How BoU shielded firms from Covid-19 shocks

2021 was a challenging year for businesses and the economy, pushing Bank of Uganda to extend its credit reief measures to September 2021.These measures were further extended for borrowers in education and hospitality sectors to September 2022. The Deputy Governor Bank of Uganda, Dr Michael Atingi-Ego expounds on what shaped the  economy in 2021 in an interview with Martin Luther Oketch.

1. What key economic issues made the economy resilient during 2021? 

With Covid-19 positivity rates increasing as a new wave hit Uganda beginning in May 2021, the government introduced another lockdown about a year after the first lockdown on March 30, 2020. While the second lockdown constrained economic activity, the negative impact was not as strong as that of the first lockdown since international borders remained open to the movement of cargo and there was some resumption of tourism activities. To support the economic recovery from the Covid-19 shocks, the public sector implemented strong and coordinated fiscal and monetary policies and provided support instruments through the Bank of Uganda (BoU) and the Ministry of Finance.

The BoU and Finance Ministry adopted expansionary monetary and fiscal policies, respectively, at the onset of Covid-19 in 2020 through 2021. The BoU, for instance, lowered the Central Bank Rate (CBR) by a cumulative 250 basis points to 6.5 pecent since April 2020. The accommodative monetary policy, in part, led to the lowering of the cost of borrowing. Lending rates declined from an average of 21 percent in May to July 2020 to 17.6 percent in May –July 2021.

The BoU intervened in the foreign exchange market to smoothen out excessive volatility in late March 2020 and, recently, in September - October 2021. Also, the Bank put in place macro-prudential policy support instruments to strengthen capital buffers for financial institutions and safeguard the stability of the financial system, which in turn would support economic recovery after the Covid-19 pandemic shock.

The policy support instruments included:

• The Covid-19 Liquidity Assistance Programme (CLAP) to financial institutions, which started in 2020 has been maintained through 2021.
• Restriction on payment of dividends and other discretionary payments by financial institutions to shareholders.
• The Credit Relief Measures (CRMs), which were extended in April 2021 for six months to September 2021. The CRMs provided a much-needed cushion for borrowers against the effects of Covid-19.

The CRMs were further extended for the education and hospitality sectors with effect from October 2021 for 12 months to September 2022. The extension allows one restructuring of credit exposures in the education and hospitality sectors, in form of repayment moratoriums, the extension of the tenor of loans, reduction of principal loan repayment, reduction of applicable interest rates or a combination of all. The CRMs have prevented the deterioration of asset quality among the supervised financial institutions. The ratio of non-performing loans to total loans has averaged 4.8-5.4 percent from March to September 2021, lower than the 6.0 percent observed in June 2020.

On the other hand, the government increased spending in 2021 towards critical sectorsto revive the economy. The measures included the following:

• More funding to the health sector for medical equipment, masks, test kits, and vaccines.
• Provision of food to vulnerable households and funding for agriculture inputs and entities that support the sector.
• Support to employment through the Emyooga initiative.
• Support to small and medium enterprises (SMEs), including waiver of interest on tax arrears, deferred payments of Pay As You Earn (PAYE) and corporate income taxes, and the expedited repayment of VAT refunds.
• Clearance of arrears.

2.  Which sectors of the economy helped the country to withstand economic shocks that emerged externally and internally?

In Financial Year 2020/21, the agriculture sector supported by good weather and government support for inputs kept the economy resilient during the Covid-19 pandemic, while the services sector particularly, tourism and transportation were severely affected by the pandemic. The growth in the industry sector was driven by a strong performance by the manufacturing sub-sector while in the services sector the growth was similar to that in the previous year supported by strong growth in health-related activities and information and communication. In addition, the easing of some pandemic-related restrictions resulted in a modest recovery of the other services sub-sectors, including, accommodation and food services, transport and storage, and trade and repairs...

3. In what ways has the record reduction in the Central Bank Rate supported the economy?

The reduction in the CBR has contributed to lowering the cost of funds for banks, the government and borrowers. In 2021, the CBR was left unchanged at 7 percent for the first five months and, thereafter, reduced to 6.5 percent in June 2021. Accordingly, the seven-day weighted average interbank rate—the rate at which banks borrow among themselves---reduced from 7.3 percent in January 2021 to 7 percent in November 2021. Yields on government securities have also declined in line with the reduction in CBR. The laws will address key issues, such as tariff regimes, land rights, decommissioning, and ownership rights.

