strengthening the case for further tightening of monetary policies. Notably, inflation in the US and Canada both increased above the 2 percent target to 2.8 percent, quarter ending August 2018, respectively. Similarly, inflation in UK rose by 0.1 percentage points, to 2.4 percent, in August 2018, compared to July 2018. Inflation in the Euro area remained relatively stable at 2 percent during the same period, but increased by 0.5 percentage points, quarter-on-quarter. Inflation in the emerging market and developing economies (EMDEs) continued to increase in August 2018, except for Brazil and South Africa. Inflation in Brazil and South Africa decreased to 4.2 percent and 4.8 percent in August, 2018, from 4.5 percent and 5.0 percent, respectively, in July, 2018. On the other hand, inflation in China and Russia increased to 2.3 percent and 3.1 percent, in August 2018, from 2.1 percent and 2.5 percent, in July 2018, respectively. In Argentina, a significant depreciation of the Peso against the US dollar led to a 4.9 percent increase in inflation to 34.4 percent compared to 31.2 percent, in July 2018. Inflation in India remained stable in August 2018 at 5.6 percent.Going forward, the moderately strong projected global growth will likely keep global inflation higher in both AEs and EMDEs. The higher global inflation could imply a pick-up in domestic inflation on account of higher imported inflation. Inflation developments in selected countries are shown in Table 3.Table SEQ Table \* ARABIC 3: Inflation Developments in Selected Countries????????Quarter to May-18Quarter to August-18?????Jun-18Jul-18Aug-18Euro Area?1.52.02.02.12.0Japan?0.81.00.70.91.3UK?2.32.32.32.32.4US?2.62.82.92.92.7Canada?2.22.82.53.02.8Brazil?2.84.44.44.54.2China?1.92.11.92.12.3India?4.15.03.95.65.6Russia?2.42.62.32.53.1South Africa4.14.74.45.04.8Argentina?25.731.729.531.234.4Source: OECD StatisticsInternational Commodity PricesInternational commodity price developments indicate a mixed picture as depicted in Figure 12. On the one hand, energy and crude oil prices increased with the average crude oil price rising by 6 percent to US$75.4 in September 2018 compared to a 2.2 percent decline the previous month. The increase in the average crude oil prices was largely supported by supply disruptions arising from shutdown of some offshore platforms in the U.S. Gulf of Mexico due to tropical storm activity; and impact of reduced purchases of Iranian crude ahead of the U.S. reinstituting sanctions. On the other hand, food prices and non-energy prices continued declining in September 2018. Non-energy prices and food prices declined by 1.9 percent and 3.7 percent month-on-month respectively compared to 1.7 percent and 1.4 percent in the previous month. Figure SEQ Figure \* ARABIC 12:Global Commodity Price DevelopmentsSource: World Bank Commodity Price DataCommodity prices are expected to remain on an upward trajectory supported by improving global economic conditions. Despite the decline in food and non-energy commodities, oil prices are expected to continue rising supported by supply restraint and geopolitical tensions producing regions.Domestic Consumer Price InflationCore inflation edged up in September 2018, with annual core inflation increasing to 3.9 percent from 3.5 percent in August 2018. The rise in inflation was supported by other goods inflation and non-food inflation, reflecting partly the pass through effects of the exchange rate depreciation. Annual other goods inflation increased to 3.4 percent, from 2.3 percent in August 2018. Annual non-food inflation increased to 3.3 per cent from 2.9 per cent during the same period.On the other hand, Annual headline inflation declined marginally by 0.1 percentage point to 3.7 percent in the same period. This is mainly attributed to a decrease in food crops and Energy, Fuel and Utilities (EFU) inflation. Annual food crops inflation decelerated in September 2018 to minus 2.2 percent, from minus 1.2 percent in August 2018, as a result of a decline in the price of vegetables and fruits on account of favourable weather conditions. Similarly, annual EFU inflation, declined by 4 percent to 10.1 percent, in the same period. The decrease in EFU inflation was mainly driven by the decline in the prices of solid fuels (charcoal and firewood). Annual services inflation also eased to 4.5 per cent in September 2018, from 5.3 per cent in August 2018. Developments in domestic inflation are shown in Table 4.Table SEQ Table \* ARABIC 4: Developments in Domestic Inflation?20172018SepOctNovDecJanFebMarAprMayJunJulAugSep?Annual Per cent change?? Headline 5.34.843.332.121.81.72.13.13.83.7 Core 4.23.53.332.61.71.71.61.10.82.53.53.9 Food crops 9.67.92.3-0.71.4-0.7-1.7-2.1-0.22.3-2-1.2-2.2 Other Goods 4.34.33.73.32.31.61.210.60.31.52.33.4 Services 4.12.32.82.631.82.52.41.91.74.15.34.5 EFU 10.614.113.712.59.811.210.310.410.315.11614.110.1?Quarterly ?moving average? Headline 5.45.14.743.42.82.41.91.81.92.333.5 Core 4.33.93.73.332.421.61.51.21.52.33.3 Food crops 11.49.76.63.210-0.3-1.5-1.300-0.3-1.8 Other Goods 4.64.44.13.83.12.41.71.30.90.60.82.41.3 Services 3.83.23.12.62.82.52.42.22.322.63.74.6 EFU 8.710.812.813.41211.210.410.610.311.913.81513.4Source: Uganda Bureau of Statistics (UBOS)0443230Monetary policy impacts on inflation and real economic activity with a lag. A critical assessment of the future trajectory of inflation is therefore crucial in the design of a forward-looking monetary policy framework. This requires a thorough understanding of the outlook and risks to the external and domestic economic environment.00Monetary policy impacts on inflation and real economic activity with a lag. A critical assessment of the future trajectory of inflation is therefore crucial in the design of a forward-looking monetary policy framework. This requires a thorough understanding of the outlook and risks to the external and