KAMPALA, June 21 (Reuters): Uganda's central bank expects to ease monetary policy further and the government's plan to reduce public borrowing in the next fiscal year should keep a lid on government debt yields, a senior bank official told Reuters.
Bank of Uganda (BoU) this month trimmed its benchmark Central Bank Rate (CBR) by 50 basis points to 11.0 per cent, the first change since a cut in December.
BoU said risks to growth from regional instability and a weak agricultural sector meant Uganda's economy would not return to its historical growth rate of 7 per cent at least in the next two years.
Adam Mugume, executive director for research who also sits on the Monetary and Credit Policy Committee, said that if the government stuck to its public borrowing target in 2014/15 (July-June), the bank would have room to further ease policy.
"If the fiscal side is not overborrowing ... you can have room to ease monetary policy," Mugume said in an interview on Friday.
In the current 2013/14 fiscal year, the government has overshot its borrowing target by 67 per cent to 1.67 trillion shillings and Mugume said that had kept yields on government debt securities relatively high.
However, he said the government plans to reduce its public borrowing in 2014/15 and had given firm assurances to the IMF under its Policy Support Instrument (PSI) programme to remain within its projected borrowing threshold.
"This time ... the government made a commitment in writing ... I think it gives room for monetary policy easing," Mugume said.
Finance Minister Maria Kiwanuka said this month the government plans to issue Treasury bonds and bills worth 1.4 trillion shillings in 2014/15, which would be a 16.2 per cent drop from this fiscal year.
Rates on Treasury bills and government bonds have been generally declining at recent auctions and Mugume said they would "remain subdued" with the yield on one-year paper likely to hover around 12 per cent over the next year.
If the government stuck to its debt issuance limit it would help keep yields on Treasury bills and bonds low and pile pressure on commercial banks to lower lending rates for private sector borrowers, he said.
BoU has previously complained that private sector growth remained tepid despite heavy interest rate cuts.
Uganda's economy is set to grow 5.7 per cent this fiscal year and 6.0-6.5 per cent in 2014/15, the central bank forecasts.
Mugume said downside risks to the growth forecast include a slowdown in inflows of foreign investments ahead of a presidential election, expected in early 2016, and escalating turbulence in neighbouring Kenya.
"Come 2015 people will start saying 'let's wait and see' ... mostly foreigners will not invest, they will tend to hold their investment plans until after the elections," he said.
Aging President Yoweri Museveni, in power since 1986, is widely expected to stand for re-election in 2016.
Mugume said Uganda's tourism sector is likely to be hit by the decline in tourism in neighbouring Kenya following a recent escalation in attacks by militants, especially along Kenya's coast.
"When visitors are coming to Uganda they tell you they first went to Kenya," he said.
"Uganda is an extension of their trip, and in any case Kenya is our biggest trading partner. You can't expect Kenya to be on fire and Uganda continues growing," he said.