The average yields on the 91-day, 182-day and 364-day treasury bills declined to 6.7 percent, 8.8 percent and 10.6 percent in November 2021 from respective rates of 8.6 percent, 11.2 percent and 13.8 percent in January 2021. Lower yields enabled government to secure additional borrowing at a cheaper cost thereby availing some fiscal space for the much-needed spending to help the country cope with the impact of the pandemic and aid the economic recovery at a time when private sector activities were constrained by lockdowns and Covid-19 containment measures. Although lending rates remain elevated, they have declined from an average of 21 percent in the three months to July 2020 to 17.6 percent, in the three months to July 2021. The lower cost of credit partly contributed to the increase in banks’ credit to the private sector. Banks’ credit grew by 10.3 percent in October 2021 relative to the growth rate of 9.1 percent in August 2020.

4. Did the Central Bank achieve its monetary policy objective for 2021?

The main objective of monetary policy is price stability, defined as 5 percent +/-3 percentage points in the medium-term (2-3 years ahead). The annual headline and core inflation averaged 2.1 percent and 2.8 percent, respectively, in the twelve months to November 2021. Judging by the outturn of inflation, the BoU has attained its monetary policy objective.

5. Is Uganda’s economy diversified enough?

The Ugandan economy is dominated by the services sector with a share of about 45 percent of total output. The remaining share is divided between agriculture and industry. The economy would benefit from more agricultural and manufacturing activities. Agriculture employed approximately 72 percent of the Ugandan population in 2020 (World Bank database). Therefore, increased activities in the agricultural and industrial sectors would improve the diversification of the economy. In addition, the economy has a large informal sector, estimated to be approximately 50 percent of total national output. Therefore, formalization of the informal economy would support domestic tax revenue mobilisation efforts, which in turn would improve the savings-investment gap.

6. What key economic policy matters need to be done in 2022?

MSMEs are the engines of economic growth and job creation. So, prioritising financing for MSMEs coupled with formalising the economy would aid enterprise growth.

The digitalisation of financial services showed the power of technology to enhance financial inclusion by serving hard-to-reach customers, especially those at the bottom of the pyramid.

Digital connectivity supports economic resilience as evidenced by the spike in e-commerce (internet shopping) growth and a spike in the usage of digital money and contactless payments by card or mobile phones with mobile money being the most popular among the underserved. The spike in the value of payments by mobile banking, debit cards, point of sale, mobile money, and internet banking during the pandemic has been astounding.

The potential for digital financial and payment services growth and the consequent enhancement of financial inclusion remains large because individual phone ownership and internet access are still low. The trend of digitalisation together with the associated financial inclusion and socio-economic transformation will be powered further by the enactment of the National Payment Systems Act, 2020, which is being implemented by the BoU.

Specifically, the imminent development of the National Payments Switch will establish interoperable low-cost digital payments for the seamless exchange of goods and services through shared digital infrastructure. Interoperability of payment systems with better connectivity is expected to increase competition and reduce costs of financial services to unleash the potential of FinTech innovations to democratise financial services. Therefore, bridging the digital divide by broadening access to IT devices and phone connectivity at affordable rates would entrench the transformative power of technology.

The BoU will continue to champion the development of electronic payments, while stressing the need to build defences against cybersecurity risks for example, cyberattacks, outages, technical glitches, fraud, and faulty algorithms, that are inherent to the information/digital age. We advocate a sector-wide approach to cybersecurity across the financial system given its high level of interconnectivity, and the fact that a chain is only as strong as its weakest link.

Covid-19 has accelerated the digital transformation, thereby elevating the importance of data and how it is harnessed for the multiple purposes that it is put to. Enterprises consume, process, and produce exponential amounts of data. Payment data comprehensively records how people spend money and live their lives. The huge volumes of data and exponential growth of digital transformation of businesses, with the growing reliance on the cloud, make it essential that we harness it appropriately not only for commercial but also for policy purposes, including impact assessments, under a constructive governance structure that minimises misuse, mishandling, or exploitative trafficking of data.

