BANK OF UGANDA MONTHLY ECONOMIC REVIEW

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1 BANK OF UGANDA MONTHLY ECONOMIC REVIEW JANUARY 2010

2 MONTHLY REPORT ON ECONOMIC AND MONETARY DEVELOPMENTS AS AT December 30, 2009 RESEARCH DEPARTMENT BANK OF UGANDA ii

3 TABLE OF CONTENTS TABLE OF CONTENTS.i EXECUTIVE SUMMARY.ii 1 INTRODUCTION.1 2 MONETARY POLICY STANCE AND ACTIONS.1 3 INFLATION AND EXCHANGE RATE DEVELOPMENTS Inflation Exchange rate.3 4 DEVELOPMENTS IN MONETARY AGGREGATES AND CREDIT Monetary aggregates Private Sector Credit Banking sector Credit Institutions and Micro Finance Deposit Institutions.7 5 DEVELOPMENTS IN MONEY AND CAPITAL MARKETS Treasury Bonds Primary Market Secondary Market Treasury Bills Primary Market Secondary market Domestic Inter-bank market Commercial Banks Lending and Deposit rates Uganda Securities Exchange.13 6 EXTERNAL SECTOR DEVELOPMENTS Exports Imports Other flows.15 7 GOVERNMENT FISCAL OPERATIONS Revenue and Grants Expenditure and net lending Overall performance.17 8 REAL SECTOR DEVELOPMENTS Energy Sector.17 9 POLICY OUTLOOK.17 i

4 Monetary Policy Stance and Actions EXECUTIVE SUMMARY BOU s monetary policy focused on maintaining price stability. BOU continued with the implementation of the flexible Reserve Money program, making a clear distinction between structural and short-term liquidity conditions in the economy. Sterilization of structural (long-term) liquidity was effected through a combination of sales of treasury bills, treasury bonds, and foreign exchange in the interbank foreign exchange market (IFEM), while repurchase agreements (REPOs) were used for short-term liquidity management. Net issuance of Treasury bill resulted in a net liquidity injection of Shs billion. Sterilization of liquidity through daily sales of US$ 0.1 million was also pursued during the month. In an effort to offset exchange rate appreciation pressures and to boost aggregate demand, BOU intervened and purchased US$ 30 million in the IFEM. The resultant effect for December 2009 was a net purchase of US$ 28.1 million on account of both sterilization and intervention. BOU continued to use the REPO for short-term liquidity management. REPO issuance with tenors ranging from 3 to 7 days amounted to Shs billion, against REPO maturities of Shs billion. Inflation Developments Annual Headline inflation declined to 10.9 percent in December 2009 from 12.0 percent in November Core inflation also declined to 7.4 percent from 8.8 percent in November 2009, while Food and Food Crops inflation dropped to 22.1 percent and 34.3 percent from respective November 2009 levels of 22.6 percent and 35.5 percent. Core inflation fell sharply during the past four months as manifested in monthly increases averaging less than 0.2 percent and translating into an annualized rate of less than 3.0 percent. With this trend, Core inflation will effectively drop further below the 5.0 percent level by June That said, it should however be noted that most inflation forecasts are usually associated with major risks and uncertainties that evolve from both domestic and global underlying conditions. Exchange rate Developments On a period average basis, the shilling depreciated by 1.2 percent in December 2009 from an average rate of Shs. 1,873.8 per U.S. dollar in November 2009 to an average of Shs. 1,896.6 per U.S. dollar. Besides the month on month depreciation of the Shilling in December 2009, there were specific depreciation pressures that occurred within December 2009 itself. This was on account of banks increased demand for foreign currency to cover their short dollar positions, particularly during the first fortnight of December ii

