ISSN 1991-766X

BANK OF UGANDA

QUARTERLY MACROECONOMIC
REPORT
Q3 2010

December 2010

www.bou.or.ug

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CONTENTS

1 INTRODUCTION ................................................................................................................. 4
2 THE GLOBAL ECONOMY ................................................................................................. 4
2.1 GLOBAL ECONOMIC GROWTH ..................................................................................... 4
2.2 GLOBAL FINANCIAL MARKETS .................................................................................... 6
2.3 CONSUMER PRICES ........................................................................................................... 7
2.4 COMMODITY MARKETS ................................................................................................... 8
2.5 OUTLOOK FOR THE EXTERNAL ENVIRONMENT .................................................... 8
2.6 IMPLICATIONS FOR THE DOMESTIC MACROECONOMIC POLICIES ................. 9
3 MONETARY AND EXCHANGE RATE POLICIES IN THE THIRD
QUARTER OF 2010......................................................................................................................... 10
4 MONETARY AND FINANCIAL MARKET DEVELOPMENTS ................................. 11
4.1 BASE MONEY ..................................................................................................................... 11
4.2 MONEY SUPPLY ................................................................................................................ 11
4.3 THE MONEY MARKET..................................................................................................... 12
4.4 COMMERCIAL BANKS .................................................................................................... 15
4.4.1 COMMERCIAL BANKS CREDIT TO THE PRIVATE SECTOR .................................. 16
4.4.2 COMMERCIAL BANKS’ DEPOSIT LIABILITIES ......................................................... 17
4.5 CREDIT INSTITUTIONS (CIs) .......................................................................................... 18
4.5.1 ASSETS ................................................................................................................................. 18
4.5.2 COMPOSITION OF PRIVATE SECTOR CREDIT ......................................................... 18
4.5.3 COMPOSITION OF THE LIQUID ASSETS OF CIs ....................................................... 19
4.5.4 DEPOSIT LIABILITIES ....................................................................................................... 19
4.6 MICROFINANCE DEPOSIT TAKING INSTITUTIONS (MDIS) ................................ 20
4.6.1 ASSETS ................................................................................................................................. 20
4.6.2 DEPOSIT LIABILITIES ....................................................................................................... 21
4.7 UGANDA’S EQUITY MARKET ....................................................................................... 21
5 DOMESTIC PRICES............................................................................................................ 23
5.1 CONSUMER PRICES ......................................................................................................... 23
5.2 PRODUCER PRICE INDEX (PPI) ..................................................................................... 24
6 EXCHANGE RATES AND BALANCE OF PAYMENTS.............................................. 25
6.1 EXCHANGE RATES........................................................................................................... 25
6.2 BALANCE OF PAYMENTS .............................................................................................. 26
7 MONETARY POLICY OUTLOOK ................................................................................... 29

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ABBREVIATIONS

BAT British American Tobacco

BOBU Bank of Baroda Uganda
BOU Bank of Uganda
CDS Central Depository System
CIs Credit Institutions
CPI Consumer Price Index
EBL Equity Bank Limited
ECB European Central Bank
EFU Energy Fuel and Utilities
EU European Union
GDP Gross Domestic Product
HICP Harmonised Index of Consumer Prices
HRA Horizontal Repurchase Agreement
ICBT Informal Cross Border Trade
IFEM Interbank Foreign Exchange Market
IMF International Monetary Fund
MDIs Micro Deposit taking Institutions
NCG Net Claims on Government
NDA Net Domestic Assets
NEER Nominal Effective Exchange Rate
NFA Net Foreign Assets
NIC National Insurance Corporation
NVL New Vision Limited
OECD Organisation for Economic Co-operation and Development
PPI Producer Price Index
PPI-M Producer Price Index for Manufacturing
PSC Private Sector Credit
REER Real Effective Exchange Rate
REPO Repurchase Agreement
RMP Reserve Money Program
SBU Stanbic Bank Uganda
UCL Uganda Clays Limited
UK United Kingdom
USA United States of America
USE Uganda Securities Exchange
VAT Value Added Tax
WEO World Economic Outlook

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1 INTRODUCTION

This report presents the economic developments and monetary policy operations in the
quarter to September 2010 relative to the quarter ended June 2010. Specifically, the report
reviews developments in the global economy in view of the implications for the Ugandan
economy. In addition, it discusses the relative performance in the external, monetary and
financial sectors and points out the monetary policy stance and actions that the Bank of
Uganda (BOU) pursued during the quarter. The report also presents the policy outlook for
the near-term.

2 THE GLOBAL ECONOMY

2.1 GLOBAL ECONOMIC GROWTH

The global economy continued to grow in the quarter to September 2010 albeit at a slower
pace due to diminishing support from the inventory cycle and policy stimuli. In the
emerging world, a strong recovery continued, particularly in emerging Asia and parts of
Latin America. Across the developed world as a whole, a gradual and somewhat lacklustre
recovery continued, with central banks keeping interest rates at record low levels. However,
uncertainty gripped markets about the sustainability of growth in the world’s three biggest
markets: the United States, Europe, and China. In the United States, growth was
disappointing and unemployment remained persistently high. In Europe, the sovereign debt
crisis and the policy response conspired to alarm markets. Finally, China’s tightening of
monetary policy and efforts to cool an overheated property market raised concerns that
growth would slow.

In the United States (U.S.), recovery in economic activity appeared to stabilize in the quarter
to September 2010. Annualized quarter-on-quarter growth stood at 2.0 percent for the third
quarter of 2010, up from 1.7 percent for the previous quarter, mainly driven by
manufacturing and rebuilding of inventory levels following the sharp cutbacks at the time of
the global financial crisis, and by fiscal stimulus programmes in the form of cash-for-
clunkers and tax rebates for home buyers in addition to monetary easing. However,
domestic final demand remained softer than GDP because the spending by US households
and by financial businesses was constrained by their need to set aside funds for debt
repayment and balance sheet repair. Inflation remained very low and enabled the Federal

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funds rate to be held at 0-0.25 percent level for a prolonged period while the private sector
recuperates.

In the euro-zone, growth slowed sharply to 0.4 percent in the quarter to September 2010
from 1.0 percent in the previous quarter. The crisis of confidence in the sovereign debt
markets of some of the economies significantly eroded the outlook for euro-zone recovery.
The growth observed was supported by continued improvement in external demand for the
exports from core economies, particularly Germany. Exports increased at a stronger pace
supported by demand from Asia. The fundamental nature of the euro-zone’s problems-
stemming from the divergent characteristics of the members of the monetary union, from
the impossibility of unilateral currency adjustments to promote export-led growth, and from
consequent difficulty in restoring competitiveness and sound public finances in peripheral
countries- are projected to delay recovery and could cause the global crisis to rumble on for
several months. Persistent high unemployment in much of the euro area, and financial
deleveraging by indebted households and businesses suggested that the overall money and
credit growth would remain weak, subsequently dragging on domestic demand.
Nevertheless, substantial economic slack could keep inflation low implying that ECB could
maintain a very accommodative monetary policy.

