The general rise in the prices of goods and services is projected to stay below the target in the short term, with balanced risks despite the uncertainties.
Ugandan banks secured Ush21.5 trillion ($5.81 billion) in emergency loans from their regulator in three months to November, pointing to a deepening liquidity crisis in a sector fueled by increased government borrowing, latest disclosures show.
The central bank, Bank of Uganda (BoU), in its latest state of the economy report (2024) says the lenders’ utilisation of the facility known as the Standing Lending Facility (SLF) grew more than six fold to Ush 25.2 trillion ($6.81 billion) from Ush3.7 trillion ($1 billion) in the three months to August 2024.
It highlighted increased demand for cash that pushed overnight lending rates to an average of 11.2 percent from 9.9 percent in the same period.
“The utilisation of the Standing Lending Facility (SLF) surged significantly to Ush25.2 trillion ($6.81 billion) from Ush3.7 trillion ($1 billion) in the three months to August 2024, highlighting increased demand for short-term liquidity by banks,” the bank says.
“Interbank money market rates rose in the three months to November 2024, reflecting tighter liquidity conditions in the banking sector.”
The standing lending facility (SLF) refers to a short-term loan that central banks grant as overnight credits to eligible lenders.
The tight liquidity conditions in the market saw yields on treasury securities in the secondary market rise across the board, with the returns on the long-dated 20-year securities remaining relatively the same as those recorded in August 2024. This is despite policy rate cuts as global financial conditions remained tight.
The Bank of Uganda (BoU)’s Monetary Policy Committee (MPC) in October lowered the policy rate by 25 basis points to 9.75 percent, citing an improved inflation outlook.
The general rise in the prices of goods and services is projected to stay below the target in the short term, with balanced risks despite the uncertainties.
“This warranted a cautious approach to monetary policy. Additionally, the economy was expected to remain robust, benefiting from low inflation and stable exchange rates,” says BoU.
The regulator says the banks’ credit to the private sector slowed during the period largely as a result of increased borrowing by the state, which outweighed monetary policy easing and reduction in the non-performing loans (NPLs).
The Private Sector Credit (PSC) growth declined to 8.2 percent from 9.1 percent on account of both shilling loans declining to 10.4 percent from 11 percent and foreign currency denominated loans falling to 2.4 percent from 4.1 percent.
“Private sector credit (PSC) growth moderated in the three months to October 2024 compared to the three months to July 2024 due to increased government borrowing, which outweighed monetary policy easing, and reduction in the non-performing loans (NPLs),” the bank says.
Uganda’s state of the economy report presents economic developments up to the three months to October and November 2024.
In the three months to October 2024, the prime lending rate for shilling-denominated loans remained unchanged at 20.7 percent while the weighted average shilling lending rate edged higher, reaching 19.1 percent compared to 18.1 percent in the previous three months.
. “Despite the uptick in average shilling lending rates, the unchanged prime lending rate suggests that banks are maintaining a cautious stance in their pricing strategies amid evolving credit dynamics,” says BoU.
“The private sector credit (PSC) growth has softened recently, reflecting the impact of increased government borrowing, which constrained private sector access to credit.”
Total net credit extensions contracted in the three months to October 2024, declining to Ush800 billion from Ush1.2 trillion in the three months to July 2024.
“This reduction reflects a cautious stance by supervised financial institutions (SFIs), which scaled back lending to the private sector amidst increased government borrowing and tight liquidity conditions, “the bank says.
“Going forward, previous monetary policy easing, and strong economic growth could provide a favourable environment for borrowing, and the relatively stable foreign exchange market is likely to bolster confidence in foreign currency loans.”
The demand for credit however rose in the three months to October 2024, reaching Ush7.4 trillion ($2 billion) from Ush 6 trillion ($1.62 billion) in the three months to July 2024 signaling sustained economic activity and growing financing needs across various sectors.
On the supply side credit availability also improved, with supply rising to Ush.4.6 trillion ($1.24 billion) from Ush 4.1 trillion ($1.1 billion) over the same period.
“Despite this positive trend, the rate of credit approval declined to 62.6 percent from 68.4 percent as banks adopted a more cautious lending approach in response to heightened risks and increased competition for funds,” the bank says.
“This cautious stance contributed to a marginal decline in non-performing loans (NPLs), which fell to 4.9 percent in September 2024 from five percent in June 2024, reflecting improved portfolio quality in the banking sector.”
