Kampala, Uganda | THE INDEPENDENT | The Bank of Uganda is confident that its recent policies against rising inflation and foreign exchange are beginning to bear fruit, through external challenges remain.
The country faced a spiral in inflation over the last nine months, which rose from less than 3 percent in february to 10 percent as global import prices especially for oil went up.
This largely imported inflation at the same time as a depreciation in the exchange as the shilling fell from about 3,600 to more than 3,800 to the US Dollar between April and August.
To tame the situation, the Central Bank embarked on raising the interest rates more sharply than ever, and the Central Bank Rate rose from 6.5 percent to 10 percent.
This saw commercial banks also increase their lending rates from an average of 19 to 21 percent in response, dampening the urge for the private sector to borrow.
However, Michael Atingi-Ego, the Deputy Governor says they expect the full impact of their interventions starting next year, when inflation will also be expected to fall back to around 5 percent.
But he also says the drop in some global commodity prices has also helped ease inflation.
The policies have also been blamed for having adverse effects including affecting the recovery of the economic growth. But the Deputy Governor says it was better to control inflation at the expense of growth.
On the exchange rate, Dr Atingi-Ego says while the foreign exchange has eased, it is not a sure situation that the trend will continue for long because the global situation can change again.
He is however, sure that their interventions have also had an impact already on the exchange rate.
Stephen Kaboyo, the Chief Executive at Alpha Capital Partners attributes the strengthening of the shilling against the dollar on increased inflows from remittances and NGO receipts.
Professor Augustine Nuwagaba says such economic shocks as have happen in the last five years are inevitable, can happen to anybody and cannot be avoided especially when they are on the supply side.
“We should focus on thriving and not surviving , we should focus our resources on areas that have high multiplier effects,” he says.
He took the same position as the Deputy Governor that it was necessary to raise the interest rates to help check the rising inflation that hit 10 percent at the end of October.
Other experts, including the African Development Bank warned African countries like Uganda against using monetary policy to curb the skyrocketing inflation when the people were already facing financial hardships.
In his view, the long-term solution especially to the depreciation of the shilling and the imported inflation should be the increase in investment in production areas, so as to increase export earnings and support the local currency.
This would also prevent imported inflation as local production would reduce reliance on the expensive imports.
Atingi-Ego appealed to MPs to compel to government allocate more resources towards production and value addition.
On Friday, the shilling closed the week’s trading at 3770 buying and 3780 selling, maintaining its strength against the US dollar, compared to the situation at the opening of the week when the exchange rate was 3780/3790.
Absa Bank Uganda head of trading Catherine Kijjaguqwe also attributed the shilling’s strengthening to increased dollar inflows.
“Inflows continue to trickle in from NGOs, exporters and other sectors, with limited pockets of corporate demand as buyers watch for any further shilling strength to meet their requirements,” she says.
She expects the foreign exchange rate to remain within the range 3750 – 3830 levels.
“The market awaits to see if inflows will remain healthy as we draw close to the year-end festivities and if the 3,750 ‘psychological level’ will be breached eventually.”
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