The Japan’s recovery continued to be weak. Japan's economy grew by an annualised rate of
4.5 percent between July and September 2010. This growth was attributed to one-off factors,
such as sales of green cars before the end of government subsidies and smokers buying
cigarettes before a tax rise. The economic outlook in Japan remained cloudy due to a decline
in demand in the US, Europe and China which hit exports that were already under pressure
from the high value of the yen. Japan has also suffered 20 straight months of deflation,
which is likely to stifle economic growth by undermining consumer demand.

Economic growth in emerging Asia remained robust during the period under review but
with signs of moderation compared to the previous quarter reflecting a slowdown in
external demand and the withdrawal of the stimulus package by some countries. The
Chinese economy grew by 9.6 percent in the third quarter of 2010 supported by private
investment and strong net exports. However, this growth was lower than the 10.3 percent
growth rate reported in June 2010 owing to the withdrawal of the policy stimuli by the
Chinese government in order to cool an overheated economy. In India, indicators of activity
and business sentiments suggested robust growth in the same period. Elsewhere across the

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Asian region, the recovery in external trade and the revival in domestic demand spending
continued to gain strength. Outside China and India inflation remained subdued, but central
banks switched to a tightening mode. Economic growth remained strong in most of Africa
during the quarter. However, in South Africa, quarter-on-quarter GDP growth slowed to 2.6
percent in September 2010 from 2.8 percent in the previous quarter mainly due to a
contraction of output from the manufacturing sector. Table 1 shows a summary of
projections of selected economic indicators for some of the world’s major economies for
2011.

Table 1: Projections of selected economic indicators for 2011

2011
Real GDP Annual Growth Q1 Q2 Q3 Q4
USA 2.1 2.5 2.8 2.9
Japan 2.7 0.6 0.8 1.2
Euro area 1.3 1.7 1.8 1.9
OECD 2.2 2.4 2.5 2.6
Inflation
USA 0.7 0.9 0.9 0.9
Japan -1.0 -0.9 -0.7 -0.7
Euro area 1.4 1.3 1.3 1.2
OECD 1.4 1.5 1.5 1.4
Unemployment
USA 9.7 9.6 9.4 9.2
Japan 4.9 4.9 4.8 4.8
Euro area 9.8 9.7 9.6 9.5
OECD 8.2 8.1 8.0 7.9
World Trade Growth 7.5 7.7 8.0 8.0
Short Term Interest Rates
USA 0.3 0.3 0.4 0.9
Japan 0.2 0.2 0.2 0.2
Euro area 1.0 1.1 1.1 1.2
Source OECD Economic Outlook 88 Database

2.2 GLOBAL FINANCIAL MARKETS

Generally the performance of global financial markets in the quarter to September 2010 was
favourable as a result of easing worries over the world economy. Both equities and bonds
posted strong gains in the quarter under review. For stocks, much of the action came in
September. Around the world many stock markets surged, with those in the emerging
markets leading. Stock markets in Latin America and Asia posted strong returns. The
European stock markets advanced although not as much as the world’s biggest gainers as
the region continued to face economic, fiscal and financial system worries. However,
abundant liquidity, associated with protracted monetary accommodation, spurred large

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capital flows towards emerging market economies, attracted by higher interest rates and
growth expectations. This contributed to significant exchange rate appreciation in countries
where there is flexibility, or further reserve accumulation in countries where this is lacking.
Some countries reacted to capital inflows through unilateral measures to stem the
consequences on their domestic economies.

During the quarter ended September 2010, investors moved their attention from funding of
European sovereign debt, to diverse global growth and implications of asset prices. The
release of the stress tests for European banks on July 23, 2010 reduced uncertainty and
alleviated concerns about the strength of the banking systems. Credit spreads declined and
equity prices increased. Furthermore, bank equity prices responded favourably to a series of
national and international announcements especially the announcement by the Basel
Committee on Banking Supervision of strengthening of the existing capital requirements for
banks. This led to a further rise in bank stock prices in the days that followed.

On the other hand, economic weaknesses in the USA, in late July 2010, led to lower inflation
expectations and falling bond yields. In August and September, the decline in yields
increased and equity prices rose strongly as investors priced in expectations. These
developments contrasted with the continued strong although to some extent lower economic
growth than in the previous quarters in a number of Asian and Latin American economies.
The inflationary pressures, accompanied by rising asset prices led some central banks to
tighten policies. Consequently, higher interest rates attracted capital flows to the higher
growth emerging economies. The acceleration of capital flows was reflected in higher equity
prices in a number of emerging market economies. This was also seen in bond prices.
Several currencies of these economies appreciated against the U.S. dollar. However, the
appreciation was small for currencies of countries that managed their exchange rates against
the dollar.

2.3 GLOBAL CONSUMER PRICES

Inflationary pressures remained subdued in most of the advanced economies while they
were somewhat lofty in dynamic emerging economies. OECD annual inflation was 1.7
percent in September 2010, up from 1.5 percent in June 2010 reflecting higher food and
energy prices. Similarly, annual inflation in the euro area rose to 1.8 percent in September

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2010 from 1.4 percent in June 2010 while in the USA, annual CPI inflation, stood at 1.1
percent in September 2010 similar to the June level.

In the United Kingdom (UK), inflation remained above the 2.0 percent target reflecting the
lagged effects of the past depreciation of the pound sterling as well as the restoration of the
VAT rate to 17.5 percent. Annual inflation in the UK was 3.1 percent in September 2010
compared to 3.2 percent in June 2010. Inflation in India declined, falling to 9.8 percent in
September 2010 from 13.7 percent in June 2010. Conversely, inflationary pressures in China
increased. The consumer price inflation rose to 3.6 percent up from 2.9 percent in June 2010
mainly driven by an increase in food prices as poor weather conditions led to reduced
supply in the markets.

2.4 COMMODITY MARKETS

Prices of crude oil experienced high volatility due to a number of reasons. Oil prices
increased reaching a 3-month high of US $ 82 per barrel at the beginning of August 2010.
However, this trend was reversed and oil prices fell to a low of US$ 71 per barrel following
concerns over the slow down in the global economic recovery. But then, towards the end of
the quarter, oil prices rose as a result of the weakening dollar and the decline in the US oil
inventories. For the quarter, crude oil prices averaged US$ 76 per barrel.

Prices of non-energy commodities also rose during the quarter primarily driven by strong
gains in food prices, in particular, prices of maize and sugar. Price increases were due to a
combination of robust demand and reduced supply as a result of adverse weather
conditions plus low inventories. The price of cotton also reached record highs as a result of
increased demand and tight supply. Metals prices recovered from the lows experienced in
June 2010 driven, especially, by aluminium, nickel and tin. Base metal prices rose in
response to a decline in production, which was due to a fall in demand especially from
China. Prices of precious metals such as silver and gold also increased during the quarter.