5 However, mid- December, a reverse swing to appreciation pressures emerged, prompting BOU s intervention on the purchase side, which again resulted into immediate depreciation pressures against other major currencies. The impact of these swings consequently caused the nominal effective exchange rate of the Shilling to depreciate. Developments in Monetary Aggregates and Credit Broad money, M3 grew by 15.7 percent on annual basis in November 2009, down from 23.8 percent November 2008, marking an apparent deceleration in money supply. Private sector credit (PSC) on the other hand grew by 19.1 percent in November 2009 compared to 19.3 percent in October 2009, while net extensions declined by 48.0 percent from Shs billion in October Regarding the components of PSC, personal loans; trade and commerce; and manufacturing accounted for 20.8, 20.7 and 13.3 percent of total loans, respectively. The share of other services, which includes real estate, was 21.4 percent while that of agriculture, and mining and quarrying was 5.3 percent and 0.3 percent, respectively. In terms of annualised growth rates however, personal loans effectively declined by 7.9 percent in November, 2009, while credit to manufacturing; and trade and commerce rose by 17.8 percent and 74.6 percent, respectively. Credit to the agricultural sector declined by 11.6 percent. The stock of outstanding loans and advances by credit institutions to the private sector grew by 50.2 percent in the year to November 2009 compared to growth of 45.8 percent in October. On the other hand, the stock of loans for the Micro Finance Deposit taking Institutions (MDIs) fell by 41.1 percent in the year to November However, it grew by 3.2 percent in the month of November Money and Capital Market Developments Interest rates on Government securities continued to fall in December. A 5-year bond was reopened on December 9, The Shs billion bond issue was oversubscribed by Shs billion. The yield was 12.7 percent, which was lower than the yield of 14.1 percent for the 5-year bond issued on September 16, The total outstanding stock of treasury bonds stood at Shs. 1,406.6 billion by end December Three scheduled Treasury bill auctions, with offers of Shs billion, Shs billion and Shs billion were held in December 2009, all of which were over-subscribed. The interest rates for all tenors on average declined throughout the month. The secondary market average bid/offer yields to maturity also declined relative to November The volume of total secondary market trading in Treasury bills amounted to Shs billion, down from Shs billion recorded in November The average discount rates on the December trades were 5.3, 7.4 and 8.2 percent for the 91-day, 182-day, and iii

6 364-day securities, respectively. The yield curve was gently upward sloping across the maturity profile. The domestic inter-bank money market remained active in December. Total volumes traded for tenors of not more than 30 days rose to Shs billion from Shs billion in November The total number of transactions however declined to 172 from 218 in November The seven day transactions remained dominant. The weighted average domestic interbank money market rates declined marginally from those recorded in November The spread between lending and deposit rates remained significant in November The weighted average lending rate for shilling denominated loans rose to 21.6 percent in November from 20.4 percent in October 2009, while lending rates for the foreign currency denominated loans declined marginally during the same period. The weighted average deposit rate for both local and foreign currency denominated demand deposits increased by slightly less than 0.1 percentage points. For foreign currency denominated time deposits, it increased to 4.8 percent from 4.1 percent in October However the rate on shilling denominated time deposits declined to 8.8 percent from 9.5 percent during the same period. Trading at the Uganda Securities Exchange (USE) in December 2009 was dismal compared to November Total turnover declined by percent from Shs billion in November 2009 to Shs billion. Market capitalization increased by 4.11 percent. The all share index also increased by 4.11 percent while the number of shares that exchanged hands decreased by 8.43 percent. External Sector Developments Total export proceeds for November 2009 were estimated at US$ million, a 1.7 percent decline from the proceeds realized in October Formal exports increased marginally to US$ million from US$ million in October Informal cross border trade (ICBT) exports were estimated at US$ million, percent higher than the level recorded in November 2008 and 5.0 percent lower than the proceeds for October The total import bill for November 2009 was estimated to have declined to US$ million from US$ million in October Private sector imports declined to US$ million from US$ million in October 2009, while Government imports declined to US$ 15.8 million from US$ Official aid inflows amounted to about US$ 13.4 million in November 2009, while net private transfers were estimated at US$ 73.3 million. The level of gross foreign reserves stood at US$ 2,761.7 million, which is sufficient to cover 5.6 months of future imports of goods and services. iv

