Government has ruled out capping interest rates as one of the proposals from borrowers who needed cheaper credit.
David Bahati, the minister of state for Planning, said capping interest rates is not a solution.
“We are not going to cap interest rates because it doesn’t work. It has not worked in Kenya and it has not worked anywhere,” he said.
He added that government can only regulate the high interest rates, although he did not explain how it can be done. Bahati was speaking at the 7th Annual High-Level Policy Dialogue on the Budget under the theme, “Unlocking Uganda’s economic potential: Investing in strategic sectors of the economy” at Sheraton Kampala hotel recently.
The conference was organized by the Advocates Coalition for Development and Environment (ACODE) and the ministry of Finance, Planning and Economic Development.
The business community has been pushing government to cap interest rates to affordable levels. Interest rates in Uganda hover around 23 per cent, which is quite high compared to the return on investment that many companies make. Last year, Kenya capped interest rates in order to protect borrowers.
Instead of capping interest rates, Bahati said government plans to recapitalize the Uganda Development Bank (UDB) to provide affordable credit to borrowers.
He revealed that government is to inject Shs 300 billion into UDB in the next five years. Next financial year, which starts on July 1, UDB will be recapitalized by Shs 50 billion.
Dr Ezra Suruma, the keynote speaker and former minister of Finance, Planning and Economic Development, attributed the collapse of many businesses to high interest rates.
He said the high interest rates have something to do with the structure of the economy and have been responsible for the collapse of many businesses. He implored government to make available affordable and long-term credit to the private sector.
“Until the money is finally injected in Uganda Development Bank, I will not believe you. This is what we have been pushing for over the years,” he said.
He also advised government to improve on the capital markets so that Ugandans can safely invest in them. Suruma also proposed that “some of the money from oil should be used to start new special banks like an agricultural bank and an infrastructure bank, among others. This will stimulate growth and financial inclusion.”
The Public Finance Management Act, 2015 says that the money from oil shall be used to finance infrastructure projects. Bahati also said that although the economy has not grown as projected, it is expected to recover.
This financial year, the economy is expected to grow below 4.5 per cent instead of the projected five per cent. He attributed this to regional instability, especially in South Sudan, and the drought which has ravaged the agricultural sector. South Sudan is one of Uganda’s main export destinations.
Bahati was optimistic that the economy is expected to again grow at six per cent annually after the next financial year. Bahati said in the next financial year, government plans to reduce on domestic borrowing through the issuance of securities such as treasury bills and treasury bonds.
Currently, he said, domestic arrears stand at Shs 2.7 trillion. This has crowded out the private sector from the financial market since banks prefer to lend to government than private businesses.
Keith Muhakanizi, the secretary to the Treasury, warned against excessive borrowing.
“We must not put the country into a debt crisis.”
He added that the pressure for borrowing is too much and that if this appetite is not curtailed, it could put the country into a crisis, to a point where the country will not be able to repay the loans.
Suruma advised government to invest in sectors such as agriculture for inclusive growth. He gave the example of the coffee industry that he said has the capacity to bring in more money than oil, and can directly benefit households.
He said government should invest more money if the country is to achieve its target of producing 20 million bags of coffee annually by 2020.
On the oil sector, the Danish ambassador to Uganda, Mogens Pedersen, warned that if stern action is not taken to fight corruption and promote inclusive growth, Ugandans should forget the anticipated benefits from the oil industry.
He warned that Uganda is headed on the path that many African countries have taken of abundant oil resources amidst poverty.
“Please, tell me one African country, where oil has been a blessing. It is always a curse for inclusive development, mainly because of corruption,” he warned.
Uganda discovered commercial quantities of oil in 2006 and efforts are underway to start oil production by 2020. Bahati assured the audience that Uganda is going to be an exception from those African states where oil has been a curse.
“You are going to see Uganda; our oil will not be a curse. All the systems have been put in place to ensure oil is a blessing for Uganda. That is why we have been cautiously slow,” he said.
Bahati said the country is looking at oil to solve its financial woes, including cutting down on borrowing.
“As government, we believe by 2020 we shall see first oil production, which is going to give us $2 billion annually [approximately Shs 9 trillion]. So, we shall be able to solve some of these challenges,” he explained.
Bahati said this financial year, government plans a massive investment in the oil sector to ensure first oil by 2020.
“We are going to invest at least Shs 1.1 trillion in the sector in order to realize the first oil target of 2020,” Bahati explained.
However, Elly Karuhanga, the chairman of Uganda Chamber of Mines and Petroleum (UCMP), asked the government to put in place a team that will make first oil a reality.
“Let us put in place a team, a dream team comprised of genuine government officials and the private sector, which will be charged with the duty to implement the oil project and en- sure first oil by 2020,” he said.
Short of that, Karuhanga doubts whether the 2020 oil target will be met.