2.5 OUTLOOK FOR THE EXTERNAL ENVIRONMENT

So far, in most of 2010, modest improvements in economic growth among major developed
economies have brightened prospects for future solid global growth. However, the
sovereign debt crisis of the peripheral euro-zone economies has prompted fiscal
consolidation to take the place of fiscal expansion, leaving the onus much more on monetary

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policy to ensure a sustained recovery. In many countries, monetary policy, given the very
low level of interest rates, is not in a position to compensate the short-term drag on growth
from fiscal restraint, although quantitative easing could in some cases provide additional
stimulus. In the medium term, as growth strengthens and output gaps close, interest rates
will begin to return to neutral levels, not least to mitigate the undesirable effects of
protracted easing. In contrast, growth in most of the emerging economies is expected to
remain strong but inflation to rise. Nevertheless, these economies are also faced with new
challenges of large and volatile capital flows presenting difficulties in the conduct of
macroeconomic policy. Some countries like those in Latin America have already adopted
macro-prudential and administrative measures to maintain financial stability.

Going forward, the challenge will be to guide the transition from a policy-driven recovery to
self-sustained growth. As stimulus is withdrawn in advanced economies, policy will have to
provide a credible medium-term framework, including for the financial sector, to stabilise
expectations and strengthen confidence. Enhanced confidence could result in a faster-than-
projected recovery, especially given the much improved position of corporations and the
strengthening position of households. However, there are significant risks on the downside,
notably those stemming from renewed declines in house prices in the United States and the
United Kingdom, high sovereign debt in some countries, and possible abrupt reversals in
government bond yields. If some of them were to materialise and threaten to derail the
recovery, additional policy responses would be warranted in countries that still have room
to manoeuvre.

2.6 IMPLICATIONS FOR THE DOMESTIC MACROECONOMIC POLICIES

The real-side of the economy appears to have strengthened further in the quarter to
September 2010 as private sector spending strengthened further. According to the recent
projections, the Ugandan economy is to grow by just over 6 percent in 2011 supported by
private consumption and a more expansionary fiscal stance. Foreign inflows and remittances
have remained robust but exports have continued to be weak in spite of sharp increases in
the global prices for commodities like coffee, tea, cotton and tea, which should have held up
and provided a solid basis for both export earnings and domestic income growth. Overall,
the uncertainty over the sustainability of the global economic recovery continues to pose a
cloudy picture. Furthermore, recent developments in the oil prices and global food prices
also pose a threat to the country’s inflation outlook. In general, domestic demand is expected

9
to continue being the most buoyant area of growth because although exports are likely to
recover, the overall GDP growth is likely to be restrained by the subdued pace of recovery in
the developed economies. The BOU will continue to pursue a cautious monetary policy
stance in order to keep inflation within the target of 5.0 percent without compromising
recovery of real economic activity.

3 MONETARY AND EXCHANGE RATE POLICIES IN THE THIRD

QUARTER OF 2010

Overall, macroeconomic stability remained the key objective of monetary policy in the
quarter ended September 2010. The BOU’s conduct of monetary policy focused on the need
to support the recovery of economic activity but mindful of the price stability objective. The
main instruments of monetary policy in the quarter were Treasury bills and bonds. The
instrument mix for the quarter was cautiously determined with the view of maintaining low
and stable inflation without compromising stability in the domestic money and foreign
exchange markets. The REPO instrument was also actively used as a short term liquidity
fine tuning instrument. The cash reserve requirements remained unchanged at 9.5 percent of
the total deposit liabilities. Furthermore, the Bank continued to pursue a flexible exchange
rate regime with occasional interventions in the foreign exchange market to smoothen out
wide volatility.

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4 MONETARY AND FINANCIAL MARKET DEVELOPMENTS

4.1 BASE MONEY

Base money, which is composed of commercial banks’ deposits at the central bank and
currency in circulation, grew by 1.9 percent compared to a growth of 14.1 percent in the
previous quarter. Figure 1 shows the quarterly growth in base money and currency. The
Figure shows that base money is largely driven by demand for currency, which could also
be driven by transaction motive for holding cash balances. Figure 1 also reflects the
seasonality pattern and thus the decline in base money growth in the first quarter could be a
reflection of seasonality.

Figure 1: Quarterly Base Money and Currency Growth Rates (Sept 2007 – Sept 2010)
25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

Currency growth rate Base money growth rate

4.2 MONEY SUPPLY

All measures of broad money expanded moderately during the period under review. Broad
money, M3 and M2, grew by 4.2 percent and 7.8 percent, respectively, having increased by
14.1 percent and 25.8 percent in the previous quarter. The increase in M3 was driven by
increases in both net foreign assets (NFA) and net domestic assets (NDA), which increased
by 2.7 percent and 9.1 percent, respectively, from their June 2010 levels; each explaining 50.0
percent of the increase in M3. The increase in NDA was mainly attributed to the growth in
private sector credit, which rose by 6.8 percent or Shs. 307.3 billion, an indication of
recovering economic activity. The NFA of the banking system was driven by the increase in
the foreign reserves. The reserves increased by Shs. 392.6 billion or 6.9 percent. M2 grew by
3.1 percent in same period, largely due to the increase in time and saving deposits, which
rose by 5.4 percent. Demand deposits and currency in circulation rose by 1.8 percent and 1.2

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percent, respectively. The persistent increase in monetary aggregates is a reflection of
monetary policy easing by the BOU and also the fact that the opportunity cost of holding
money decreased in the quarter under review as shown in Figure 2.

Table 2: Monetary survey, (Shs. billion, end period)

Aggregate Change
Jun.09 Sept. 09 Dec. 09 Mar. 10 Jun. 10 Sep.10 Jun.10- Sep.10
Absolute Percent
Net Foreign Assets (NFA) 5,711.5 5,958.6 5,705.3 6,139.1 6,383.9 6,558.2 174.4 2.7
o/w Bank of Uganda 5,119.5 5,421.5 5,325.4 5,643.4 5,740.9 6,019.1 278.2 4.8
o/w Commercial Banks 592.0 537.0 379.9 495.7 643.0 539.2 -103.8 -16.1
Net Domestic Assets 586.1 341.9 1,039.8 1,129.5 1,909.2 2,082.7 173.5 9.1
(NDA)
Net Claims on -644.4 -833.4 -705.9 -614.3 251.7 224.5 -27.2 -10.8
Government (NCG)
Claims on Public Entities 35.4 57.7 53.3 45.3 52.6 31.9 -20.7 -39.4
Claims on the Private 3,599.5 3,691.6 3,994.0 4,231.6 4,510.1 4,817.4 307.3 6.8
Sector

Other Items (net) -2,404.4 -2,574.2 -2,301.9 -2,533.2 -2,906.0 -2,992.1 -86.1 3.0

Money Supply (M3) 6,297.6 6,300.5 6,745.1 7,268.6 8,293.2 8,640.96 347.9 4.2

Foreign Currency 1,376.9 1,360.2 1,412.6 1,495.4 1,881.4 2,027.37 145.9 7.8
Deposits
Money Supply (M2) 4,920.7 4,940.3 5,332.4 5,773.2 6,411.7 6,613.60 201.9 3.1
Term Deposits 1,942.5 1,915.0 2,077.1 2,412.1 2,622.8 2,764.52 141.7 5.4
Demand Deposits 1,732.7 1,816.9 1,925.6 2,057.1 2,345.7 2,388.15 42.5 1.8
Currency in Circulation 1,245.4 1,208.3 1,329.7 1,304.1 1,443.3 1,460.92 17.7 1.2
Source: Bank of Uganda

4.3 THE MONEY MARKET

In the third quarter of 2010, the BOU conducted six Treasury bill and four Treasury bond
auctions to sterilise structural liquidity. The impact of these auctions on yields-to-maturity
was mixed. In the Treasury bill market, the yields-to-maturity on the 182-day and 364-day
papers declined to 5.3 percent and 6.1 percent from respective rates of 5.7 percent and 7.2
percent in June 2010, reflecting an increase in the amounts offered for the highly demanded
longer dated securities. However, the yields-to-maturity on the 91-day paper rose to 4.7
percent from 4.3 percent in June 2010.