7 Government Fiscal Operations Total revenue and budget support grants (excluding project grants) in October 2009 were estimated at Shs billion, up from Shs billion realized in October Total domestic revenue amounted to Shs billion, which was Shs.16.1 billion higher than the revenue performance of the corresponding month of 2008, and Shs.19.1 billion short of total collections for September Receipts from budget support grants are estimated at Shs.58.5 billion, which is Shs.33.1 billion above the official disbursements of October Total government expenditure and net lending in October 2009 is estimated at Shs billion, Shs billion and Shs billion above the respective expenditures of October 2008 and September Increases were recorded in both recurrent and development expenditures. Expenditures on wages and salaries amounted to Shs billion. Preliminary estimates for October 2009 indicate an overall deficit of Shs billion in Government budgetary operations. Excluding grants, the deficit widens to Shs billion, which is higher than the deficits realised in the corresponding period of Real Sector Developments Electricity consumption in GWH decreased by 7.45 percent during November 2009 from consumption levels of October This was mainly driven by decreases in street lighting (39.43 percent) and industrial consumption (4.69 percent) categories. This was a further decrease from 4.96 percent registered in October Total purchases by the distribution company in GWH further fell by 3.48 percent in December 2009, compared to a 3.98 percent rise in October Policy Outlook The Bank of Uganda s monetary policy stance will continue to focus on maintaining price stability in order to achieve the core inflation target for June 2010 and to the extent possible, supply adequate liquidity to boost aggregate demand. This will be done in line with the current macroeconomic framework which is intended to deliver sustained economic growth, low and stable inflation, and overall macroeconomic stability. v

8 1. INTRODUCTION This report reviews the macroeconomic and monetary developments in December Specifically, it discusses the monetary policy stance and actions, the instrument mix, and developments in financial and economic indicators during the month. It also provides a policy outlook for the near-term horizon. 2. MONETARY POLICY STANCE AND ACTIONS During the month, overall macroeconomic stability remained the key objective of monetary policy. The Bank of Uganda (BOU) s monetary policy focused on maintaining price stability. BOU continued with the implementation of the flexible Reserve Money program, making a clear distinction between structural and short-term liquidity conditions in the economy. The instrument mix was cautiously chosen with a view to achieving the low and stable inflation objective, without compromising the stability of the domestic and foreign exchange markets. Sterilization of structural (long-term) liquidity was effected through a combination of sales of treasury bills, treasury bonds, and foreign exchange in the interbank foreign exchange market (IFEM), while repurchase agreements (REPOs) were used for short-term liquidity management. During the month, Treasury bill issues at cost amounted to Shs billion. These were however more than offset by Treasury bill maturities of Shs billion leading to a net liquidity injection of Shs billion. In a continued bid to promote the development of financial markets alongside the conduct of monetary policy, a 5-year bond of face value Shs billion was reopened. Sterilization of liquidity through daily sales of US$ 0.1 million was also pursued during the month. In an effort to ensure exchange rate stability and boost aggregate demand, BOU also intervened and purchased US$ 30 million in the IFEM. The resultant effect of this action in the IFEM for December 2009 was a net purchase of US$ 28.1 million on account of both sterilization and intervention. Given the generally liquid market as evidenced by substantial commercial banks excess reserves 1, BOU continued to use the REPO for short-term liquidity management. REPO issuance with tenors ranging from 3 to 7 days amounted to Shs billion. This was against REPO maturities of Shs billion. This contrasts with REPO issues and maturities of Shs billion and Shs billion, respectively in November In December 2009, excess reserves held by commercial banks at the BOU remained substantial standing at a daily average of Shs billion, compared to Shs billion and Shs billion in November 2009 and December 2008, respectively. Indeed, average daily excess reserves during 2009 stood at Shs. 121 billion compared to Shs.53 billion and Shs. 60 billion in 2008 and 2007, respectively. 1

9 3. INFLATION AND EXCHANGE RATE DEVELOPMENTS 3.1 Inflation Virtually all components of inflation declined in December Annual Headline inflation declined to 10.9 percent from 12.0 percent in November Annual core inflation also declined to 7.4 percent from 8.8 percent in November 2009, while annual food and food crops inflation declined to 22.1 percent and 34.3 percent from 22.6 percent and 35.5 percent, respectively in November Monthly core inflation also declined to -0.2 from 0.2 percent in November 2009, while headline inflation declined to -0.3 percent. The monthly food crop price index also fell by 1.7 percent compared to a decrease of 0.8 percent recorded in the preceding month. Inflation developments are shown in Figure 1 and Table 1. Figure 1: Annual Inflation Developments Percent Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Headline Core Food Crops Core inflation has fallen sharply over the last four months. Monthly increases have averaged less than 0.2 percent, which translates to an annualized rate of less than 3.0 percent. The fall in core inflation could be partly explained by rapid decrease in money expansion, driven by tight fiscal stance during H1 2009/10. If this trend continues, then core inflation may fall below 5.0 percent by the June It is however important to note that inflation forecasts are associated with major risks. Indeed, the core inflation path over the next few months can be affected by both domestic and global developments, which may translate into further increases in domestic prices. If aggregate demand continues to be subdued then core inflation will continue to decline. On the other hand, increases in international prices or a rapid depreciation of the shilling may cause this declining trend in core inflation to reverse, at least in the short term. 2

