KAMPALA: In a strategic move, the Bank of Uganda (BOU) has initiated a Domestic Gold Purchase Program to build the country’s foreign reserves and mitigate risks associated with reserve investments. This initiative, highlighted in the State of the Economy report of June 2024, is set to have wide-reaching implications for Uganda’s economy.
“The gold purchase program will help accumulate foreign currency reserves and address the associated risks in the international financial markets,” the report states. By purchasing gold directly from artisanal miners, BOU aims to stabilize its reserves and support small-scale miners’ livelihoods, potentially creating positive ripple effects across other sectors of the economy. This aligns with the Bank’s mission to drive socio-economic transformation.
The program also dovetails with the government’s ongoing efforts to add value to minerals and reduce imports of raw gold, thus supporting the Import Substitution Strategy. This dual-benefit approach is expected to enhance Uganda’s economic resilience amid global financial uncertainties.
However, the domestic financial landscape presents its challenges. The report notes that the domestic money market has been experiencing tight liquidity conditions, reflected in higher interbank money market rates and increased uptake of the Standing Lending Conditions. Yet, there has been a slight easing since late May. “Yields on treasury securities edged up across all maturities due to increased government issuances and tight domestic monetary conditions,” the report adds.
In this strained monetary environment, credit to the private sector has remained subdued. Both gross credit extensions and recoveries have declined, with banks increasingly hesitant to renew credit lines. Despite this, government intervention programs like the Parish Development Model (PDM) and Emyooga, along with fintech solutions, have supplemented bank credit to the private sector. The financial inclusion aspect of the PDM intervention, for example, is projected to have contributed 0.5 percent of GDP in FY23/24.
Fiscal dynamics are also in flux. The fiscal stance in the first ten months of FY2023/24 was expansionary, driven by increases in development expenditure. The fiscal deficit is projected to decline to 4.5 percent of GDP by the end of FY2023/24 from 5.5 percent in FY2022/23. However, the deficit is expected to rise again to 5.7 percent of GDP in FY2024/25 before embarking on a consolidation path to 2.2 percent of GDP in the medium term. The government plans to enhance domestic revenue collections, reduce wasteful expenditures, improve efficiencies in the education and health sectors, and reduce external commercial borrowing to achieve these fiscal targets.
On the external front, the current account deficit remains elevated due to persistent trade imbalances and a deteriorating primary income deficit. Nonetheless, it is sustainably financed by surpluses in the financial account. “The global economic growth is expected to remain resilient in 2024 and 2025, though clouded by significant downside risks such as escalating geopolitical tensions and further supply chain disruptions,” the report cautions.
Despite these global challenges, Uganda’s inflation has been notably low, averaging 3.2 percent over the last twelve months, positioning it favorably compared to other regional economies. This inflation control, coupled with strategic economic policies like the Domestic Gold Purchase Program, positions Uganda to navigate the complex global economic landscape effectively.
As Uganda continues to implement these strategic initiatives, the long-term outlook appears cautiously optimistic. The integration of local mining efforts into national economic strategy underscores the innovative approaches being employed to drive sustainable economic growth and resilience.