Days before the reading of the National Budget for the 2020/21 fiscal year, Uganda’s central bank slashed its key policy rate by one percentage point to seven per cent on June 8, which is expected to revive a struggling economy hit hard by the lockdown measures.

Whereas the rate cut means lower funding costs for commercial banks and reduced lending rates for borrowers, and falling yields earned on Treasury bills and bonds, a severe decline in business activity experienced in many sectors and slow uptake of new loans by consumers and businesses are likely to stifle credit growth for the rest of 2020.

A series of monetary policy actions executed over the past two months have yielded record declines in lending rates, but overall lending activity in the banking sector fell sharply during the same period, a sign of complicated economic challenges.

While average lending rates dropped to 17.6 per cent in April, the total value of loan applications received by commercial banks during the same month fell by 50 per cent, according to Bank of Uganda data. Only 20 per cent of loan applications filed in April were approved by commercial banks, showing the risk averseness of lenders.

However, sluggish credit growth also poses a threat to economic recovery efforts as distressed businesses struggle to pay suppliers, wages and taxes after several weeks of closure.

“Although Uganda is gradually easing the lockdown measures instituted to contain the spread of the Covid-19, the adverse consequences of the global and domestic supply chain disruptions could persist through the remaining part of 2020. Accordingly, BoU has revised down its projection of economic growth to a range of 2.5 per cent to 3.5 per cent in 2020 from the April 2020 forecast of between three per cent to four per cent,” says the BoU’s latest monetary policy statement.

“There are serious credit risk concerns that are yet to be resolved. Though the banks’ liquidity levels have increased of late, how many borrowers are willing to take up new loans at this time?” said Charles Katongole, head of Treasury and Financial Market Operations at Standard Chartered Bank Uganda.

Mr Katongole added that a falling dollar and euro may force offshore investors to repatriate less money back home. The Uganda shilling held steady at Ush3,739 against the dollar.

“The banks have completed loan restructuring arrangements with various clients and we shall review their progress reports later this month. There is hope that a combination of monetary and fiscal stimulus measures undertaken by government will eventually restore strong economic growth,” said Wilbrod Owor, executive director at the Uganda Bankers Association.

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RECORD DECLINES

A series of monetary policy actions executed over the past two months have yielded record declines in lending rates, but overall lending activity in the banking sector fell sharply during the same period, a sign of complicated economic challenges.

However, sluggish credit growth also poses a threat to economic recovery efforts as distressed businesses struggle to pay suppliers, wages and taxes after several weeks of closure.