10 Table 1: Developments Different Measures of inflation Dec-08 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Headline inflation (%) Monthly Annual months average Core Inflation (%) Monthly Annual months average EFU Inflation (%) Monthly Annual * months average Food crop Inflation (%) Monthly Annual months average Source: Uganda Bureau Of Statistics 3.2 Exchange rate On a period average basis, the shilling depreciated by 1.2 percent in December 2009 from an average rate of Shs. 1,873.8 per U.S. dollar in November 2009 to an average of Shs. 1,896.6 per U.S. dollar. This is in contrast to the appreciation of 1.3 percent registered in November The main factors that caused the depreciation of the Shilling were increased demand for dollars, particularly from the manufacturing and energy sectors, as well as some offshore players. In addition, commercial banks heightened their demand for dollars in order to cover their short dollar positions, especially during the first weeks of the month. Towards mid December however, there were appreciation pressures which prompted BOU s intervention on the purchase side. The Shilling also depreciated against other major currencies. Consequently, the nominal effective exchange rate of the Shilling also depreciated as reflected in Figure 2. Figure 2: Exchange rate developments, January 02, January 02,

11 The exchange rate developments in the months ahead will largely depend on the evolution of fundamentals and the need to boost aggregate demand in the economy. 4. DEVELOPMENTS IN MONETARY AGGREGATES AND CREDIT 4.1 Monetary aggregates Broad money, M3 2 grew by 15.7 percent in the year to November 2009, which is lower than the growth rates of 17.1 percent and 23.8 percent realised in October 2009 and November 2008, respectively. M2 3 also grew by 17.6 percent in November 2009, down from 20.7 percent in the year to October The deceleration in money supply was largely driven by the fall in Net Domestic Assets (NDA) and slow increase in Net Foreign Assets (NFA). NDA fell by 10.8 percent in November 2009 compared to an increase of 31.9 percent in October This decline was particularly caused by a 22.4 percent annual drop in other assets of the Bank of Uganda. In addition, NFA rose by only 12.2 percent in November 2009 compared to an increase of 19.8 percent in October The evolution of monetary aggregates is shown in Table 2 and Figure 3. Table 2: Development in Monetary Aggregates Shs. Billions Annual Change (%) Oct-08 Nov-08 Oct-09 Nov-09 Oct-08 Nov-08 Oct-09 Nov-09 Broad Money - M % 23.8% 17.1% 15.9% O/w Foreign Deposits % 6.1% 5.3% 8.8% Broad Money - M % 29.6% 20.7% 17.6% O/w Private Time and Savings Deposits % 40.7% 33.2% 28.4% Currency In Circulation % 22.3% 8.4% 4.9% Private Demand Deposits % 25.5% 17.3% 17.2% Net Foreign Assets % 12.9% 19.8% 12.2% O/w BOU (net) % 17.8% 19.5% 16.9% Commercial Bank (net) % -21.3% 23.0% -36.7% Net Domestic Assets % 76.8% 31.9% -10.8% Domestic Credit % 76.0% 22.2% 22.1% O/w Claims on Central Government (net) % -11.7% 13.1% 6.1% Claims on the Private Sector % 52.4% 19.3% 19.1% Other Items(net) % 75.6% 14.8% 43.1% 2 M2 plus foreign currency deposits 3 Includes Currency in Circulation and Shilling Deposits 4

12 Figure 3: Evolution of Monetary Aggregates In terms of growth, most of the monetary aggregates have been growing at a declining rate since December 2008 as shown in Table 1 and Figure 4. This has largely been influenced by the significant decline in the growth of currency. Indeed, in November 2009, currency grew by only 4.9 percent compared to 8.4 and 22.3 percent in October 2009 and November 2008, respectively. Figure 4: Annual Growth Rates of M2, Currency and Total Deposits. 4.2 Private Sector Credit Commercial Banks The annual growth in the stock of private sector credit (PSC) remained virtually unchanged in November compared to the growth rate recorded in October It grew by 19.1 percent compared to growth of 19.3 percent in October This growth is however significantly lower than the annual growth of 52.4 percent recorded in 5

