Govt Protecting Private Sector From Domestic Borrowing Impact – Finance Ministry

The spike in domestic borrowing by the government has increased the discomfort in the private sector, as commercial banks also raise their interest rates.

Commercial banks have been announcing new prime lending rates over the last three months attributing their decisions on ‘current business environment’ and ‘prevailing market conditions’.   

The interest rates had gradually dropped from an average 19 percent to 17.5 percent per annum since last year began as the Bank of Uganda reduced the Central Bank Rate from 7 percent in February 2021 to 6.5 percent in April 2022.

Bank of Uganda’s aim then was to ensure that the commercial banks reduce on their lending rates since they would be able to get money for credit cheaply.

However, by the beginning of this year, the regulator was not yet satisfied with the lending rates and constantly accused the banks of maintaining high cost of credit at the expense of economic recovery.

However, BOU reversed the trend after April and over the next six months, has increased the CBR to 10 percent to influence a rise in the commercial bank rates and discourage borrowing.

This in turn would reduce the amount of money in circulation and help tame the inflation.

Last Month, the business community petitioned parliament over what they called a high CBR, then at 9 percent, and sought the legislators to compel BOU to bring it down to the levels comparable to other East African countries of between 6 and 7 percent.

The commercial banks have now increased their lending rates for ‘prime borrowers’ to between 18.8 and 20 percent, meaning ordinary borrowers will have to pay even higher.

Some banks are specifically notifying current loan holders that they will part at additional 1 percent from what they have been paying as interest.

This is also coming at a time that the government is increasing both external and domestic borrowing which has taken the total debt stock of the country to 80 trillion shillings, with just over 30 trillion being domestic debt.

As the government increasingly indicates the need to continue borrowing to meet the budgetary needs, the fear is that it might also get more involved in the domestic market and pose competition for the money with the private sector.

This financial year, Parliament approved the government budgetary proposal to borrow up to 5 trillion shillings, an increase if 41 percent from the previous year.

This means, there is still room for the Ministry of Finance, Planning and Economic Development, MoFPED, to borrow more from either commercial banks, the central bank or through treasury bills and bonds.  

The Private Sector Foundation Uganda, PSFU says the borrowing structure for next financial year should ensure further reduced domestic borrowing because currently, the private sector is suffering.

PSFU Chairman Elly Karuhanga says that because of expanding expenditure without matching growth in domestic revenue, the fiscal space is very limited and this leaves no room for flexibility by Government.

This, according to him, compels government to use the sale of Treasury Bills as part of the domestic refinancing strategies.

“Consequently, commercial banks end up investing more in Treasury Bills and this does not only crowd out the private sector from the financial sector but also undermines the import substitution strategy,” he says.

MoFPED says that despite the approval of the budget by parliament, they want to make sure there is less reliance on the local market, the reason for the recent requests to get commercial loans.

Earlier in the month, the government secured parliament’s approval to a syndicated 1.7 trillion shilling credit facility arranged by Standard Chartered.

The other banks, according to the documents presented by the Ministry to Parliament, are Nippon Export and Investment Insurance (NEXI) of Japan and the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), which are expected to provide the money.

The Ministry is also seeking to borrow another 500 million euros to finance the current budget (2022/23), and has notified interested lenders to apply to structure the credit facility.

Permanent Secretary and Secretary to the Treasury, Ramathan Ggoobi says while these might be commercial loans, they have set terms that ensure they will have appropriate repayment terms.

“This financing will offset the equivalent of the Net Domestic Financing (NDF) requirement that was approved for the FY 2022/2023,” says the statement from the ministry, adding that this excludes the dreaded Eurobond option.

The statement says the credit should be for a minimum of a minimum of 10 years Tenor, a competitive interest margin and a grace period of not less than four years, among others.

According to Ggoobi, these arrangements will ensure that the government reduces on how much it goes to the domestic financial market to borrow.

“Government if Uganda, in a comparatively smarter way is supporting private sector recovery by…reducing domestic borrowing, which would’ve become more expensive if it went ahead and borrowed as it had planned prior to the current global crisis,” he said.

He says the government wants the available credit in banks to be left for businesses to borrow at relatively lower rates than what they would be if it issued more paper (treasury bills and bonds).

However, some experts say that while bills and bonds are the easiest way for government to raise money, it is becoming less affordable as the treasury becomes more cash-strapped.      

Last week, the State Minister for Finance, Henry Musasizi said the government was increasingly going for commercial and domestic loans because concessional lenders were becoming scarce.

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