In the Treasury bond market, the yields-to-maturity on the 2-year, 3-year and 5-year papers
rose to respective rates of 8.5 percent, 9.6 percent and 9.4 percent from 8.3 percent, 9.1
percent and 8.9 percent recorded in the previous quarter. However, the yield-to-maturity on
the 10-year Treasury bond was 10.8 percent, lower than the 12.4 percent recorded for a
similar security issued in February 2010. Figure 2 shows the evolution of the effective yields
on Treasury bills, while Table 3 shows the developments in the primary market of Treasury
bonds.

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Figure 2: Evolution of the Effective Yield on Treasury Bills (Jan 2002 – Sept 2010)

Source: Bank of Uganda

Table 3: Treasury Bonds: Volume, Price and Interest Rates

Sep-09 Dec-09 Mar-10 Jun-10 Sept-10
Stock of Treasury bonds (Shs. billion) 1,406.59 1,406.56 1,506.59 1,563.87 1,791.87
Change in stock (absolute) 45.00 0.00 100.00 57.28 228.00
Price and interest rates (percent)
2-year average price (Shs. /100) 92.71 96.10 0.00 103.10 102.80
3-year average price (Shs. /100) 91.12 0.00 96.72 102.89 101.69
5-year average price (Shs. /100) 88.16 95.73 107.75 107.28 105.27
10-year average price (Shs. /100) 0.00 80.92 94.66 0.00 101.34
2-year yield-to-maturity rate 14.31 12.26 0.00 8.28 8.45
3-year yield-to-maturity rate 13.98 0.00 11.58 9.13 9.59
5-year yield-to-maturity rate 14.13 12.67 8.80 8.89 9.41
10-year yield-to-maturity rate 0.00 14.70 12.09 0.00 10.78
Issues at face value (Shs. billion)
2-year 50.00 60.00 0.00 60.00 100.00
3-year 50.00 0.00 60.00 60.00 100.00
5-year 50.00 40.00 50.00 60.00 90.00
10-year 0.00 60.00 100.00 0.00 80.00
Total issues at face value 150.00 160.00 210.00 180.00 370.00
Total maturities 105.00 160.00 59.77 142.000 171.65
Total net issues at face value 45.00 0.00 150.23 8.35 258.553
Issues at cost value (Shs. billion)
2-year 46.36 57.66 0.00 61.86 102.80
3-year 45.56 0.00 58.03 61.73 101.69
5-year 44.08 38.29 53.85 64.37 94.74
10-year 0.00 48.55 47.33 0.00 81.06
Total issues at cost value 136.00 144.505 206.54 187.96 380.29
Source: Bank of Uganda

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Total trades of Treasury bills in the secondary market amounted to Shs. 464.9 billion in the
quarter ended September 2010, which was 60 percent higher than the value of trades in the
three months to June 2010. A total of Shs. 90.5 billion in horizontal repo transactions took
place during the quarter while the rest of the transactions were outright sales.

Secondary market trading in Treasury bills continued to grow owing to the continued active
use of the Horizontal Repo Agreement (HRA) to secure interbank loan transactions, the ease
with which securities can be transferred on the Central Depository System (CDS) and the
periodic ranking of primary dealers by the BOU, which motivates primary and secondary
market development. The yields to maturity on the 91-day paper rose to 4.3 percent from 3.8
percent in the previous quarter. On the other hand, the yields to maturity on the 182-day
and 364-day tenors declined to 4.9 percent and 5.6 percent during the quarter from
respective rates of 5.0 percent and 6.1 percent in the previous quarter reflecting
developments in the primary market. Table 4 provides a summary of indicators from the
secondary market of treasury bills.

Table 4: Summary of indicators from the secondary market of Treasury bills (July- September 2010)
91-days 182-days 364-days
Yield-to-maturity rates quotation (percent per annum)
Bid Offer Bid Offer Bid Offer
Minimum 3.54 3.43 4.48 4.33 5.18 4.91
Maximum 5.08 4.98 5.53 5.43 6.92 6.65
Average (simple)
4.33 4.15 5.01 4.83 5.86 5.69
Total trading activity Shs. 464.858 billion
Transactions (Shs billion) 258.180 81.770 124.907
- Horizontal repos 90.500 0.000 0.000
- Transfers 0.000 0.000 0.000
- Outright sales 30.815 79.589 124.907
Average discount rate 4.20% 4.79% 5.39%
Average yield-to-maturity 4.25% 4.88% 5.59%
Source: Bank of Uganda

In the secondary market of Treasury bonds, 2-year, 3-year, 5-year and 10-year tenor
securities worth Shs. 464.3 billion were traded. The total value of trades was much lower
than the Shs. 1,196.7 billion realised in June 2010. The average indicative bid/offer yields-to-
maturity were as indicated in the Table 5 below.

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Table 5: Summary indicators from the secondary market for Treasury bonds

Tenor of Bond
2-year 3-year 5-year 10-year
Yield-to-maturity quotation (percent per annum)
Bid Offer Bid Offer Bid Offer Bid Offer
Min 5.15 4.85 7.00 6.85 7.70 7.50 11.00 10.15
Max 8.25 8.00 8.60 8.45 9.55 9.35 12.60 12.40
Average 6.52 6.34 7.65 7.49 8.58 8.39 11.69 11.44
Source: Bank of Uganda

The BOU continued to use the vertical repo for short-term liquidity management. During the
quarter to September 2010, both repos and reverse repos were issued depending on the
existing liquidity conditions.

The interbank money market remained buoyant during the quarter to September 2010 with
commercial banks participating in the domestic inter-bank money market in order to
smoothen their daily liquidity fluctuations. Reflecting the underlying liquidity conditions in
the domestic money markets, the weighted average inter-bank money market rate rose from
2.7 percent in June 2010 to 3.0 percent in September 2010.

4.4 COMMERCIAL BANKS

The banking sector remained sound and strong in the period under review, with the ratio of
non- performing loans to total credit at 2.8 percent at the end of September 2010 compared
to 3.0 percent at end June 2010. Total assets of the banking sector grew by 5.4 percent from
Shs. 10,443.0 billion in June 2010 to Shs. 11,002.1 billion in September 2010. Commercial
banks’ NFA declined during the quarter to September 2010 mainly driven by declines in
total foreign assets, balances held in foreign banks and lending to non-residents. The
external assets of commercial banks declined by 8.2 percent from Shs. 1,335.7 billion in June
2010 to Shs. 1,226.3 billion in September 2010.

