UGANDA, Kampala | Real Muloodi News | During his latest national address, President Museveni announced that the Ugandan government intends to reduce domestic borrowing in an effort to drive-down interest rates and increase banks’ appetite to lend to the public.
Museveni stated that the administration has assessed the situation, and realised that one of the reasons banks are not providing affordable loans to locals is because of continual borrowing by the Government.
“The high-interest rates of the commercial banks is on account of two actors: the commercial banks wanting high profits and not caring about the wanainchi, and government (Finance) giving high priced treasury bills to the world to borrow from the public,” the president said. “We should minimise borrowing by the Government,” he added.
Commercial banks, which account for over 90% of private credit, prefer to lend more to the government because it is low risk. With the Ugandan government’s record-high financing needs, government borrowing has largely crowded-out private lending. This is evident by the share of private sector loans in commercial banks’ total assets declining from 48 per cent in March 2020 to 41 per cent in March 2021.
At the same time, the percentage of government debt expanded from 20% to 25%, with government bonds accounting for 50% of the year-on-year rise in banks’ commercial assets.
Bond yields have stayed high, causing lending rates to remain sticky, reducing the efficacy of the monetary policy transmission channel.
Museveni said, “each year, the government pays USh15.16 trillion as debt repayment, and USh4.9 trillion of this is interest i.e. money that was never used in our country.” “We now know where the problem of high interest rates is coming from. It will, gradually, be addressed. The enemy you are prepared for, loots little.”
Museveni’s words came after public outrage over commercial banks’ exorbitant interest rates, restricting millions of people access to cheap loans.
Lending interest rates in Uganda have averaged 21 per cent since the early 1990s. Depending on the length of the loan, clients can ultimately pay more than double the amount borrowed.
Well-functioning financial systems throughout the world empower financial institutions to supply more people with cheaper loans and other financial services. This, in turn, promotes the expansion of current firms and the formation of new ones.
At the household level, it empowers individuals and families to balance their expenditure and savings better, invest in their children’s education and access to decent healthcare, and acquire tangible and other significant assets against disruptions like the latest locust invasion COVID-19 pandemic in Uganda.
These concerns have a vital role in generating more robust economic development and inclusive growth.
According to the International Monetary Fund (IMF), Uganda’s fiscal policy should balance recovery support and manageable debt levels while decreasing dependence on domestic borrowing to reduce crowding-out of private sector funding.
According to the IMF, the relatively close budgetary strategy should enhance expenditure composition by lowering security expenditures and increasing social spending.
According to specialists, deficit reduction must seek to bring public debt below the authorities’ target of 50% of GDP, as formalised in the authorities Charter of Fiscal Responsibility (CFR), over the mid-term, beginning in FY 21/22, while incorporating systemic changes to boost public financial management and expenditure effectiveness.
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