The Independent Uganda: You get the Truth we Pay the Price
Widening trade deficit
Bank of Uganda warns that the country’s external position is likely to deteriorate further. It says, strengthening demand will continue to drive the widening trade deficit through increased imports.
But, this could be moderated by recovery in personal transfers amid gradual global recovery.
On the financing side, BoU says, foreign direct investment inflows are likely to remain subdued on concerns of emerging variants of the coronavirus.
However, higher donor inflows related to the COVID-19 pandemic as well as disbursements from existing project loans, are expected to make up for the reduced FDI inflows.
In the medium term, BoU says, the current account deficit is projected to deteriorate as economic activity returns to normal.
Bank of Uganda adds that a slight pickup in FDI inflows is expected to be driven by fixed running costs of projects in infrastructure and the oil and gas sector, and that a pick-up in travel receipts is expected as the COVID-19 vaccination is rolled-out.
The contribution of remittances will depend on the recovery of the global economy – it may take longer to reach the pre-crisis levels, BoU warns.
The deteriorating current account deficit, according to BoU, may put pressure on the exchange rate as the demand for forex by importers and corporates rises.
The shilling depreciated by 0.3% year-on-year(y-o-y) and 0.7% month-on-month(m-o-m) to a mid-rate of 3,691.68/USD relative to the appreciation of 0.3% y-o-y in December 2020.
BOU was able to purchase foreign exchange for reserve build-up to a tune of US$265.7million July-2020 to February 10, 2021 compared to the target of US$302 million for FY2020/21.
Going forward
Bank of Uganda says, private investment and consumption are expected to increasingly contribute to economic growth as domestic and global demand improves.
Better global economic outlook due to vaccine deployment, continued improvement in PSC partly supported by monetary policy easing, government support to specialised groups like the ‘emyooga’ grant, increased agricultural production and continued recovery in exports will support the economy.
In addition, stronger global economic growth, increased investment following the finalisation of the Final Investment Decision and successful rollout of the Covid-19 vaccine.
The other factor is whether Uganda will benefit from the Debt Service Suspension Initiative (DSSI) by international lenders, which may moderate the risk of debt distress and free up some fiscal resources for economic development.
On the negative, public investment financing challenges that could slow implementation of public investments, weak private sector credit growth, weaker global economy, delay in the Covid-19 vaccine distribution and unpredictable weather patterns could fail positive economic growth projections.
Other key indicators like inflation are expected to remain within the policy target of 5%, other factors constant.
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