Download Tight monetary and fiscal policy stabilized the economy A

Irene Birungi Mugisha:
Tight monetary and fiscal policy stabilized the economy
A combination of tight monetary and fiscal policy in place for the whole of financial year
2015/16 by the government has helped the country to stabilize the economy and maintaining
reasonable economic growth despite this being an election.
The tight monetary policy in place enable government to stabilization the economy in form
containing inflation rate at single digit for instance in January the annual headline inflation rate
stood at 7.7 per cent and reduced to 7.6 per cent in February 2016.
As calculated by Uganda Bureau of Statistics, shows that core inflation for January 2016 closed
at 7.1 per cent and slightly increased to 7.6 per cent in February.
The forecast by Bank of Uganda indicates that annual headline inflation is forecast to peak at 810 per cent in quarter three of 2016 because of the deteriorating outlook of food prices, while
Core inflation is forecast to peak at 6-8 per cent in quarter two 2016, flattening out in the second
half of 2016 before declining to the BoU’s medium-term target of 5 per cent in mid-2017.
Like all economic policies, monetary policy has three interrelated elements: selection of
objectives, implementation, and at least an implicit theory of the relationships between actions
and effects.
The tight monetary stance by Bank of Uganda has helped the country to realize stability in the
foreign exchange market and adequate enough to support private sector credit growth and the
country’s overall economic growth.
Monetary policy usually plays a more positive regulatory role in economic systems that rely
heavily on market forces to organize and direct processes of production and distribution. In such
economies, decisions of business firms relating to rates of output, amounts of labor employed,
rates of capital formation, and so on, are strongly influenced by relationships between costs and
actual and prospective demands for output.
The Bank of Uganda says due to tight monetary policy in place, growth in monetary aggregates
remains subdued, largely reflecting the tight monetary policy stance. For instance in its monetary
policy report of February the central bank said on year on year (Y-o-Y), money supply M3 and
M2 grew by 13.4 per cent and 5.2 per cent in the quarter ended December 2015 compared
growth rates of 18.5 per cent and 7.7 per cent in the quarter ended September 2015.
The executive director research Bank of Uganda, Dr Adam Mugume explains that growth in
Private Sector Credit (PSC) declined to 17.8 per cent Y-o-Y in the quarter to December 2015
from 24.4 per cent in the quarter to September 2015.
While the growth in the shilling value of forex denominated loans declined to 23.3 per cent from
37.8 per cent in the quarter to September15. In dollar terms, forex denominated loans declined
by 1.2 per cent compared to a growth of 1 per cent in the quarter to September 2015.
The growth in shilling lending declined to 14.0 per cent in December 2015 from 15.2 per cent in
the previous quarter, in part driven by low demand for credit.
In the foreign exchange, statistics at central bank shows in Jan-2016, the Shilling depreciated by
2.6 per cent, month to month (M-o-M), to an average midrate of Uganda shilling 3,451.21 per
US dollar, compared to an appreciation of 1.9 per cent posted in Dec-2015. On annual basis, the
Shilling depreciated by 20.6 per cent
On a trade weighted basis, the Shilling appreciated at a slower pace of 2.3 per cent in Jan-2016
M-o-M, but depreciated by 3.5 per cent on annual basis. Statistics further shows that in Dec2015, the Real Effective Exchange Rate (REER) appreciated by 7.7 per cent M-o-M but
depreciated by 2.1 per cent Y-o –Y.
Concerning Gross Domestic Product (GDP) growth, Dr Mugume says the projected domestic
economic growth remains modest at 5 per cent in 2015/16.
“The outlook for aggregate demand is highly uncertain due to the on the ongoing global
economic turbulences. Real GDP growth is expected to strengthen gradually through the
projection horizon, with growth of about 5.5 per cent in 2016/17, a revision from the previous
5.8 per, and 6.1 per cent in 2017/18,” her said.
Fiscal policy is the use of government spending and taxation to influence the economy. When the
government decides on the goods and services it purchases, the transfer payments it distributes,
or the taxes it collects, it is engaging in fiscal policy.
Fiscal policy is said to be tight or contractionary when revenue is higher than spending (i.e., the
government budget is in surplus) and loose or expansionary when spending is higher than
revenue (i.e., the budget is in deficit).
For this year’s case Uganda has been administering tight fiscal policy stance a development
which seen the Ministry of Finance, Planning and Economic Development registering surpluses
and utilizing the surplus to meet other government expenditure by reallocating the revenue it has
with going into supplementary budget.
Unlike the past election of 2011, when there fiscal expansion which saw government issuing
treasury bills and bonds up to the tune of Shs1.7 trillion which was more than the planned Shs1.4
trillion. This time around the ministry of Finance instead reduced the issuing of government
securities. The permanent secretary/Secretary to the Treasury Mr Keith Muhakanizi says the due
to tight fiscal policy in place where government is only spending in the priority areas/ sectors
government domestic borrowing was reduced from Shs1384 trillion that was planned in the
budget of 2015/2016 to Shs900 billion