Russia-Ukraine conflict dampens Uganda’s growth prospects-BoU report

KAMPALA– The adverse global economic developments and higher domestic inflation have diminished the prospects for Uganda’s domestic economic growth, according to the Bank of Uganda [BoU] Monetary Policy Report June 2022.

“The optimism for economic recovery from the removal of the pandemic-related restrictions in January 2022 has been dampened by the effects of the Russia-Ukraine conflict. Latest data on both hard and soft indicators show that the pace of economic recovery is weakening,” BoU says in its latest report that highlights the latest developments as far as key economic indicators of the country are concerned.

The Composite Index of Economic Activity [CIEA] signalled a growth of 0.8 percent in the quarter to April 2022, a remarkable slowdown from the 2.4 percent growth observed in the three months to January 2022. CIEA is a single summary statistic that tracks the current state of the economy.

According to BoU, growth of economic activity is being dragged down by softening growth in the industry and services sectors. “The slowdown in the industry and services sectors is largely consistent with the declining private sector credit in these sectors, softening business sentiments and declining growth in the volume of imports due tightening business operating conditions.”

Meanwhile, Producer Price Index grew by 16.1 percent in April, from about 13.8 percent observed in January 2022, an indication that the increase in the marginal costs of production that was slowing due to the then easing global supply constraints have reversed course and continue to escalate owing to the Russia-Ukraine conflict.

In addition,indicators that measure the strength of private absorption such as Value Added Tax, consumer confidence index and imports growth are also softening. “Support to economic growth was only rendered by government consumption and development spending and increases in the volumes of non-coffee exports.”

Both the Stanbic Purchasers Mangers’ Index (PMI) and the Bank of Uganda’s Business Tendency Index (BTI) which are indicators of business confidence and business operating conditions were less optimistic in May 2022, indicating softening growth in economic activity for the second quarter of 2022, which is consistent with the CIEA.

The BTI stood at 55.8 points in May 2022, a second straight month of further drop in the index since March 2022. The PMI was also less upbeat in May 2022 at 51.5, as price pressures continue constrain demand (Figure 10, right). Businesses continue to have a negative view about the present business situation as the index with near term outlook was less favourable.

“Consumer sentiments about present and expected economic situation remains negative and were more pessimistic in May 2022. Consumer sentiments which were steadily improving after the full economy reopening started deteriorating in March 2022 reflecting the war induced further surges in consumer prices,” the report says.

The outlook to economic growth is less favourable than previously projected. Growth is now projected in the range of 4.5-5.0 percent in 2022, which is a 1 percentage point down grade from April 2022 projection.

“Weaker external demand at the back of surging global commodity prices, and the resultant high domestic inflation will lead to tighter monetary conditions, thereby constraining aggregate demand domestically,” the report says, adding that the risks to the growth outlook are tilted to the downside, including weaker global growth, escalation of geopolitical conflicts, persistent global supply chain disruptions, tighter global financial conditions and the associated heightened global economic uncertainty, and higher inflation.

“These downside risks are dampening consumer and investor confidence, heightening exchange rate volatility, and prolonging weak growth in private sector credit. Nonetheless, in the medium-term, the economy will grow at 6 – 7 percent supported by public and private investments in the oil sector.”

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