July 22, 2024

Weakening shilling could push inflation above 5% target by July, says Bank of Uganda  

The recent depreciation of the shilling against the dollar has led to increased inflationary pressures. Bank of Uganda stated that this may cause inflation to exceed the 5 percent target in the second half of 2024.

The shilling has been depreciating since November last year, with a sharp decline in February prompting Bank of Uganda to raise the Central Bank Rate to 10 percent from 9.5 percent. During the release of the Monetary Policy Statement in Kampala, Bank of Uganda’s deputy governor, Michael Atingi-Ego, warned that if the shilling’s depreciation continues, inflation could surpass 5 percent in the first quarter of the 2024/25 financial year and remain above 5 percent throughout 2025.

Atingi-Ego mentioned downward inflationary pressures from diminishing effects of supply-side shocks, receding global inflation, and improved domestic food supply. However, these are likely to be outweighed by the effects of a weaker shilling. The shilling’s heightened volatility has seen it open at Shs3,909.96 against the dollar and close at Shs3,910, partly due to increased outflow of offshore investors and domestic market demand.

Bank of Uganda stressed the need for a tight monetary stance to contain inflation, which has already risen to 3.4 percent.

Despite the inflation risks, economic growth for the 2023/24 financial year is expected to remain unchanged at 6 percent but is projected to decline to between 5.5 percent and 6.5 percent in subsequent years. This downward revision is attributed to the likely impact of tighter monetary policy, which could reduce household real incomes and dampen consumer spending and investment expenditure.

Bank of Uganda also anticipates underperformance in tax revenues, potentially increasing domestic financing and crowding out private sector credit growth, thus dampening economic activity.

However, there are positive developments such as strengthening activity in the oil sector and Uganda’s removal from the grey list by the Financial Action Task Force. These could attract additional foreign direct investment inflows and partially mitigate the negative effects.

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