Will reduced domestic borrowing lead to lower interest rates?

Mr Bosco Ogwang is a businessman in Gulu Town who has been watching the release of the Central Bank Rate (CBR) once every two months

Select notes of the Uganda currency. The writer wonders whether reduced domestic borrowing on the part of government will deliver the country to lower interest rates. FILE PHOTO 

BY Mark Keith Muhumuza


View. The reason a bank can’t lend to a person like me is because they have their money parked somewhere is Treasury Bills and Bonds where they get risk free returns - Andrew Rugasira, CEO Good African Coffee.


Kampala. Mr Bosco Ogwang is a businessman in Gulu Town who has been watching the release of the Central Bank Rate (CBR) once every two months. His interest, as he explained on the sidelines of a town-hall meeting hosted by Bank of Uganda (BoU) at the Acholi Inn in Gulu, was to know when it would be a good time to start borrowing again.
“You see we have been wondering why the CBR is at 15 per cent yet my bank tells me I can borrow at 30 per cent. Why is the margin so high?” He wonders.
This has been a predominant question the people have continued to ask BoU to answer at the town hall meetings in Gulu and Mbale.
In early June the Monetary Policy Statement issued by the BoU Governor Emmanuel Tumusiime-Mutebile, further eased the CBR to 15 per cent in a move meant to stimulate the economy. The business community has been keenly watching the trend, especially that for the last two statements, BoU has been easing on interest rates.

“Given the lower inflation projections, it was appropriate for monetary policy to be stimulatory to support the economic activity,” reads the June 2016 State of the Economy report.
However, even with BoU’s moves to reduce the CBR, there seems to be a reason why commercial banks are keeping their rates at much higher levels.
“Lending rates remain elevated, notwithstanding the marginal easing of the monetary policy stance in April, in part reflecting provisioning for bad debt, lagged impact of the tight monetary policy stance and structural rigidities in the financial sector, including the high cost of doing business,” the report further reads.

In explaining to the hundreds who showed up at the town hall meetings in Gulu and Mbale, Dr Louis Kasekende, the deputy governor BoU, referred to this phenomenon as the cost of money that has been on the high-side.
The rates being offered by commercial banks have essentially turned away customers, which explain the complete slowdown in borrowing. BoU statistics indicate that at the end of April 2016, the private sector borrowing had grown by 9.8 per cent compared to 24 per cent in the first three months of 2015/16. The bankers believe that there will be a gradual process in interest rates.

“The further drop in the CBR by 1 per cent is a welcome one and we expect that this will support a rebound in private sector credit growth and also ease the pressure on the high-interest rates on borrowing clients,” Mr Samuel Fredrick Mwogeza, chief financial officer, Stanbic Bank Uganda told Daily Monitor in an interview recently.
The government is also, however, riding on another factor to revive private sector credit growth; the slowed government borrowing in 2016/17. The government expects slowdown domestic borrowing to Shs612 billion in the current financial year from Shs1.4 trillion in 2015/16.
“We (government) have to reduce the competition for money with the private sector. Businesses have been crowded out by continued government borrowing,” Mr Gabriel Ajedra, State minister for General Duties said on the sidelines of the meeting in Gulu.

However, for now, that may not be the case since interest rates are still on the high side. In the State of the Economy Report, BoU does indicate that the government is borrowing at much lower rates.
“Yields on government securities declined between February and May 2016, on account of the return to stability following the conclusion of the presidential and parliamentary elections, announced a reduction in domestic financing and lower inflation expectations,” the report reads.

Effect on SMEs
SMEs that require loans to expand have been affected the most by the high-interest rates. The June 2016 State of the Economy report reads: “During this period, there was also a significant drop in loans to the business services sector, which is largely comprised of SMEs that are deemed “riskier” customers. Lending to the manufacturing, trade, and building & construction sectors also slowed significantly during the course of the year.


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