On the other hand, commercial banks’ NDA increased by 7.0 percent from Shs. 6,206.9
billion in June 2010 to Shs. 6,640.9 billion in September 2010 mainly driven by increases in
net claims on the central government (NCG) and credit to the private sector. NCG expanded
by 16.6 percent, driven by commercial banks’ investments in Treasury securities while loans
to the private sector grew by 6.8 percent in the quarter to September 2010. Credit to the
private sector grew on average by 6.9 percent for the last four quarters, an indication of
strong aggregate demand recovery. Figure 3 shows quarterly growth rates in private sector
credit while details of the balance sheet of commercial banks are shown in Table 6.

15
Figure 3: Private Sector Credit Growth Rates (Sept 2008 – Sept 2010)

12.00% 6000

10.00% 5000

8.00% 4000

Shs Billion
6.00% 3000

4.00% 2000

2.00% 1000

0.00% 0

Quarterly Growth Rates (%) Private Sector Credit Levels

Source: Bank of Uganda

Table 6: Key balance sheet items of commercial banks (in Shs. billion at end of period)
Change
Jun. 09 Sept. 09 Dec. 09 Mar. 10 Jun. 10 Sep. 10 Jun. 10 to Sep. 10
Absolute Percent
Net Foreign Assets 592.0 537.0 379.9 495.7 643.0 539.3 -103.8 -16.1
External Assets 1,141.6 1,064.2 944.2 1,221.0 1,335.7 1,226.3 -109.4 -8.2
Foreign Liabilities 549.7 527.1 564.4 725.3 692.7 687.1 -5.6 -0.8
Net Domestic Assets 4,460.2 4,555.2 5,035.4 5468.9 6,206.9 6,640.9 434.0 7.0
Claims on Central Government (net) 1,565.1 1,651.4 1,625.5 1,839.8 1,902.7 2,219.0 316.3 16.6
Claims on Private Sector 3,587.7 3,676.7 3,977.8 4,214.7 4,484.6 4,791.3 306.7 6.8
Cash in Vaults 223.3 233.8 265.5 249.7 295.8 323.8 28.1 9.5
Net Claims on Bank of Uganda 450.6 473.0 600.70 539.1 862.2 685.1 -177.1 -20.5
Other Items, Net -1,401.6 -1,537.4 -1,487.0 -1,419.6 -1,391.4 -1,410.8 -19.4 1.4

Total Deposits 5,052.2 5,092.2 5,415.3 5,964.6 6,849.9 7,180.0 330.2 4.8
Demand Deposits 1,732.7 1,816.9 1,925.6 2,057.1 2,345.7 2,388.2 42.5 1.8
Time and Savings Deposits 1,942.5 1,915.0 2,077.1 2,412.1 2,622.8 2,764.5 141.7 5.4
Foreign Exchange Accounts 1,376.9 1,360.2 1,412.6 1,495.4 1,881.4 2,027.4 330.2 4.8
Certificates of Deposits 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Source: Bank of Uganda

4.4.1 COMMERCIAL BANKS CREDIT TO THE PRIVATE SECTOR

Private sector credit continued to grow in the quarter ended September 2010, increasing by
6.8 percent compared to 6.4 percent in the previous quarter. This increase was mainly driven
by a significant rise in credit to the trade and commerce sector, which grew by 31.1 percent.
Loans to the building, mortgage and construction as well as business services sectors also
registered high increases. However, there was a decline in credit to other services and
personal loans as indicated in Table 7 below.

16
Table 7: Outstanding loans and advances by sector
Change
Amounts outstanding as at end of period in millions of shillings Absolute Percent
Sep.09 Dec.09 Mar.10 Jun.10 Sep.10 Share (%) Jun.10 Sep.10
Agriculture 205,113 208,424 258,095 292,597 308,087 6.4 15,490 5.3
Mining & Quarrying 15,055 9,537 6,540 37,533 45,183 0.9 7,650 20.4
Manufacturing 498,475 517,044 564,808 618,457 640,689 13.3 22,211 3.6
Trade 738,643 874,030 825,315 869,957 1,140,937 23.6 270,980 31.1
Transport & Communication 219,786 299,523 346,824 353,702 373,717 7.7 20,015 5.7
Electricity & Water 28,508 26,065 29,083 52,488 52,098 1.1 -390 -0.7
Building, Mortgage& Construction 617,466 639,332 771,014 845,284 939,671 19.5 94,388 11.2
Business services 120,554 146,792 191,056 4.0 44,264 30.2
Community, Social and other services 137,178 131415 153,418 3.2 22,003 16.7

Personal & Household loans 980,316 944,479 922,176 961,878 795,775 16.5 -166,103 -17.6
Other services 435,562 516,434 268,287 228,865 184,343 3.8 -44,522 -19.5
Total 3,738,924 4,034,867 4,260,875 4,538,969 4,824,954 100.0 285,985 6.3

Source: Bank of Uganda

4.4.2 COMMERCIAL BANKS’ DEPOSIT LIABILITIES

Total deposits held by commercial banks stood at Shs. 7,180.0 billion at end September 2010
from Shs. 6,849.9 billion at end June 2010 driven largely by rapid expansion in net domestic
assets. This represented an increase of 4.8 percent in the period June 2010 to September 2010
compared to an increase of 14.8 percent in the previous quarter. Foreign currency deposits
increased by 7.8 percent while shilling deposits grew by 3.7 percent reflecting an increase in
demand and term deposits of 1.8 percent and 5.8 percent, respectively, as shown in Figure 4
below.

Figure 4: Evolution of the stock of private sector deposits (Shs. billion, at end of period)

8000
7000
6000
5000
4000
3000
2000
1000
0
Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

Foreign currency Demand Time and savings Total Deposits

Source: Bank of Uganda

17
4.5 CREDIT INSTITUTIONS (CIs)
4.5.1 ASSETS
During the quarter ended September 2010, total assets of credit institutions increased by 1.7
percent to Shs. 133.9 billion from Shs. 131.8 billion in June 2010 mainly due to a rise in
outstanding loans and advances. CIs investments in government securities increased
marginally while balances with associated banks and companies declined by 6.2 percent
over the same period as indicated in Figure 5.

Figure 5: Assets of Credit Institutions (Shs. Billion)

160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0

Total Assets

Source: Bank of Uganda

4.5.2 COMPOSITION OF PRIVATE SECTOR CREDIT

The stock of outstanding loans and advances to the private sector grew by 8.3 percent
compared to an increase of 4.3 percent in the previous quarter. The trade and commerce
sector continued to account for the largest share of credit (36.7 percent) during the quarter
under review, reflecting the profitable nature and the low perceived risk of the sector. Table
8 shows the sectoral distribution of credit to the private sector.

