Election Risks Place BoU On High Alert

Bank of Uganda Governor Emmanuel Tumusiime-Mutebile has said there can never be a repeat of the post- 2011 general elections, where the prices of goods and services shot above 30 per cent after a flush of campaign funds flooded the market.

As Uganda enters the tense election season, with a couple of individuals preparing to fight for their political lives, there are fears that the urge to swing votes could lead to another huge spending spree.

Some experts feel history could be repeated – although not on the scale of 2011 – with inflation, which has been subdued around the official five per cent target for the last six to eight months, creeping further upwards during the last stretch of the campaigns.

Commenting on Uganda’s latest release of the central bank rate, Razia Khan, the regional head of Research for Standard Chartered Africa, said: “Moreover, we believe spending will rise in the run-up to Uganda’s 2016 election… ”

She explained that Bank of Uganda would try and squeeze some money out of circulation by influencing a key rate that would make it expensive for people to borrow money. Mutebile, however, says there can never be a repeat of 2011, and that he has his fingers on the trigger and is ready to arrest any inflationary pressures.

“I really don’t expect to have the scenario of 2011 whatever must have been an impact on spending or electioneering was worsened by the weather conditions which increased food prices dramatically,” Mutebile told reporters at BOU offices last week. “I don’t expect the same coincidence this time.”

Back in 2011, the central bank was accused of printing money to finance the elections. Many people interpreted the issuance of some new notes ahead of the elections as a sign of printing money for the elections to keep the government in place. Bank of Uganda has maintained that it only financed the budget deficit, but had no control over how govt spent the money.

Speaking at the Uganda Bankers Association annual dinner recently, Mutebile said he was not prepared to print any money to finance public expenditure because it was already catered for in the national budget. Nevertheless, the central bank is wary of the risks that could come with elections.

“When I talk of projected increase in domestic demand, I take into account elections,” he said. Private sector lending has increased by 12.6 per cent in the last five months compared to 8.5 per cent in the same period last year, according to BOU, as the economy continued its gradual recovery.

The central bank rate (CBR), which influences lending rates on the market, was maintained at 11 per cent for the fourth month in a row. Razia Khan said she expected an increase in the CBR.

“… the next move in the CBR is more likely to be a hike than an easing,” she predicted. “We forecast a 50 bps hike in the CBR in September 2015, taking the rate to 11.5 per cent.”

Khan pointed to the volatility in the shilling, which has lost ground against the dollar over the last three months, as one of the reasons as to why the central bank needed to be cautious over its policy.

Dr Adam Mugume, BOU’s executive director for Research, said the shilling had depreciated by more than nine per cent since the beginning of the year, the weakest it has gone in a three-year span. Although, Mugume says the shilling’s performance is not worrying.

“In the last year, the local currency had overly appreciated so, what we are looking at is sort of a correction, to bring it to the levels where it is supposed to be.”

In the last three months, the shilling has oscillated between Shs 2,710 and Shs 2,750 to a dollar, sometimes reaching the highs of Shs 2,790. Mugume said he expected diaspora remittances and more foreign direct investment inflows into Uganda to ease pressure on the shilling.

Source : The Observer

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