Uganda’s inflation remains among the lowest in the region, averaging 3.2 percent over the twelve months leading to May 2024. However, annual headline inflation rose to 3.6 percent in May 2024 from 3.2 percent in April 2024, and core inflation increased to 3.7 percent from 3.5 percent, according to Bank of Uganda Deputy Governor Michael Atingi-Ego in a recent monetary policy statement.
“This uptick is primarily driven by rising costs in healthcare, education, transportation services, and higher prices for solid and liquid fuels,” Atingi-Ego said. “Services inflation climbed to 6.2% from 5.4%, and electricity, fuel, and utilities (EFU) inflation rose to 9.5% from 7.4%, reflecting recent increases in international energy prices and the lagged effects of the shilling’s past depreciation,” he added. He also noted that, “Tight monetary conditions, declining global inflation, and a favorable domestic food supply have partially offset these inflationary pressures.”
On June 4, 2024, the Bank of Uganda’s Monetary Policy Committee (MPC) decided to maintain the Central Bank Rate (CBR) at 10.25%, as outlined in a statement. This decision reflects the MPC’s assessment of current economic conditions, particularly the dynamics of inflation and the stability of the Ugandan shilling.
Domestic inflation has experienced a moderate rise, albeit lower than initially projected. This moderation is largely attributed to the stabilization of the exchange rate, with a bias towards appreciation since March 2024. The relative stability of the Ugandan shilling against the US dollar has been bolstered by recent CBR increases and substantial inflows from robust coffee exports, benefiting from favorable international coffee prices.
Looking ahead, inflation in FY2024/25 is projected to remain moderate, broadly reflecting stable demand conditions and contained cost pressures. The inflation forecast has been slightly revised downwards compared to April 2024, largely due to a less depreciated shilling exchange rate. Inflation is expected to rise and average between 5.0% and 5.4% in the short term (12 months ahead) before stabilizing around the medium-term target of 5% in the second half of 2025.
Uncertainties persist around the inflation outlook, including potential impacts from escalating geopolitical tensions in the Middle East, possible energy price hikes, unfavorable weather patterns affecting food supply, and production capacity pressures. The materialization of these risks could imply stronger inflationary pressures. Additionally, persistent global inflation and higher interest rates could lead to heightened volatility in capital flows and the exchange rate, resulting in higher domestic inflation than currently assumed. Conversely, inflation may undershoot projections if monetary policy reduces demand more than anticipated or if global demand weakens further, resulting in lower imported inflation.
Despite these challenges, the Ugandan economy remains resilient. Recent economic indicators have been mixed but consistent with projected growth of 6% in FY2023/24. The composite index of economic activity (CIEA) suggests a slowdown, with growth at 0.9% quarter-on-quarter and 5.3% year-on-year in the quarter to April 2024. Nevertheless, economic growth for FY2024/25 is projected to be between 6.0% and 6.5%, rising above 7% in subsequent years.
However, risks to the growth outlook remain. Uncertainty about the global economic situation and a stronger shilling depreciation could weigh on domestic demand. Private sector credit growth could weaken further due to tighter domestic financing conditions, resulting in lower demand. External factors such as a weaker global economy and escalating geopolitical conflicts could further impede growth through supply chain disruptions, higher freight costs, and reduced export demand.
Additionally, Uganda faces challenges such as decreased capital inflows, headwinds to export growth, and heavy external debt servicing, partly due to rising global interest rates. This, combined with declining budget support, has resulted in decreasing international reserves. Concerns over debt affordability and constrained financing options have led to a downgrade of the country’s sovereign credit rating, though with a stable outlook, suggesting these challenges are short-term. Rebuilding international reserves will require increased coordination of monetary and fiscal policies.
On a positive note, favorable weather conditions leading to good food crop harvests, higher government and private sector investment in the extractive industry, and government intervention programs could boost economic activity.
The MPC concluded that while the near-term balance of risks around inflation remains skewed to the upside, the current monetary conditions are adequate to contain inflation around the medium-term target of 5%. As a result, the MPC maintained the CBR at 10.25%. The bands on the CBR remain at +/-2 percentage points, and the margins on the CBR for the rediscount and bank rates at 3 and 4 percentage points, respectively. Consequently, the rediscount and bank rates will remain at 13.25% and 14.25%, respectively.
This decision supports the objectives of bringing inflation to its medium-term target while supporting economic growth, consistent with socio-economic transformation. The MPC will ensure that the monetary policy stance remains conducive to sustainable economic growth amid price stability.
