Private sector credit capacity still not strong enough - IMF
Posted Thursday, July 3 2014 at 01:00
Reason. Stance has been attributed to excessive government borrowing and high interest rates.
The International Monetary Fund (IMF) has cautioned that private sector credit in Uganda is still constrained despite policy actions by the government aimed at revamping the economy.
This largely means that commercial banks’ lending to the private sector to support high scale activities in the economy is not strong enough to help Uganda economy to grow at its potential level of 7 per cent per annum.
The conclusion was reached recently after the IMF executive board had completed the second review of Uganda’s economic performance under the programme supported by the Policy Support Instrument (PSI) in Washington DC.
The board in their assessment said Uganda’s recent economic performance has been largely satisfactory with robust growth, low inflation and strong international reserves.
However, Mr David Lipton, the deputy managing director of the IMF, said government spending has expanded beyond the programme ceiling, while private sector credit growth has remained limited.
In the short term, the government’s monetary policy is expected to focus on offsetting the recent tax revenue shortfall by significantly strengthening collection.
Mr Lipton said: “Resisting spending pressures, limiting domestic borrowing to programmed levels, and curbing the use of supplementary budgets will allow implementation of important infrastructure projects and social programmes.”
He observed that significant progress has been achieved in institutional reforms, with authorities implementing sound public financial management reforms.
PSI for Uganda
The IMF executive board approved the Policy Support Instrument (PSI) for Uganda on June 28 2013. The IMF’s framework for PSIs is designed for low-income countries that may not need, or want IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies. PSIs are voluntary and demand driven.
Private sector take on limited credit growth
The Executive director of Private Sector Foundation Uganda, Mr Gideon Badagawa, told the Daily Monitor in an interview yesterday that the reason why the private sector credit growth is still inhibited is because of the excessive government borrowing from the domestic money market.
“Excessive public borrowing from the commercial banks for consumption expenditure is crowding out private sector credit growth and is the reason why the private sector credit is still constrained,” he said.
In the previous financial year ending June, the government borrowed shilling 1.7 trillion from the domestic market to finance its fiscal operations due to a short fall in domestic revenue and donor aid cuts.
This financial year the government announced that it will borrow up to Shs1.4 trillion from the domestic money market. Mr Badagawa said the government is borrowing the money which would have been lent to the private sector.