Table 8: Composition of Credit Institutions Credit by Sector (Billions of Shillings)

Change
Jun. 09 Sept. 09 Dec. 09 Mar. 10 Jun. 10 Sep. 10 Jun.10 to Sep.10
Absolute Percent
Agriculture 0.8 2.2 2.4 2.3 2.3 2.8 0.5 22.7
Manufacturing 0.1 0.8 0.5 0.4 0.2 0.3 0.1 24.6
Trade & Commerce 11.4 21.7 25.6 24.8 25.5 27.0 1.5 6.0
Transport & Utilities 2.4 5.2 5.0 4.8 4.3 4.8 0.5 11.2
Building & Construction 0.7 4.1 5.3 6.4 7.1 8.3 1.2 17.2
Other services & Personal Loans 37.2 24.2 24.5 26.4 28.4 30.1 1.7 6.0
Total 52.6 58.2 63.5 65.2 68.0 73.6 5.6 8.3
Source: Bank of Uganda

18
4.5.3 COMPOSITION OF THE LIQUID ASSETS OF CIs
In the quarter to September 2010, liquid assets of credit institutions declined by 11.9 percent
following an 18.3 percent increase recorded in June 2010. This decline resulted mainly from a
fall in deposits with financial institutions in Uganda. The developments in the liquidity
indicators of credit institutions are summarized in Figure 6 below.

Figure 6: Liquidity indicators of CI’s (Shs. billion, at end period)

45.0
40.0
35.0
30.0
25.0
Ushs. Billions

20.0
15.0
10.0
5.0
0.0
Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

Balances with financial institutions in Uganda Investments in government securities Notes and Coins

Source: Bank of Uganda

4.5.4 DEPOSIT LIABILITIES

In the quarter to September 2010, total deposits grew by 2.0 percent compared to an increase
of 9.4 percent in the previous quarter. The increase in total deposits was mainly attributed to
an increase in savings deposits. Figure 7 shows the composition of the deposit liabilities of
credit institutions on a quarterly basis.
Figure 7: Deposit Liabilities of Credit Institutions

100.0
90.0
80.0
70.0
Ushs. Billions

60.0
50.0
40.0
30.0
20.0
10.0
0.0
Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

Savings Deposits Time Deposits Other Deposits ( Loans Insurance/Compulsory Savings) Accrued Interest

Source: Bank of Uganda

19
4.6 MICROFINANCE DEPOSIT TAKING INSTITUTIONS (MDIS)

4.6.1 ASSETS
Total assets of MDIs grew by 8.3 percent to Shs.150.5 billion at end September 2010 from
Shs. 142.2 billion in the previous quarter mainly driven by an increase in loans advanced to
the private sector and deposits held with financial institutions in Uganda. MDIs’ investment
in government securities declined to Shs. 1.4 billion from Shs. 9.7 billion in June 2010 as
shown in Figure 8. This decline was attributed to a shift by some MDIs from investments in
government securities to fixed deposits since fixed deposits were offering better returns.

Figure 8: Assets of MDIs (Shs. Billion)

250.0

200.0

150.0

100.0

50.0

0.0

Total Assets

Source: Bank of Uganda

Credit to the private sector continued to expand in the quarter to September 2010. Total
outstanding credit, increased by 8.8 percent during the quarter following a 6.9 percent
growth registered in the three months to June 2010 mainly driven by a significant rise in
loans to the trade and commerce sector. This sector continued to absorb the bulk of credit
extended by MDIs, accounting for 71.1 percent of total outstanding credit in September 2010.
Table 9 shows the structure of outstanding credit extended by MDIs.

20
Table 9: Distribution of MDIs Credit by Sector (Shs. Billions)
Change
Jun. 09 Sept. 09 Dec. 09 Mar. 10 Jun. 10 Sep.10 Jun.10 to Sep.10
Absolute Percent
Agriculture 5.34 4.94 4.93 5.43 6.47 6.98 0.5 8.0
Manufacturing 2.14 0.97 0.93 2.10 2.07 2.85 0.8 37.3
Trade & Commerce 72.42 71.67 70.38 71.42 71.15 76.90 5.7 8.1
Transport & Utilities 3.78 3.85 3.91 3.99 4.45 6.61 2.2 48.7
Building & Construction 1.97 2.01 2.07 2.12 3.38 3.89 0.5 14.9
Other services 8.20 9.44 10.45 11.19 11.81 10.85 -1.0 -8.1
Total 93.85 92.90 92.68 96.26 99.33 108.08 8.8 8.8
Source: Bank of Uganda

4.6.2 DEPOSIT LIABILITIES

Total private sector deposits held by the MDIs grew by 12.5 percent between June 2010 and
September 2010, compared to growth rates of 24.7 percent and 1.7 percent observed in the
previous quarter and in the quarter ended September 2009, respectively. Saving and time
deposits increased by 10.1 percent and 30.9 percent, respectively during the quarter ended
September 2010. Figure 9 shows the deposit liabilities of MDIs.

Figure 9: Deposit liabilities of MDIs (June 2009-September 2010)

50.00

45.00

40.00

35.00
UShs. Billion

30.00

25.00

20.00

15.00

10.00

5.00

0.00
Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

Savings Deposits Loan Insurance Fund Time Deposits

Source: Bank of Uganda

4.7 UGANDA’S EQUITY MARKET

Trading statistics from the Uganda Securities Exchange (USE) revealed a decline in
performance during the three months to September 2010. The number of deals declined to
1,053 from 1,460 in the previous quarter. The number of shares traded also declined to 23.1
million from 65.8 million in the previous quarter. Total shares traded picked up in the last

21
two months of the quarter but were low in July 2010 as traders were unable to participate in
the market before immobilising1 their shares. Reflecting these developments, the total
turnover declined to Shs. 3.9 billion from Shs. 8.5 billion recorded in the quarter ended June
2010. The USE All Shares Index (ALSI) maintained a stable upward trend throughout the
quarter, posting 1,022.01 in July 2010 and 1,060.29 in August 2010. In September 2010, the
ALSI closed at 1,117.90, its highest level since 2008, reflecting a rise in equity prices. British
American Tobacco Uganda (BATU) registered the highest increase in price rising to Shs. 700
from Shs. 330 in the previous quarter. Table 10 shows the developments in the Uganda
equity market, while Figure 10 provides a trend of the all share index at the Uganda
Securities Exchange.

Table 10: Trading at the Uganda Securities Exchange

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10

Number of Shares
Traded 44,293,519 14,067,002 7,248,654 4,940,202 9,692,626 8,423,935
Turnover (Shs. billion)
5.15 2.41 0.91 1.02 1.18 1.74
Market Cap (Shs. billion,
Closing) 9,550 9,812 9,992 9,974 10,744 11,311
USE All Share Index
(Closing) 982.10 1,005.43 1,023.82 1,022.01 1,060.29 1,117.90
Source: Uganda Securities Exchange

Figure 10: Trading at the Uganda Securities Exchange

12,000 1,800

ALSI (Sept 07 = 100); Daily Turnover

1,600
Market Cap (Shs billion, closing

10,000
1,400

8,000 1,200

1,000
6,000
800

4,000 600

400
2,000
200

0 0

Market Cap (Shs billion, Closing) Daily Average Turnover (Shs. Million, closing)
USE All Share Index (Closing)

Source: Uganda Securities Exchange

1Immobilization is the process through which securities held in certificate form are deposited into
corresponding clients’ accounts in the Securities Central Depository.