Snapshot of the economy

How BoU shielded firms from Covid-19 shocks

2021 was a challenging year for businesses, pushing Bank of Uganda to extend its credit relief measures to September 2021. These measures were further extended for borrowers in education and hospitality sectors to September 2022.  The Deputy Governor Bank of Uganda, Dr Michael Atingi-Ego explains.

1. What key economic issues made the economy resilient during 2021? 

With Covid-19 positivity rates increasing as a new wave hit Uganda beginning in May 2021, the government introduced another lockdown about a year after the first lockdown on March 30, 2020. While the second lockdown constrained economic activity, the negative impact was not as strong as that of the first lockdown since international borders remained open to the movement of cargo and there was some resumption of tourism activities. To support the economic recovery from the Covid-19 shocks, the public sector implemented strong and coordinated fiscal and monetary policies and provided support instruments through the Bank of Uganda (BoU) and the Ministry of Finance.

The BoU and Finance Ministry adopted expansionary monetary and fiscal policies, respectively, at the onset of Covid-19 in 2020 through 2021. The BoU, for instance, lowered the Central Bank Rate (CBR) by a cumulative 250 basis points to 6.5 pecent since April 2020. The accommodative monetary policy, in part, led to the lowering of the cost of borrowing. Lending rates declined from an average of 21 percent in May to July 2020 to 17.6 percent in May –July 2021.

The BoU intervened in the foreign exchange market to smoothen out excessive volatility in late March 2020 and, recently, in September - October 2021. Also, the Bank put in place macro-prudential policy support instruments to strengthen capital buffers for financial institutions and safeguard the stability of the financial system, which in turn would support economic recovery after the Covid-19 pandemic shock.

The policy support instruments included:

• The Covid-19 Liquidity Assistance Programme (CLAP) to financial institutions, which started in 2020 has been maintained through 2021.
• Restriction on payment of dividends and other discretionary payments by financial institutions to shareholders.
• The Credit Relief Measures (CRMs), which were extended in April 2021 for six months to September 2021. The CRMs provided a much-needed cushion for borrowers against the effects of Covid-19.

The CRMs were further extended for the education and hospitality sectors with effect from October 2021 for 12 months to September 2022. The extension allows one restructuring of credit exposures in the education and hospitality sectors, in form of repayment moratoriums, the extension of the tenor of loans, reduction of principal loan repayment, reduction of applicable interest rates or a combination of all. The CRMs have prevented the deterioration of asset quality among the supervised financial institutions. The ratio of non-performing loans to total loans has averaged 4.8-5.4 percent from March to September 2021, lower than the 6.0 percent observed in June 2020.

On the other hand, the government increased spending in 2021 towards critical sectorsto revive the economy. The measures included the following:

• More funding to the health sector for medical equipment, masks, test kits, and vaccines.
• Provision of food to vulnerable households and funding for agriculture inputs and entities that support the sector.
• Support to employment through the Emyooga initiative.
• Support to small and medium enterprises (SMEs), including waiver of interest on tax arrears, deferred payments of Pay As You Earn (PAYE) and corporate income taxes, and the expedited repayment of VAT refunds.
• Clearance of arrears.

2.  Which sectors of the economy helped the country to withstand economic shocks that emerged externally and internally?

In Financial Year 2020/21, the agriculture sector supported by good weather and government support for inputs kept the economy resilient during the Covid-19 pandemic, while the services sector particularly, tourism and transportation were severely affected by the pandemic. The growth in the industry sector was driven by a strong performance by the manufacturing sub-sector while in the services sector the growth was similar to that in the previous year supported by strong growth in health-related activities and information and communication. In addition, the easing of some pandemic-related restrictions resulted in a modest recovery of the other services sub-sectors, including, accommodation and food services, transport and storage, and trade and repairs...

3. In what ways has the record reduction in the Central Bank Rate supported the economy?

The reduction in the CBR has contributed to lowering the cost of funds for banks, the government and borrowers. In 2021, the CBR was left unchanged at 7 percent for the first five months and, thereafter, reduced to 6.5 percent in June 2021. Accordingly, the seven-day weighted average interbank rate—the rate at which banks borrow among themselves---reduced from 7.3 percent in January 2021 to 7 percent in November 2021. Yields on government securities have also declined in line with the reduction in CBR. The laws will address key issues, such as tariff regimes, land rights, decommissioning, and ownership rights.

