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The Central Bank is calling for the nurturing of a competitive export sector base and investments in labour intensive manufacturing to create jobs.
Deputy Central Bank governor Louis Kasekende says growth has slackened in the last few years due to the weak demand in the economy both local and globally, but more can be down to reverse the situation.
"You can clearly see that we are below our potential," said Kasekende speaking as chief guest during MTN's annual results announcement last week.
He said the Central Bank's efforts that have born fruit and seen inflation drop to about 5% would be maintained.
"We will not suffer a repeat of the spike in inflation that took place in 2011 and we (should) return to the 6-7% growth rates," said Kasekende.
The economy underwent a robust boom in the 2000s, averaging GDP growth of 7.9%.
The leading sectors during this boom were telecoms and financial services sector, which averaged double digit growth. But Kasekende observed that despite the boom of the two sectors, they are not mass job creators.
"Telecoms have done well but the skills sets needed are very high compared to agriculture," said Kasekende. He said even if the country has built a reasonable foreign exchange reserve, now at about $3b (about three quaters of our national budget), there is need to do more.
"For the first time in our history, we have reserves of $3b, it is a buffer to the Central Bank to ride through a shock and manage the exchange rates," observed Kasekende.
During this boom time, Kasekende noted that the share of agriculture to GDP growth decreased, while services share shot up as a share of GDP, to about 50%.
But this has been reversed since 2008 to 2009, with real GDP growth slowing as global markets slackened and domestic supply declined. Real growth fell to 3.4%.
The economic challenge has been compounded by the problems in the private sector, with bank lending remaining stagnant for the last 18 months.
He advised that one of the solutions to containing the unattractive cost of credit is to work on the high cost of doing business, as well as reforms in the pensions sector that would free up lots of the cash in the NSSF.
He also urged banks to respond to the Central Bank's cutting of the indicative central bank rate which has fallen by 11% points.
"Unfortunately, commercial banks have been slow in decreasing rates, the average lending rates remain at 24% in January 2013," said Kasekende. He explained that real rates are at 17-19% if you deduct the 5% wiped off by inflation, which he says are very high for any economy.
He said because of this unattractive cost of credit, some borrowers have turned to forex loans "which is in itself dangerous if your income is in shillings."
Inflation has stabilised at about 5%.
"We aim to hold core inflation at this level in the medium term. In the very short term, there maybe a slight increase, but we will not allow it to remain persistently at above 5%," said Kasekende.
He says if inflation were to rise again, the Central Bank would be left with no alternative but to tighten the monetary policy.
During this time, the currency has also depreciated by 6%, while the trade balance has narrowed.
He urged firms and the Government agencies to embrace technology and leverage it to spur growth
The New Vision Newspaper
18 March 2013
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