domestic economic environment.Economic Outlook and RisksEconomic OutlookThe economic outlook has not changed from the previous forecast round. Growth is expected to strengthen further in FY 2018/19 and over the medium-term supported by public infrastructure investments, improvement in agricultural productivity, recovery in foreign direct investment and improvements in global demand conditions. Economic growth is expected to rise to over 6 percent in FY2018/19. However these growth prospects are susceptible to a number of risks, including slow execution of public investments and the global growth momentum may be short lived given the increase in trade protectionism. This could spill over into domestic economy through increased uncertainty, trade and financial flows.While the external environment still indicates robust growth in 2018 and 2019, the projections were revised downwards as a result of the escalating global trade disputes and instability in key Emerging Market Economies (EMEs) currencies, which have increased concerns about the potential effect on global GDP performance. Although SSA growth remains strong and unchanged from earlier forecasts, the potential for negative headwinds from weaker than anticipated global growth cannot be underestimated and could subdue export trade going forward. Risks remain tilted to the downside in the short and medium term, arising from the escalating trade disputes between China and USA which could hinder business confidence and disrupt investment. In addition, the sustained volatility in the financial markets, external debt risks and instability in key Emerging Market Economies currencies could hinder economic growth going forward.Inflation Outlook and RisksThe inflation outlook is projected to rise faster than previously projected but to remain at 5 per cent in the medium term. The outlook is shaped by a number of factors which include expected stronger domestic economic activity, higher exchange rate depreciation, favourable weather conditions, higher foreign in?ation, increase in international oil prices and associated increase in domestic fuel pump prices and relatively stable food prices and the increasing uncertainty in the global economy following the uncertainty of Brexit and the tight global financial conditions. Inflation is projected to remain within the 5 percent target in the medium term. The inflation forecasts are depicted in Figure 13.Figure SEQ Figure \* ARABIC 13: Inflation OutlookSource: Bank of UgandaThere are risks to the inflation outlook, are tilted to the upside. On the upside, the future direction of food crops prices due to changes in weather conditions may threaten the current favourable food crop prices; the strong domestic economic activity may result in increased aggregate demand; the strong global economic activity may also continue to spur upward commodity price movements; the normalization or tightening of AEs monetary policies may tighten global financial market conditions resulting in net FDI outflows and domestic exchange rate depreciation; the path of the exchange rate, which in part is contingent on external economic environment and the evolution of international crude oil prices and the expansionary fiscal policy in FY 2018/19 are likely to push up inflation. On the downside, higher agricultural output due to improved weather conditions is likely to moderate domestic inflation.Conclusion Domestic economic conditions have continued strengthen. The BoU’s Composite Index of Economic Activity (CIEA) shows that in the first eight months of 2018, annualised growth was about 7 percent, which would suggest economic growth of about 6.5 percent in FY 2018/19. Economic growth has been solid since the second-half of 2017 supported by the global economy upturn and the easing of domestic financial conditions. The economy is expected to remain on a steady growth path supported by robust domestic demand growth, public infrastructure investments, improving agricultural productivity, and recovery in Foreign Direct Investment (FDI). However, these growth prospects are susceptible to a number of risks. These include, the slow execution of public investments could impede growth and the global growth momentum that could be short lived given the increase in trade protectionism. Core inflation edged up in September 2018, with annual core inflation increasing to 3.9 percent from 3.5 percent in the previous month. The rise in inflation was supported by other goods inflation and non-food inflation, reflecting partly the pass through effects of the exchange rate depreciation. On the other hand, Annual headline inflation declined marginally by 0.1 percentage point to 3.7 percent in the same period, mainly due to a decline in food crops and Energy, Fuel and Utilities (EFU) inflation. The inflation outlook is projected to rise faster than previously projected but to remain at 5 per cent in the medium term. However, the inflation forecast is subject to several risks, including future path of exchange rate which in part is contingent on external economic environment, crude oil prices, uncertainty in the global financial conditions, trading partner inflation and weather conditions. In line with the objective of keeping inflation close to the target and given the assessment of the current and evolving macroeconomic situation, the Central Bank Rate (CBR) was increased to 10 percent. The band on the CBR was maintained at +/-3 percentage points and the margin on the rediscount rate at 4 percentage points on the CBR. Consequently, the rediscount rate and the bank rate were increased to 14 percent and 15 percent, respectively. The Bank reiterates its commitment to conduct monetary policy with flexibility, so that projected inflation is maintained at 5 per cent over the policy horizon. ................
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