The average yields on the 91-day, 182-day and 364-day treasury bills declined to 6.7 percent, 8.8 percent and 10.6 percent in November 2021 from respective rates of 8.6 percent, 11.2 percent and 13.8 percent in January 2021. Lower yields enabled government to secure additional borrowing at a cheaper cost thereby availing some fiscal space for the much-needed spending to help the country cope with the impact of the pandemic and aid the economic recovery at a time when private sector activities were constrained by lockdowns and Covid-19 containment measures. Although lending rates remain elevated, they have declined from an average of 21 percent in the three months to July 2020 to 17.6 percent, in the three months to July 2021. The lower cost of credit partly contributed to the increase in banks’ credit to the private sector. Banks’ credit grew by 10.3 percent in October 2021 relative to the growth rate of 9.1 percent in August 2020.

4. Did the Central Bank achieve its monetary policy objective for 2021?

The main objective of monetary policy is price stability, defined as 5 percent +/-3 percentage points in the medium-term (2-3 years ahead). The annual headline and core inflation averaged 2.1 percent and 2.8 percent, respectively, in the twelve months to November 2021. Judging by the outturn of inflation, the BoU has attained its monetary policy objective.

5. Is Uganda’s economy diversified enough?

The Ugandan economy is dominated by the services sector with a share of about 45 percent of total output. The remaining share is divided between agriculture and industry. The economy would benefit from more agricultural and manufacturing activities. Agriculture employed approximately 72 percent of the Ugandan population in 2020 (World Bank database). Therefore, increased activities in the agricultural and industrial sectors would improve the diversification of the economy. In addition, the economy has a large informal sector, estimated to be approximately 50 percent of total national output. Therefore, formalization of the informal economy would support domestic tax revenue mobilisation efforts, which in turn would improve the savings-investment gap.

6. What key economic policy matters need to be done in 2022?

MSMEs are the engines of economic growth and job creation. So, prioritising financing for MSMEs coupled with formalising the economy would aid enterprise growth.

The digitalisation of financial services showed the power of technology to enhance financial inclusion by serving hard-to-reach customers, especially those at the bottom of the pyramid.

Digital connectivity supports economic resilience as evidenced by the spike in e-commerce (internet shopping) growth and a spike in the usage of digital money and contactless payments by card or mobile phones with mobile money being the most popular among the underserved. The spike in the value of payments by mobile banking, debit cards, point of sale, mobile money, and internet banking during the pandemic has been astounding.

The potential for digital financial and payment services growth and the consequent enhancement of financial inclusion remains large because individual phone ownership and internet access are still low. The trend of digitalisation together with the associated financial inclusion and socio-economic transformation will be powered further by the enactment of the National Payment Systems Act, 2020, which is being implemented by the BoU.

Specifically, the imminent development of the National Payments Switch will establish interoperable low-cost digital payments for the seamless exchange of goods and services through shared digital infrastructure. Interoperability of payment systems with better connectivity is expected to increase competition and reduce costs of financial services to unleash the potential of FinTech innovations to democratise financial services. Therefore, bridging the digital divide by broadening access to IT devices and phone connectivity at affordable rates would entrench the transformative power of technology.

The BoU will continue to champion the development of electronic payments, while stressing the need to build defences against cybersecurity risks for example, cyberattacks, outages, technical glitches, fraud, and faulty algorithms, that are inherent to the information/digital age. We advocate a sector-wide approach to cybersecurity across the financial system given its high level of interconnectivity, and the fact that a chain is only as strong as its weakest link.

Covid-19 has accelerated the digital transformation, thereby elevating the importance of data and how it is harnessed for the multiple purposes that it is put to. Enterprises consume, process, and produce exponential amounts of data. Payment data comprehensively records how people spend money and live their lives. The huge volumes of data and exponential growth of digital transformation of businesses, with the growing reliance on the cloud, make it essential that we harness it appropriately not only for commercial but also for policy purposes, including impact assessments, under a constructive governance structure that minimises misuse, mishandling, or exploitative trafficking of data.