13 November On a monthly basis, private sector credit grew by 2.5 percent in November 2009 in contrast to the growth rates of 2.9 percent and 2.6 percent in October 2009 and November 2008, respectively. Net extensions however declined by 48.0 percent from Shs billion in October Specifically, total (shilling and foreign currency) gross extensions by commercial banks declined to Shs billion from Shs billion in October Recoveries also declined to Shs billion from Shs billion in October In terms of sectoral distribution, personal loans, trade and commerce, and manufacturing accounted for 20.8, 20.7 and 13.3 percent, respectively. The share of other services, which includes real estate, was 21.4 percent. Agriculture and mining and quarrying sectors continue to have the lowest shares of 5.3 percent and 0.3 percent, respectively. The evolution of the sectoral distribution of credit is depicted in Figure 5. Figure 5: Sectoral distribution of credit to the private sector The growth of credit to various sectors of the economy has also been rather varied as shown in Figure 6. Personal loans declined by 7.9 percent on an annual basis in November, 2009 in contrast to a decline of 5.5 percent in October and an increase of 25.2 percent September On the other hand, the annual growth rate of credit to the trade and commerce sector stood at 74.6 percent, up from 64.2 percent in October Credit to the manufacturing sector grew by 17.8 percent, down from 20.9 percent in October 2009, while credit to the agricultural sector declined by 11.6 percent. 4 Partly attributed to the inclusion of new banks since January

14 Figure 6: Sectoral growth rate of credit to the private sector Credit Institutions and Micro Finance Deposit Institutions On annual basis, the stock of outstanding loans and advances by Credit Institutions to the private sector grew by 50.2 percent in November This is in contrast to a growth rate of 45.7 percent in October 2009 and a decline of 77.3 percent a year ago. On a monthly basis, it grew by 2.3 percent in November, down from 4.6 percent in October Loans to the trade and commerce sector accounted for 41.1 percent, followed by the other services and personal loans sector, which accounted for 38.3 percent. The construction, and transport and communications sectors accounted for 7.6 percent and 8.0 percent, respectively. The sectoral distribution of loans and advances by credit institutions is shown in Figure 7. Figure 7: Sectoral volume of loans of Credit Institutions to Private Sector Note: Data for February 2008 to December 2008 is for four Credit Institutions (CIs), while January 2009 covers three CIs after Commercial Microfinance Limited transformed into a commercial bank. February 2009 to November 2009 covers four CIs after Opportunity Uganda Limited transformed into a credit institution. 7

15 The Micro Finance Deposit taking Institutions (MDIs) stock of gross outstanding loans to the private sector decreased by 41.1 percent in the year to November However it increased by 3.2 percent in the month to November 2009, with Trade and Commerce sector continuing to hold the largest share of the MDIs loans at 61.5 percent. 5. DEVELOPMENTS IN MONEY AND CAPITAL MARKETS 5.1 Treasury Bonds Primary Market In line with the monetary policy and financial markets development objectives, Bank of Uganda reopened a 5-year bond on December 9, The Shs billion bond issue was oversubscribed by Shs billion and realized a cover ratio of 4.7. At a weighted average price of 95.7 per Shs. 100, the resultant yield for the 10.8 percent coupon bond was 12.7 percent, which was lower than the yield of 14.1 percent for the 5-year bond issued on September 16, After accounting for the maturities of the 2-year bond totalling to Shs billion, this auction brings the total outstanding stock of treasury bonds to Shs. 1,406.6 billion by end December Coupon payments on the 2-year bond totaling to Shs. 3.7 billion were also effected during the month. All bond issues in the market so far are listed on the Uganda Securities Exchange. Details of the most recent Treasury bond issues are shown in Table 3. Table 3: Summary of Government Treasury bond Primary Issues as at December 31, 2009 (in Billions of Uganda Shillings, unless otherwise stated) 2-Year 3-Year 5 Year 5-Year 10 Year Tenure/Issue date New Issue New Issue New Issue Re-Opened New Issue Oct Aug Sep Dec Nov Maturity Date Oct Aug Sep Sep Nov Offers Total Bids O/w Competitive Un-auctioned amount Over (Under) Subscription Amount Sold (Face Value) Amount Sold (Cost Price) Bid-Cover Ratio Previous Bid-Cover Ratio WAP per Shs Previous WAP per Shs Yield to Maturity % Previous Yield to Maturity % Coupon Rate