22
5 DOMESTIC PRICES

5.1 CONSUMER PRICES

Inflationary pressures in the quarter to September 2010 were quite subdued. Annual
headline inflation declined significantly from 4.2 percent in June 2010 to 0.3 percent in
September. This decline was mainly driven by lower prices of food crops compared to the
peak levels observed in September 2009. Food crop inflation declined to minus 17.6 percent
in September 2010 from 3.5 percent in June 2010.

Core inflation, which excludes food, energy and utilities inflation, declined to 4.1 percent in
September 2010 from 4.5 percent in June 2010. Core prices which had been stagnant since
May 2010 declined significantly in August 2010 to 4.0 percent and increased marginally to
4.1 percent in September 2010. Annual electricity, fuel and utilities (EFU) inflation also
decreased to 1.3 percent in July 2010 from 3.9 percent in June 2010 before increasing to 2.1
percent in September 2010. The increase in EFU inflation in September 2010 was attributed
to higher prices of fuel and charcoal. Fuel pump prices were driven up by the increase in the
international crude oil prices at the beginning of the quarter followed by disruptions to
supplies into Uganda from Kenya in September 2010. Developments in the consumer price
inflation are as indicated in Figure 11 below.

Figure 11: Developments in Consumer Inflation from September 2008 to September 2010

60.0
50.0
40.0
Annual Inflation ( %)

30.0
20.0
10.0
0.0
-10.0
-20.0
-30.0

Headline Core EFU Food Crops

Source: Bank of Uganda

23
5.2 PRODUCER PRICE INDEX (PPI)

During the twelve months to September 2010, the annual combined Producer Price Index for
the manufacturing sector2 (PPI-M) increased by 9.3 percent due to a general rise in prices in
all sectors except paper products. Drinks and tobacco, textiles, clothing and footwear as well
as food products, registered the highest annual increases of 14.2 percent, 13.3 percent and
11.1 percent, respectively.

On a quarter-on-quarter basis, producer prices rose by 3.2 percent in the quarter to

September 2010 following a 2.8 percent rise registered in the previous quarter due to a
general rise in prices in all sectors except textiles, clothing and footwear, which dropped by
3.2 percent. Chemicals, paint, soap and foam as well as food products reported the highest
price increases of 6.9 percent and 4.7 percent, respectively.

During the quarter ended September 2010, prices of export products rose by 7.8 percent,
having increased by 3.8 percent in the previous quarter. This rise in prices was mainly
attributed to the depreciation of the shilling on a period average basis from Shs. 2,171.7 per
U.S. dollar in the quarter to June 2010 to Shs. 2,246.5 per U.S. dollar in the quarter to
September 2010.

Prices of goods produced for the local market rose by 1.4 percent in the quarter to September
2010, following a 2.4 percent rise in the previous quarter. This was mainly due to a general
increase in prices of all subsectors except drinks and tobacco and textiles, clothing and
footwear in which prices fell by 2.4 percent and 0.5 percent, respectively. Figure 12 shows
the developments in the annual producer price index.

2 This is a combined index of prices of products produced for the local and exports markets. It measures the
relative prices received by domestic producers on their products sold in the local and exports markets.

24
Figure 12: Trend of Annual Producer Price Inflation; Sept 2007 – Sept 2010

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

-5.0

Combined Local Exports

Source: Uganda Bureau of Statistics

6 EXCHANGE RATES AND BALANCE OF PAYMENTS

6.1 EXCHANGE RATES

The shilling opened trading at Shs. 2,274.6 per U.S. dollar in July 2010 and closed at Shs.
2,244.1 per U.S. dollar in September 2010, a slight appreciation of 0.01 percent. The global
developments had a strong influence on the exchange rate. The weakening of the U.S. dollar
in the third quarter of 2010 had a dominant impact on the shilling. The dollar weakened
mainly due to the fragility of the U.S. economic recovery and anticipation of further
quantitative easing by the Federal Reserve. However, the dollar impact was offset by
domestic developments especially in the month of September, which among other things
included commercial banks covering their short dollar positions and increased demand from
the energy and telecommunication sectors. This resulted into the shilling depreciating on an
average basis by 3.4 percent from Shs. 2,171.7 per U.S. dollar in the quarter ended June 2010
to Shs. 2246.5 per U.S. dollar in the quarter ended September 2010.

During the period under review, the BOU intervened on both sides of the market resulting
in a net purchase of US$ 32.7 million, compared to a net purchase of US$ 33.9 million in the
preceding quarter. The BOU suspended the daily sales of US$ 0.1 million to the interbank
foreign exchange market (IFEM) for liquidity sterilization purposes in the quarter ended
September 2010 and commenced daily purchases of US$ 0.5 million in August in a strategic
bid to build reserves.

25
The nominal effective exchange rate (NEER) depreciated by 6.6 percent during the quarter to
September 2010, compared to a depreciation of 5.2 percent observed in the previous quarter.
As a result of the developments in the NEER and the inflation differential, the real effective
exchange rate (REER) depreciated by 7.5 percent in the quarter ended September 2010,
compared to a depreciation of 5.2 percent recorded in the previous quarter as shown in
Figure 13.

Figure 13: Exchange rate developments: January 2005 to September 2010

150.00 2,300

2,200
140.00

2,100
130.00

2,000

Ushs per US$

NEER/REER

120.00
1,900
110.00
1,800

100.00
1,700

90.00
1,600

80.00 1,500
May-05

May-06

May-07

May-08

May-09

May-10
Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10
Nov-05

Nov-06

Nov-07

Nov-08

Nov-09
Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10
Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10
NEER INDEX 2005/06=100 REER INDEX 2005/06=100

Source: Bank of Uganda

6.2 BALANCE OF PAYMENTS

The overall balance of payments performance during the quarter ended September 2010
improved to a deficit of US$ 95.4 million from the deficit of US$ 121.1 million recorded in the
previous quarter. However, the overall balance of payments deteriorated when compared to
a surplus of US$ 295.5 million recorded the quarter ended September 2009.

This deterioration in the balance of payments, relative to the third quarter of 2009, was on
account of developments in both the current and capital accounts of the balance of
payments. In the capital account, there was a surplus of US$ 98.7 million during the third
quarter of 2010 compared to a surplus of US$ 607.7 million in the corresponding quarter of
2009. The large decrease was mainly due to the one-off SDR allocation of US$ 224 million to
the BOU from the International Monetary Fund (IMF) in third quarter of 2009 that did not
re-occur during the quarter to September of 2010. In addition, there was a reduction in net
foreign capital inflows to government in the quarter ended September 2010 to US$ 24.2

26
million compared to US$ 146.8 million reported in the same quarter of 2009. The decline in
the foreign capital inflows was mainly due to the delayed budget support disbursement of a
World Bank loan of about US$100 million. Furthermore, there was a net sale of equities held
by non-residents to residents of about US$79.4 million that resulted in higher portfolio
investment outflows during the quarter compared to the same quarter a year ago.

