The 2020/2021 fiscal year has been largely difficult due to the COVID-19 pandemic which has negatively affected all sectors of the economy, according to the Bank of Uganda’s annual report for 2021 released on October 19.

“Although Uganda gradually eased lockdown measures during the first half of the fiscal year, previous disruptions to global and domestic supply chains resulted in a severe contraction in economic activity and a sudden drop in the economy. consumer demand, “part of the report reads.

He adds that sectors with high contact intensity continued to be affected by social distancing measures and increased uncertainty.

In terms of sector performance, the manufacturing and service sectors recorded growth rates of only 2.1% and 2.5%, respectively, well below the historical average while the agricultural sector grew by 3.5%. %, which is lower than the 4.8% growth rate recorded the previous year. .

As a result, the growth of real gross domestic product in fiscal year 2020/21 only increased slightly to 3.3%, compared to 3.0% recorded in fiscal year 2019/20.

At the same time, inflation has remained subdued due to stable exchange rates and the existence of spare capacity in the economy. Annual headline inflation and core inflation averaged 2.5% and 3.5%, a slight increase from 2.3% respectively recorded in the previous year.

The report indicates that the benign inflation environment has allowed an accommodative monetary policy to continue to support economic activity.

Indeed, the central bank rate was held at 7% during the first 11 months of the fiscal year and further reduced to 6.5%, the lowest level on record, in June 2021.

Despite the accommodative stance of monetary policy, growth in credit to the private sector (PSC) has remained subdued largely due to risk aversion among lenders and weak demand for credit, due to the relatively gloomy economic environment conditioned by the COVID-19 pandemic.

PSC growth fell to 8.1% in fiscal year 2020/21, compared to 11.7% in fiscal year 2019/20.

Most of the deceleration was due to shilling denominated loans, which grew 9.9%, below the 15.6% growth rate recorded in fiscal year 2019/20.

Credit growth to the private sector also remained uneven across major sectors of the economy, with the mining and quarrying and trade sectors registering negative growth rates in FY 2020/21.

The balance of payments recorded a surplus of US $ 440 million in fiscal year 2020/21, largely supported by large budget support inflows. Although the current account deficit widened to an all-time high of US $ 4,139 million in fiscal year 2020/21, it was more than offset by financial account inflows, leading to an accumulation of reserves. during the year.

The deterioration in the current account deficit was due to the widening trade deficit, in part due to public investment, which boosted imports, while exports remained relatively subdued.

In addition, tourism receipts have declined due to global measures to contain the pandemic.

Foreign direct investment inflows, however, remained low due to global economic uncertainty. It fell to $ 847 million, from $ 967 million in fiscal year 2019/20.

FDI is, however, expected to pick up due to the positive developments in the oil sector and in line with the expected recovery of the economy.

Portfolio inflows, which are more vulnerable to refinancing risks, were however large, registering a net inflow of US $ 116 million in FY2020/21, compared to a net outflow of US $ 321 million in the fiscal year 2020/21. during the 2019/20 financial year, foreign investors having increased their holdings of domestic debt. securities.

The stock of foreign exchange reserves at the end of June 2021 stood at USD 4,214 million, which is equivalent to 5.5 months of import coverage.

Healthy banking sector

The report says, however, that the banking sector has remained strong, with bank liquidity and capital buffers well above minimum regulatory requirements.

The asset quality of the commercial banking system has also improved, largely supported by the credit relief measures put in place by the BoU to mitigate the negative economic impact of the pandemic on borrowers and the financial sector.

In June 2021, the ratio of non-performing loans to total gross loans stood at 4.8% compared to 6.0% in June 2020.

The Bank of Uganda continued to seize the opportunities of the evolving financial ecosystem to enhance financial inclusion and economic transformation.

Beyond Uganda

Following the contraction of global production in 2020 due to the COVID-19 pandemic and associated measures to contain its spread, global economic activity began to recover in the second half of 2020 and the recovery accelerated over the course of of the first half of 2021.

The World Bank, in its report on the global economic outlook for June 2021, forecast a recovery of world production of 5.6% in 2021, an upward revision from the projections of January 2021.

Nonetheless, the recovery is uneven among advanced economy countries, particularly the United States, the recovery is stronger, largely supported by successful vaccination campaigns and significant stimulus measures. Indeed, advanced economies are the main engine of the resumption of global growth.

Emerging markets and developing economies, including China, which controlled the spread of the pandemic earlier than most economies, are expected to grow 6% in 2021, down from a contraction of 1.7% in 2020.

However, excluding China, emerging markets are expected to experience modest growth of 4.4% in 2021, compared to a contraction of 4.3% in 2020.

Although improving external demand and international commodity prices are expected to support growth in emerging markets (excluding China) in 2021, new waves of COVID-19 amid low vaccination rates and inadequate political support should slow down the pace of the recovery.

Sub-Saharan African economies are expected to grow 2.8 percent in 2021, the same level of growth projected in January 2021, but up from the 2.4 percent contraction in 2020.

The pace of growth in 2021 is moderated by weak fiscal space to provide fiscal stimulus measures associated with challenges in vaccine procurement.

The report warns: “The outlook is uncertain, however, with high downside risks resulting mainly from the emergence of new variants and waves of COVID-19 … may trigger an earlier than expected tightening of global financial conditions, if central banks tighten monetary policy, with more negative effects on heavily indebted emerging markets. “

Museveni’s New Year’s Promise

In a televised address on October 28, President Yoweri Museveni said the country had imported enough doses of the covid vaccine to be administered to the population to allow the economy to fully reopen in January next year.

As the country waits for this to happen, Bank of Uganda Governor Emmanuel Tumusiime Mutebile has vowed to do everything in his power to keep him alive.

“The Bank of Uganda will continue to do everything in its power to defend a stable and predictable economic environment and financial stability in order to improve the social and economic well-being of the people of Uganda,” Mutebile said in the report. annual.

He said that in the era of the pandemic, the BoU has maintained an accommodating monetary policy to support economic activity amid benign inflation, which he hopes to continue to do until full reopening.

He said Uganda’s economic growth is estimated to be 3.3 percent in fiscal year 2020/2021, rising to 3.5-4.5 percent in fiscal year 2021/2022 and will fall back to 6-7 percent by 2024/2025.

Likewise, the path of inflation is likely to be shaped by upside and downside uncertainties, but will remain within the medium-term target of 5%.

Mutebile says that mitigating measures such as accommodating monetary policy, credit relief measures to be extended on a case-by-case basis after expiration in September 2021, and budget support for micro-small and medium-sized enterprises, among others. , should minimize the negative impacts of COVID. -19.

In his October Monetary Policy Report, Mutebile said that with the ebb of the second wave of COVID, a gradual easing of restrictions related to the pandemic and improved immunization coverage, economic activity is gradually returning to normal.

He said high-frequency indicators of economic activity for August and September 2021 suggest the economy is retreating from the impact of the second wave of COVID-19.

However, he said, some contact-dependent sectors that have been hit hard by the pandemic continue to face difficult conditions and the virus continues to create uncertainty in the near-term economic outlook.

He said economic growth will depend on releasing pent-up demand, boosting investment activity through the government’s focus on infrastructure and supporting sectors that have been more. hard hit by the pandemic and accommodating monetary conditions.

In addition, an acceleration in private consumption, strong growth in external demand, a gradual return of tourism and private foreign and domestic investment in the petroleum sector are other supporting factors.