16 5.1.2 Secondary Market The average indicative bid/offer yields-to-maturity in the secondary market were quoted at 11.4/11.3, 11.7/11.5, 12.6/12.4 and 14.3/14.1 percent for the 2-year, 3-year, 5- year and 10-year bonds, respectively, as shown in Table 3. These rates, except for the 10- year bond, were lower than the respective rates of 12.0/11.8, 12.4/12.2, 13.0/12.8 and 13.0/12.8 percent, reported in November There was also a significant decline in these rates compared to the respective rates of 16.2/16.0, 16.5/16.3, 15.6/15.2 and 14.2/13.9 percent, recorded in December During the month, 2-year, 3-year and 5- year bonds worth Shs billion, 62.6 billion and Shs. 1.3 billion were traded at respective average yield-to-maturity rates of 10.5, 11.5 and 12.3 percent. Table 4: Bid/Offer Rates in the Treasury bond Secondary market, December, 2009 Yield-to-maturity quotation (percent) 2-year 3-year 5-year 10-year Bid Offer Bid Offer Bid Offer Bid Offer Min Max Average Treasury Bills Primary Market Three scheduled Treasury bill auctions, with offers of Shs billion, Shs billion and Shs billion were held in December 2009, all of which were over-subscribed. As shown in Table 5, the interest rates for all tenors on average declined throughout the month. These rates were lower than those registered in November 2009, and in December The evolution of discount rates on Treasury bills since October 2002 is shown in Figure 8. Overall, there has been a noticeable decline in Treasury bill discount rates. Table 5: Interest Rates in the Primary Market for Treasury bills in December 2009 Auction Date Effective Yield (%) Discount Rate (%) 91-day 182-day 364-day 91-day 182-day 364-day Dec Dec Dec

17 Figure 8: Trend of Discount Rates on Treasury Bills, October 2002 December Secondary market In line with the fall in interest rates in the primary market, the average bid/offer yields to maturity also declined. The rates for the 91-day, 182-day and 364-day papers declined to 6.0/5.9, 8.8/8.6 and 9.6/9.3 percent from the respective rates of 6.5/6.4, 9.7/9.5 and 10.6/10.3 percent in November 2009 and the respective rates of 10.0/9.7, 15.1/14.7 and 16.3/16.0 percent recorded in December Details of Treasury bills secondary market activity in December 2009 are shown in Table 6. Table 6: Developments in the Secondary market for Treasury bills, December 2009 Tenor of bills 91-days 182-days 364-days Yield-to-Maturity quotation (percent) Bid Offer Bid Offer Bid Offer Min Max Average Trading Activity Transactions (Shs billion) O/w Horizontal REPOs O/w Transfers O/w- Outright sales Total trades across maturities Av Discount rate 5.33 percent 7.37 percent 8.18 percent - Av Yield to maturity 5.50 percent 7.61 percent 8.61 percent Rediscounts at BOU - Borrowing at BOU - As reflected in Table 6, the volume of total secondary market trading amounted to Shs billion. This was however lower than Shs billion recorded in November

18 The average discount rates on these trades were 5.3, 7.4 and 8.2 percent for the 91-day, 182-day, and 364-day securities, respectively. The yield curve, based on the monthly average indicative yield-to-maturity bid and offer quotations, was gently upward sloping across the maturity profile as shown in Figure 9. Figure 9: Yield curves in the Securities market for December, Domestic Inter-bank Market The domestic inter-bank money market remained active in December. In terms of trading volumes, the total amount traded for tenors of not more than 30 days rose to Shs billion from Shs billion in November The total number of transactions however declined to 172 from 218 in November The seven day transactions remained dominant, accounting for 81.9 percent of the total volumes traded in December The weighted average domestic interbank money market rates declined from 3.7 percent in November to 3.5 percent in December All commercial banks participated in the inter bank market during this period. Table 6 provides a comparative analysis of trading activity in the inter-bank market during November and December