The current account deteriorated to a deficit of US$312.8 million compared to the deficit of
US$292.2 million recorded in the corresponding quarter of 2009. The increase in the current
account deficit was due to higher imports of goods and services. Imports of goods increased
by US$ 80.4 million, to US$ 1,012.0 million compared to imports worth US$931.6 million in
the third quarter of 2009. Similarly, service imports were estimated at US$443.6 million, an
increase of US$58.4 million compared to the service import bill of US$385.2 million recorded
in the quarter to September 2009. There was an increase in current transfer inflows to
US$498.8 million during the quarter compared to the estimate of US$361.6 million in the
same quarter of 2009/10 mainly due to higher inflows to government.

Other events in the balance of payments during the quarter to September 2010 included a
stable trend in the net payments on foreign investment reflected in the income account
deficit of US$81.8 million compared to a deficit of US$88.0 million in the third quarter of
2009. Exports proceeds of goods fell from US$559.1 million recorded in the quarter ended
September 2009 to US$510.1 million as export prices remained weak. In addition to the low
export prices, there was a substantial revision to the informal cross border trade exports that
contributed to a general downward revision of aggregate exports. The downward revision
to informal cross border trade statistics was done jointly with the Uganda Bureau of
Statistics and corrected informal exports to Sudan that had been overstated in previous
reports.

The developments on the current and capital accounts of the balance of payments during the
quarter resulted in an overall drawdown of foreign reserves excluding valuation gains and
losses estimated at US$93.4 million compared the build-up of US$283.3 million that was
recorded in quarter ended September 2009. In stock levels, the reserves amounted to
US$2,716.8 million, which was sufficient to cover 5.0 months of future import demand for

27
goods and services. The summary of the balance of payments statement is provided in Table
113 below.

Table 11: Developments in the Balance of Payments (US$ million)

Jul - Sep Oct-Dec Jan - Mar Apr-Jun Jul-Sep
2009/10 2009/10 2009/10 2009/10 2010/11
A. Current Account Balance -292.17 -246.62 -406.40 -678.64 -312.82
A1. Goods Account (Trade Balance) -372.47 -332.29 -400.63 -578.45 -501.96
a) Total Exports (fob) 559.11 647.44 601.70 522.80 510.05
b) Total Imports (fob) -931.58 -979.72 -1,002.33 -1,101.25 -1,012.01
A2. Services Account (services net) -102.84 -140.89 -233.26 -242.80 -132.77
a) Inflows (credit) 282.34 259.77 214.92 235.04 310.85
b) Outflows (debit) -385.18 -400.65 -448.16 -477.83 -443.62
A3. Income Account (Income net) -87.99 -67.58 -79.37 -77.03 -81.77
a) Inflows (credit) 6.28 8.75 4.55 5.52 5.32
b) Outflows (debit) -94.28 -76.33 -83.92 -82.55 -87.09
A4. Current Transfers (net) 271.12 294.13 306.86 269.40 403.68
a) Inflows (credit) 361.62 405.46 415.00 369.91 498.80
b) Outflows (debit) -90.50 -111.33 -108.15 -100.51 -95.12
B. Capital & Financial Account Balance 607.66 358.15 345.61 181.82 98.68
B1. Capital Account 0.00 0.00 0.00 0.00 0.00
a) Capital Transfers, inflows (credit) 0.00 0.00 0.00 0.00 0.00
b) Capital Transfers, outflows (debit) 0.00 0.00 0.00 0.00 0.00
c) Non-produced nonfinancial assets (credit) 0.00 0.00 0.00 0.00 0.00
d) Non-produced nonfinancial assets (debit) 0.00 0.00 0.00 0.00 0.00
B2. Financial Account; excl financing items 607.66 358.15 345.61 181.82 98.68
a) Direct Investment 150.94 150.94 173.15 173.15 170.87
i) Direct investment abroad 0.00 0.00 0.00 0.00 0.00
ii) Direct investment in Uganda 150.94 150.94 173.15 173.15 170.87
b) Portfolio Investment -1.83 -2.21 -18.08 -17.86 -81.51
Assets 0.00 0.00 0.00 0.00 0.00
Equity Securities 0.00 0.00 0.00 0.00 0.00
Debt Securities 0.00 0.00 0.00 0.00 0.00
Liabilities -1.83 -2.21 -18.08 -17.86 -81.51
Equity Securities -0.14 0.54 0.19 -0.04 -79.38
Debt Securities -1.68 -2.75 -18.27 -17.82 -2.14
c) Financial Derivatives (Net) -2.35 -2.33 -0.37 -0.30 -0.55
d) Other Investment 460.90 211.76 190.91 26.84 9.88
Assets 39.56 107.42 -80.12 -43.40 -57.85
Monetary authorities 0.00 0.00 0.00 0.00 0.00
General government 8.64 28.19 26.84 7.68 -106.18
Banks 38.91 64.23 -132.97 -51.09 48.34
Other sectors -8.00 15.00 26.00 0.00 0.00
Liabilities 421.29 104.34 271.04 70.24 67.72
Monetary authorities 224.00 0.00 0.00 0.00 0.00
General government 146.79 21.25 115.00 20.43 24.15
Banks -10.95 19.79 73.56 -20.03 -2.86
Other sectors 61.50 63.30 82.47 69.84 46.44
C. Errors & Omissions -19.99 -69.07 54.80 325.94 118.72
C. Overall Balance (A + B +C) 295.51 42.47 -5.98 -121.10 -95.41
D. Reserves & Related Items -295.51 -42.47 5.98 121.10 95.41
a) Reserve assets -283.33 -43.04 7.47 120.64 93.36
b) Use of Fund credit and loans 0.00 0.00 0.00 0.00 0.00
c) Exceptional Financing -12.18 0.58 -1.48 0.47 2.05
Source: Bank of Uganda

3The data was revised to reflect most recent outturns and new assumptions. Changes are mainly due to revisions
on export data on account of new information on informal cross border trade (ICBT) and non-coffee exports.

28
7 CONCLUDING REMARKS AND MONETARY POLICY OUTLOOK

The Ugandan economy looks poised for recovery from the slowdown associated with the
global financial crisis and recession. Forecasts indicate that inflation might increase as
aggregate demand strengthens further and in part due to concerns related to rising world
commodity prices as well as tensions in the financial markets. All measures indicate that
aggregate demand is rebounding. The 2010/11 government budget deficit, which will
require a substantial level of domestic financing, will inevitably push up interest rates
during the course of the year. The exchange rate will continue to be influenced by
conditions in the global currency markets and domestic factors.

However, BOU will pursue a cautious monetary policy stance in order to contain core
inflation within the 5.0 percent target, while at the same time supporting the restoration of
aggregate demand. The near term inflation forecast will continue to drive monetary policy
decisions going forward. The BOU will also closely monitor the growth of monetary
aggregates and will take measures to curtail excessive growth, which could have
implications for future inflation.

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