At a meeting of the Uganda Manufacturers Association (UMA) on Wednesday last week, there was a warning from one of the prominent business people in Uganda, Mr Abid Alam, the chairman of the Alam Group. Mr Alam, warned that Uganda’s interest rates were high and many companies are going to go out of business as a result. Only recently, one Alam Group flagship companies, Steel Rolling Mills (SRM) was placed under receivership for failing to pay back a loan totaling about Shs50b.
Several companies have been struggling to meet debt obligations and have been lobbying for the government to reign in on high-interest rates. They, through the Private Sector Foundation Uganda, UMA and several other individuals such as Gen Salim Saleh, have described the interest rates as uneconomic.
This has not only come from the business community, but also President Museveni who has argued that having more commercial banks in the country has not brought in lower interest rates. Last week, President Museveni revealed that interest rates were one of the challenges the country faced if there was going to be an economic recovery.
“I think these are the three remaining issues. At least I have got the money for my roads, electricity, education health, agriculture for the army and we are working with the Chinese which will solve the problem of ICT undersea cable and the railways. But there are still problems of the minimum wage, high corporation tax for production and high cost of money (high-interest rates),” he said at the Bank of Uganda (BoU) Golden Jubilee celebrations.
As at the end of June 2016, commercial bank lending rates averaged 23.54 per cent. These rates are still considered to be high and prohibitive of the private sector. Interest rates started rising in April 2015 as BoU attempted to wave off any inflationary pressures resulting from the depreciation of the Uganda Shilling at the time.
The bank rate
The BoU monetary policy committee at the time believed that further depreciation of the Uganda Shilling would lead to an increase in inflation that would hurt the economy. In April 2015, the committee recommended the raising of the Central Bank Rate (CBR) to 12 per cent from 11 per cent. By October 2015, the CBR had been raised to 17 per cent.
“This is what we term as a tight monetary policy. The actions of the Central Bank were meant to slow down demand, in order to reduce inflationary pressures,” says Ms Razia Khan, the chief economist for Africa at Standard Chartered Bank.
Indeed, the banks reacted and raised interest rates. Interest rates that had been averaging 20 per cent in April 2015 had gone up to 25 per cent by November 2015. The rates even went higher for some banks that were lending at about 30 per cent by February 2016. However, as the inflationary pressures waned and BoU reacted by reducing the CBR, the action of the commercial banks is regarded to be slow. In other words, when the CBR was raised, commercial banks raised their rates at a fast pace. When the CBR is reduced, the banks react at a much slower pace. Mr Herman Kasekende, the head Standard Chartered Bank told reporters recently that the CBR cannot be looked at in isolation.
“The CBR is just a signal rate. We would want to see lending rates going below 23 per cent. It is not the only factor we consider when determining interest rates,” he said.
He says the cost of money from customer deposits remains high. According to BoU, fixed deposits locked in for six to 12 months peaked at 17 per cent in January 2016. That makes the cheapest option for commercial banks for funds to lend remaining on the high side. Mr Kasekende reveals that customers are also looking to other options for higher returns on their money.
“Depositors will still look at investing in government securities as long as the rates remain high. Sometimes, when the CBR goes down, the government securities stay up. That is what we have seen in the last three months,” Kasekende explains.
Between August 2015 and March 2016, rates on government securities were still higher than the CBR. This made government securities more attractive than earnings on customer deposits.
“If all the rates – government securities, CBR and time deposits rates – start going much lower than where they are, definitely, we shall see interest rates on loans coming off,” he adds.
Government borrowing
The government has made a commitment to reducing domestic borrowing to Shs612b in 2016/17 down from Shs1.2 trillion in 2015/16. This has been welcomed by most experts and bankers who have often blamed the government for crowding out the private sector with domestic borrowing. The demand from the private sector has been for the government to slow down on how much it was borrowing. The rise in returns on government securities kept commercial bank lending rates up, which in turn, slowed down lending to private sector.
“When interest rates rise, we deliberately slow down lending to the private sector and opt for alternative sources of income,” says Ms Sophie Achak, investor relations and strategy manager at Stanbic Bank Uganda.
She reveals that when government securities rates increased, the bank shed the debt with low returns and lent to government at the higher rate. That means the private sector was deprived of much-needed credit for expansion.
No savings, no cheap money
At the Joseph Mubiru Memorial Lecture the keynote speaker, Dr Ngozi Okonjo-Iweala, former Nigerian Finance minister, and World Bank director noted that for a country to enjoy low-interest rates, it was important that savings also expand. This was re-echoed by the moderator, Ms Razia Khan.
“With revenue mobilisation being as weak as it is, not enough taxes being collected, the government is not saving enough. Public savings are already low. Then you go to personal savings, where a big percentage of the population is unbanked, that leaves a weaker level of personal savings than you might expect. Altogether, public, private and corporate savings, the savings rate in Uganda is too low,” she points out.
This was part of the structural reforms in the economy that experts have been insisting on. Even the bankers have also noted that the discussion on interest rates needs to move to mobilisation of savings and other alternative sources of capital.
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