19 Table 7: Summary of inter bank money market activity Tenor No. Of transactions November 2009 December 2009 Amount (Shs bn) Weighted Rate No. Of transactions Amount (Shs bn) Overnight Weighted Rate 2 days days days days days week > 1 week Total Commercial Banks Lending and Deposit Rates The spread between lending and deposit rates continued to remain high. The weighted average lending rate for shilling denominated loans rose to 21.6 percent in November from 20.4 percent in October The lending rate for the foreign currency denominated loans however declined, though marginally, to 10.3 percent from 10.7 percent of October On the other hand, the deposit rates remained virtually unchanged, save for rates on time deposits, as shown in Table 8. The weighted average deposit rate for both local and foreign currency denominated demand deposits remained relatively stable, increasing by less than 0.1 percentage points. On the other hand, the weighted average interest rate for the foreign currency denominated time deposits increased to 4.8 percent from 4.1 percent in October 2009, while that on shilling denominated time deposits declined to 8.8 percent from 9.5 percent in October Table 8: Commercial Banks Lending and Deposit Rates (Percent) Weighted rates Average Foreign Currency Denominated Aug 2009 Sept 2009 Oct 2009 Nov 2009 Shilling Denominated Aug 2009 Sept 2009 Oct 2009 Lending Demand Deposits Savings Deposits Time Deposits Nov

20 5.5 Uganda Securities Exchange Trading at the Uganda Securities Exchange (USE) was dismal in December 2009, compared to November Total turnover declined by percent from Shs billion in November 2009 to Shs billion. Market capitalization increased by 4.11 percent. The all share index also increased by 4.11 percent while the number of shares that exchanged hands decreased by 8.43 percent. The turnover was highly skewed in favour of Stanbic Bank (Uganda) Ltd (SBU) and Development Finance Company Uganda Ltd (DFCU) which accounted for 72.7 percent and 13.2 percent of total turnover, respectively. Uganda Clays share was 4.9 percent while New Vision Limited (NVL) share declined to 1.5 percent. Bank of Baroda (Uganda) Ltd (BOBU) and British American Tobacco (Uganda) Ltd (BATU) posted shares of 7.4 and 0.3 percent, respectively. Trading counters of East African Breweries Ltd (EABL), Jubilee Holdings Limited (JHL), Kenya Airways (KA), KCB group and Equity Bank Limited (EBL) remained relatively inactive. The details of developments in the equities market in the months of August to December 2009 are shown in Table 9. Table 9: Trading at Uganda Securities Exchange, August 2009 December 2009 August '09 Sept '09 Oct '09 Nov '09 Dec '09 Total Turnover 1,844,727,830 1,491,622,900 3,264,448,780 1,804,097,815 1,533,665,205 No. Of shares Traded 11,336,338 9,204,168 14,004,108 10,106,763 9,254,561 Market Cap (Billion Shs. E.O.P) 7,343 7,051 6,845 6,852 7,134 All Share Index Source: Uganda Securities Exchange 6 EXTERNAL SECTOR DEVELOPMENTS 6.1 Exports Total export proceeds for November 2009 are estimated at US$ million, which is a decline of 1.7 percent from the proceeds realized in October This is however higher than US$ million realized in November Formal exports increased marginally to US$ million from US$ million in October Coffee exports amounted to US$ 22.1 million (equivalent to 235, kilogram bags), representing a decline of 11.8 percent and 19.9 percent in volume and value terms, respectively, compared to coffee exports of November The average realized export price for coffee in November 2009 was US$ 1.57 per kg, 15 cents less than the average unit price for November On the other hand, formal non-coffee exports increased only 13

21 marginally in November 2009, although this was a 12.0 percent increase relative to November Informal cross border trade (ICBT) exports were estimated to have risen to US$173.0 in November 2009, compared to about half that amount in November This is however a decline of about 5.0 percent from the proceeds of October The trend in export earnings for the period November 2008 November 2009 is shown in Figure 10 and Table 10. Table 10: Exports of Merchandise (US$ millions) Nov-08 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Total Exports (a + b) a) Formal exports Coffee Volume (millions of 60-Kg bags) Av. Unit value Non-Coffee exports Electricity Gold Cotton Tea Tobacco Fish & its products Hides & skins Simsim Maize Beans Flowers Oil re-exports Cobalt Base metals & their products Others b) Informal exports (i.e. ICBT) Imports The total import bill 5 for November 2009 was estimated to have declined to US$ million from US$ million in October Private sector imports declined to US$ million from US$ million in October 2009, while Government imports declined to US$ 15.8 million from US$ 19.4 million over the same period. Developments in the import bill are reflected in Table 9 and Figure Effective November 2004, import values are reported free on board (f.o.b) 14

