Commercial banks are still playing deaf to Bank of Uganda’s intervention of reducing lending rates in the market, by sticking to their own valuations even after a key monetary rate has been kept fairly low for four months, writes ERNEST JJINGO.
The resistance by commercial banks to bring down their lending rates from the lofty heights of more than 20 per cent poses questions over the impact of Bank of Uganda’s policy of using the central bank rate as a tool of influencing market rates.
“We have kept the Central Bank Rate low for four months now so as to motivate commercial banks to lend more to their customers. However, most of them have refused to follow our advice of reducing the interest rates by keeping it at average 20 percent which is out of reach for many Ugandans,” said Prof Emmanuel Mutebile, the governor, Bank of Uganda, at a press conference recently. The rate was stayed at nine per cent for February.
Still, Mutebile pointed to other economic factors that might still keep interest rates up. He said government needed more money to invest in the infrastructure network, and that it was likely to source that money by borrowing from the domestic market through the issuance of instruments such as the treasury bills and bonds. This would crowd out private sector credit.
“The economic growth is weighed down by weak growth in exports. Moreover, domestic public sector financing needs to grow, increasing risk premiums and pushing borrowing costs for the broader economy higher despite the accommodative monetary policy stance,” he said in a statement.
There are worries what all this could mean for the economy going forward. Already the numbers don’t look good.
“The GDP (the value of goods and services in the economy over a given period) data released by Uganda Bureau of Statistics in December 2019 estimates economic growth for the first three quarters of 2019 at 5.2 percent lower than 5.4 percent over the same period in 2018,” Mutebile said.
The governor remains optimistic, though. Economic growth prospects remain positive with GDP for 2019/2020 still projected to grow at an average rate of 6.3 percent in the next two to three years because of growth in public sector credit, improved agricultural performance and a pickup in global economy.
On the global scene, the recent outbreak of coronavirus has lowered the near-term growth outlook and although there is considerable uncertainty regarding the duration and severity of the disease, its effect on the global economy is likely to be larger than currently projected if it persists for an extended period.
Mutebile said, “The immediate effect of the coronavirus outbreak to our economy is through imports because many people in our country import from China.”