on inflation, economists have said.

Leading commercial banks have adjusted their prime lending rates upwards in January due to tight liquidity conditions that have pushed up short-term rates.

Standard Chartered increased its shilling prime lending rate to 19.5 % from 18.5%, while Stanbic, which had the lowest rate in the sector, has also revised the rate upwards to 18.5% from 16%. dfcu will raise it base lending rate next week to 20% from 19%.

”While inflation is seen tapering off, the current market conditions may not in the short and medium term keep interest rates low in line with the central bank’s objectives,” said an economist.
Core inflation, which the central bank targets, was 12.6% at the end of 2008. The central bank’s target is 5%.

In the recent past, financial markets have been characterised by tight shilling liquidity due to demand for shillings at the end of the year in line with the festive season. This also left less money available for market players, which put pressure on government securities yields.

This was made worse by lack of government expenditure since most of the civil servant’s salaries were remitted in mid-December.

The tight liquidity position was exacerbated by the availability of cheap securities on the secondary market that were dumped by offshore investors since they took positions as the global financial crisis continued to take its toll.
Commercial banks opted for these cheap securities, increasing pressure on yields in the primary market.

This culminated into the central bank’s rejecting bids for the two-year bond auction in December and cancellation of Treasury Bill auctions in the first two weeks of January.

”About this time of the year, we always experience some sort of liquidity crunch. This arises out of players holding or retaining their cash. What comes to us is highly priced which pushes up yields,” explained Stephen Kaboyo, the central bank’s deputy director of the Financial Markets Department.

Uganda’s securities market attracted offshore players due to the high yields. The global financial crisis has seen them exit the market, creating volatility in the foreign exchange market and impacting on the securities primary market.

”We have been running an attractive bond market attracting foreign flows, so we are a victim of our success. The money that is supposed to come to us in the primary market is on the secondary market,” he explained.
Dr Charles Abuka, the acting director of research at the central bank, said monetary policy actions would impact on rates in the short-term.

”To bring inflation down, interest rates have to go up. But with time, they will come down. As we mop more, interest rates are impacted, so part of our actions have resulted into a hike in rates,” Abuka said.

He was optimistic the liquidity would improve with expected expenditure programmes by the Government among other things.

”The information we have shows that there is a likelihood of a fall in international food and fuel prices, helping to bring down inflation, especially the imported component to achieve medium-term objectives,” he added.

The global financial crisis had resulted into lower export earnings, leading to deterioration of the country’s external balance of payments.

Relating the external balance to the global financial crisis, part of the impact is that prices for coffee, minerals have gone down. If exports take a knock, the external balance will worsen, noted Abuka.

This, he said, had also been reflected in the depreciation of the shilling against the dollar, which is trading within the 1,998-2,010 range. The local unit has depreciated by 17% since the beginning of the year.

Abuka noted that owing to our low level of public debt, comfortable level of foreign reserves and sound banking sector, Uganda will achieve fairly GDP growth.

At a preliminary level, there are downside risks because of the global financial crisis, which may affect things like interest rates, private consumption and investments but we know that Uganda is likely to maintain a fairly good rate of growth.

But the International Monetary Fund (IMF) last year predicted that Uganda’s growth will slow down, falling short of the projected 8.1 rate for 2008/09.

IMF estimates economic growth to slow to a healthy 7-7.5% in the 2008/09 fiscal year, said Roger Nord, the IMF’s assistant director in the African Department.

Experts also suggested a recession in America and Europe would impact on Uganda’s remittances from abroad, aid flows, foreign direct investments and export earnings in the second half of this financial year.

Uganda gets about $800m annually in aid inflows and $900m in private transfers.



This article originally appeared in the Kampala-based Sunday Vision