High Oil Prices a Challenge to Uganda

Uganda’s oil import bill has continued to grow, threatening the central bank’s effort to curb soaring inflationary pressures. According to data released by the central bank in Kampala during the bank’s monthly monetary review, Uganda’s oil import bill grew from Shs100 trillion Shs225 trillion. This resulted from the continued increase in global oil prices thus exerting pressure on local oil prices.

Mr Emmanuel Tumusiime Mutebile, the BoU governor said: “Although oil prices eased in April, concerns of supply shocks have remained since the start of the year. He added that the developments in the oil sector remain a big concern in BoU’s effort to curb further growth of inflation.

Maintain a tight policy
Mr Mutebile added the central bank would maintain a tight monetary stance in light of the current economic environment characterised by high food prices, a relatively volatile currency market and high fuel prices among others.

Bank of Uganda for the third consecutive month maintained the Central Bank Rate – the rate at which the Bank of Uganda lends to commercial banks, at 21 per cent as it seeks to wipe out threats of exacerbating inflationary pressures.
Early this week, the Uganda Bureau of Statistics announced a drop in inflation falling from 21.1 per cent in March to 20.1 in April.

Mr Mutebile said the central bank projects that inflation would have fallen to between 8 per cent and 12 by December 2012 before falling to between 5 per cent and 7 per cent in the first half of 2013.

Reacting to the development Ms Razia Khan, the Standard Bank Regional Head of Research, told Daily Monitor that the central bank’s decision to keep the CBR on hold does not come as surprise, following the release of April CPI earlier this week, which revealed a 5.5 per cent month on month rise in food prices.
Ms Khan said although inflation continues to move downwards, the market is still cagey due to rising food prices, high fuel prices, soaring utility and commodity prices.

Sticky issues
She said it was interesting for the governor to note the effect of oil prices and non-food inflation, which remain a sticky issue in stabilising the economy. According to BoU’s monetary statement, aggregate demand continued to slowdown worsened by high interest rates and the general increase in the cost of doing business.

Mr Ivan Kyayonka, the Shell Uganda country director told Daily Monitor that the volatile nature of global oil prices would continue to affect Uganda as it is a problem outside its own control.

Recently the International Monetary Fund downgraded Uganda’s growth projection to 4 per cent from an earlier projection of 5 per cent. However, according to Mr Mutebile, the recovery being registered in the global economy might lift Uganda’s economic performance for the 2012/13 financial year.

Mr Mutebile added that if the global economy remains positive it would help to lift Uganda growth which is now below its potential. “Uganda’s economy has the potential to grow by 8 per cent per annum but as of now it is growing at 4 per cent,” he said.

By Martin Luther Oketch
The Monitor Newspaper
03-May-2012