Mutebile: Broke Gov't Can't Afford New COVID-19 Lockdown Rescue Packages

The Bank of Uganda has given a mixed view of the economic performance in the short term, with a high likelihood of either a slowdown in economic growth or a decline in activities generally. This is largely due to the uncertainties caused by the COVID-19 pandemic and containment measures, on both the Ugandan and global economies.

This forecast has forced the Monetary Policy Committee at the Bank of Uganda to further reduce the Central Bank Rate (CBR), the rate which indicates the possible movement of the cost of credit from 7% to 6.5%, for the next two months. This rate, the lowest ever, is aimed at encouraging commercial banks to also lower their interest rates from the current average of 19%, which is still considered too high for business loans.

Uganda’s growth partly depends on the performance of the global economy especially the export markets, diaspora remittances, the tourism markets and Uganda’s development partners, among others.  The recovery in global economic growth is stronger than earlier projected, but it is uneven, with the Organization for Economic Co-operation and Development (OECD) projecting global GDP to grow by 5.8% in 2021. This faster recovery than earlier expected is good news for Uganda and other developing economies if it is sustained, according to the Bank of Uganda.

Last week, on the local scene, the Uganda Bureau of Statistics, UBOS, forecast growth of 3.3%, up from the 3.1% projection made earlier in the year. It is expected that growth will be boosted by stronger consumption by households.  However, the economy will grow between 4 and 4.5% next financial year, despite fears that private sector investments will be further affected by the COVID-19-related uncertainties, according to BOU governor Emmanuel Tumusiime-Mutebile.

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The strengthening of the economies in years to come is being pegged on the hope that vaccination will become more effective, allowing the economy to be more open and active. However, there is also worry that there could instead be new waves of infections, which are even more contagious than the previous ones and these will affect some sectors more than others.

Mutebile is also worried that the government’s capacity to respond to new emergencies is dwindling especially due to the high debt level, adding that even a new series of rescue packages might not be possible.    

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Mutebile also re-echoes the fears of Deputy Governor Michael Atingi-Ego over the rising debt level, saying even the high domestic debt is worrying. Next financial year, the government intends to borrow Ushs 2.9 trillion, which is considerably lower than this year’s 6 trillion, while total domestic debt stock currently stands at about Ushs 18 trillion.

The worry about this is that even the domestic lenders to the government are actually foreigners, and should there be some financial volatility in their home countries, there could be a massive capital outflow from Uganda to those countries. This would also affect the exchange rate and lead to a high cost of imports among others.

BOU is also worried that all this is coming at a time that the relief measures that were launched by the financial services sector will soon come to an end without any hope of being renewed. They include restoring the costs of bank transactions, the real-time demand for loan repayments among others, which were suspended at the onset of the pandemic last year.

This will most likely lead to higher non-performing loans, which will in turn discourage banks from lending to the private sector. All these fears led to the Central Bank to lower the CBR and lower the cost of credit to the commercial banks further, to try tame possible avoidance of the public by the lenders.