Excess money supply: Prospects for prices and spending growth in Uganda.

While prominent economists, civil society organizations, and media outlets often describe Uganda’s money supply as low and well-managed, recent data suggest otherwise. In February 2026, broad money (M3) grew at an annual rate of 20.3%, levels last seen during the COVID-19 period. This surge risks fueling future inflationary pressures and unstable nominal demand, even though current headline inflation remains subdued at around 2.8–2.9%.

The money gap, defined as the deviation of actual broad money growth from the benchmark rate needed for macroeconomic stability, offers a clearer lens than the conventional interest-rate focus. This benchmark (approximately 11.3%) is a monetarist-derived rate equal to Uganda’s estimated potential real GDP growth plus the Bank of Uganda’s 5% medium-term inflation target. Positive gaps signal excess money creation; negative gaps indicate shortfalls.

Chart 1: Money gap and Spending

Chart 1 reveals a persistent pattern: large positive money gaps (especially the sharp spikes in late 2025 and early 2026) consistently coincide with accelerations in nominal spending growth. Conversely, periods when the gap turns negative align with weaker or decelerating spending. This co-movement is not coincidental. It reflects the core monetarist mechanism of disequilibrium adjustment: excess money eventually spills into higher nominal demand. The volatility in both series further illustrates that unstable monetary growth breeds unstable spending.

The transmission of excess money to the real economy works less through bond yields or the central bank policy rate (held at 9.75%) and more powerfully through variable-income assets such as residential property and equities, whose returns tend to rise with nominal GDP. Excess liquidity first boosts demand for these assets, lifting their prices and generating wealth effects that stimulate additional consumption and investment.

Chart 2 confirms this dynamic. The money gap and Ugandan house price inflation move closely together. When the gap widened dramatically into positive territory in late 2025 (with extreme spikes approaching +35 in some readings), residential property price growth accelerated markedly. After running at modest rates of 4–6% for much of 2024–early 2025, year-on-year house price inflation reached 9.2% by Q2 FY2025/26 and has since trended toward 10–11%. These wealth effects then amplify aggregate nominal spending and, with variable lags of 6–18 months, feed into the broader price level.

Chart 2: Money gap and House prices

The recent M3 surge has sustained strong economic momentum, as evidenced by 8.5% year-over-year real GDP growth in Q2 FY2025/26, driven by robust household consumption and investment. The Bank of Uganda and many observers rightly note that current inflation (around 2.8% in March 2026) remains well below target, allowing accommodative policy to support growth amid favorable external conditions and upcoming oil production.

However, monetary effects on prices and spending typically operate with lags. The large positive money gap now evident, driven by accelerated M3 expansion reaching annualized rates near 18–20% in late 2025, is poised to exert further upward pressure on asset prices, nominal demand, and, eventually, the general price level in the coming quarters. Unless this excess growth is reined in, the economy faces heightened risks of accelerating inflation and more volatile spending, even if real output gains moderate amid rising price pressures.

Monitoring the money gap and its transmission through variable-income assets offers a more reliable early-warning system for nominal demand and inflation risks than a narrow focus on short-term interest rates. For sustained stability, the Bank of Uganda should prioritize anchoring broad money growth closer to the 11.3% benchmark.