KAMPALA – Bank of Uganda (BoU) has reduced the Central Bank Rate (CBR) to 8 percent to stem the effects of coronavirus on the economy.
The lending rate for the month of March was at 9 percent but ever since, the central bank says the COVID-19 pandemic has led to a severe contraction in economic activity due to global supply chain disruptions, travel restrictions, measures to limit contact between persons, and the sudden decline in demand.
“Consumer-facing sectors have been severely affected by social distancing measures and heightened uncertainty, while the manufacturing sector has declined on account of disruptions to the inflow of raw materials,” BoU Governor Emmanuel Tumusiime-Mutebile said in a statement issued on Monday, April 6.
“The band on the CBR will remain at +/-3 percentage points and the margin on the rediscount rate and bank rate will remain at 4 and 5 percentage points on the CBR, respectively. Consequently, the rediscount rate and the bank rate will be 12 percent and 13 percent, respectively,” he added.
BoU has also directed Supervised Financial Institutions (SFIs) to defer the payments of all discretionary distributions such as dividends and bonus payments for at least 90 days effective March 2020, depending on the evolution of the pandemic.
“This will ensure that SFIs have adequate capital buffers, while supporting the real economy,” Mr Mutebile said.
In addition, he said BoU will Provide exceptional liquidity assistance to commercial banks that are in liquidity distress for a period of up to one year, provide liquidity to commercial banks for a longer period through issuance of reverse REPOs of up to 60 days at the CBR, with opportunity to roll over and purchase Treasury Bonds held by Microfinance Deposit taking Institutions (MDIs) and Credit Institutions (CIs) in order to ease their liquidity distress whenever it arises.
The governor said MDIs and CIs that do not hold Treasury bills or bonds in their asset holdings will be provided with liquidity secured by their holdings of unencumbered Fixed Deposits
He added that due to Coronavirus, the Ugandan economy is projected to slow down drastically in the second half of Financial Year (FY) 2019/20, with GDP growth for the FY projected at 3 – 4 percent.
“Downside risks to the economic growth outlook have increased, particularly in the near term and economic activity is projected to remain subdued until the pandemic is contained globally. Although GDP growth is projected to gradually recover in the second half of FY2020/21, the emerging output gap is projected to persist until 2022. However, there is significant uncertainty over the depth and duration of the current slowdown,” he said.
The COVID-19 pandemic has been reflected in deterioration of global financial conditions and an appreciation of the US dollar against other major currencies, resulting in the volatility in the domestic foreign exchange market.
“The Uganda shilling depreciated against the US dollar by 2.2 percent between February and March 2020. In addition, the propagation of COVID-19 bears severe consequences on Uganda through worsening of external position, due to capital outflows, adverse effects on the flow of international trade, tourism, workers’ remittances, foreign direct investment and loan disbursement, exacerbating exchange rate depreciation pressures,” he added.