22 Major import items in December 2009 included oil and oil products, machinery and equipment, vehicles & accessories, base metals & their products, chemicals & related products, mineral products, and vegetable products, beverages, animal fats & oils. The oil import bill amounted to US$ 37.8 million, which was US $5.3 million lower than the oil import bill for November Table 11: Imports of merchandise (US$ millions) Nov-08 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Total Imports Government Imports Project Non-Project Private Sector Imports Oil imports Non-oil imports Figure 10: Exports, imports and the trade balance November 2008 November Exports/Imports(US$millions) TradeBalance(US$millions) 0.0 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov Exports Imports Trade Balance 6.3 Other flows Official aid 6 inflows in November 2009 amounted to about US$ 13.4 million while net private transfers were estimated at US$ 73.3 million. Net outflows on the services and income accounts are estimated at US$ million. Official cash debt service (excluding IMF payments) stood at US$ 3.9 million, while net inflows on account of trade credits amounted to US$ 0.01 million. Specifically, inflows (buyers credit and suppliers credit) are estimated at US$ million, while outflows (pre-finance shipments and suppliers credit repayments) are estimated at US$ million. The 6 excluding project aid but including resources from the HIPC Initiative 15

23 level of gross foreign reserves stood at US$ 2,761.7 million; US$14.4 million less than the preceding month s level. This reserve level is sufficient to cover 5.6 months of future imports of goods and services. 7 GOVERNMENT FISCAL OPERATIONS 7.1 Revenue and Grants Total revenue and budget support grants (excluding project grants) in October 2009 are estimated at Shs billion. This is slightly more than the Shs billion realized in October 2008, although still short the September 2009 performance. Specifically, total domestic revenue amounted to Shs billion, which is Shs.16.1 billion higher than the revenue performance of the corresponding month of 2008, and Shs.19.1 billion short of total collections for September Receipts from budget support grants are estimated at Shs.58.5 billion, which is Shs.33.1 billion above the official disbursements of October Table 12: Government Budgetary Operations (Shs. Billion) Oct Preliminary Q1 09/10 Preliminary Sep Preliminary Oct Total Revenue & Grants , Total Domestic Revenue URA: Excl. Refunds/Govt Taxes Non URA Revenues Grants Expenditure and Lending Current Expenditure Development Expenditure Others 1/ Overall Fiscal Balance (25.0) (105.8) Overall Fiscal Balance Excl. Grants (74.9) (164.3) Source: Ministry of Finance, Planning and Economic Development 1/ Includes Net Lending/Repayments, Arrears Repayments and contingency 7.2 Expenditure and net lending Total government expenditure and net lending in October 2009 is estimated at Shs billion, which is Shs billion and Shs billion above the respective expenditures of October 2008 and September There were increases in both recurrent and development expenditures as shown in Table 10. Expenditures on wages and salaries amounted to Shs billion, which is about 30.5 percent of recurrent 16

24 expenditure. Interest payments and transfers to URA totalled Shs billion and Shs. 8.3 billion, respectively. 7.3 Overall performance Preliminary estimates for October 2009 indicate an overall deficit of Shs billion in Government budgetary operations. Excluding grants, the deficit widens to Shs billion, which is higher than the deficits realised in the corresponding period of REAL SECTOR DEVELOPMENTS 8.1 Energy Sector Electricity consumption in GWH decreased by 7.45 percent during November 2009 from consumption levels of October This was mainly driven by decreases in street lighting (39.43 percent) and industrial consumption (4.69 percent) categories. This was a further decrease from 4.96 percent registered in October Total purchases by the distribution company in GWH further fell by 3.48 percent in December 2009, compared to a 3.98 percent rise in October Details of energy consumption by tariff category and purchases are shown in Table 12. Table 12: Energy Consumption by Tariff Category August November 2009 Monthly Changes A. Consumption (GWH) Aug-09 Sept-09 Oct-09 Nov-09 Sept-09 Oct-09 Nov-09 Domestic % 7.59% 17.65% Commercial % -1.35% 2.50% Industrial % 5.29% -4.69% Street Lighting % 44.44% % Total % -4.96% -7.45% B. Purchases in GWH: UMEME purchases from UETCL % 3.98% -3.48% 9 POLICY OUTLOOK The Bank of Uganda s monetary policy stance will continue to focus on maintaining price stability in order to achieve the core inflation target for June 2010 and to the extent possible, supply adequate liquidity to boost aggregate demand. This will be done in line with the current macroeconomic framework which is intended to deliver sustained economic growth, low and stable inflation, and overall macroeconomic stability. 17

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