By George Mangula
Lending rates on Shilling denominated loans rose to 19.7 percent in the quarter to July 2020 from 18.2 percent in the quarter to April 2020, according to Bank of Uganda September State of the Economy Report .
According to the report, month-on-month lending rates increased sharply in July 2020, to 20.9 percent from 19.3 percent in June 2020. It says increases in the lending rates were driven largely by a rise in unsecured lending to personal and households and lending the agriculture which is considered highly risky. “Although BOU has steadily reduced the CBR, the pricing behaviour of banks seems not to have changed with several consistently pricing below or above the industry rate reflecting structural bottlenecks to adjustments in lending rates.”
It says growth in private sector credit (PSC) remained subdued in the quarter to July 2020 on account of the decline in economic activity coupled with poor asset performance. “The slow growth in credit was aggravated by business closures due to the lockdown aimed at containing the spread of the COVID-19 pandemic.”
It says the average year-on-year growth in PSC averaged at 8.9 percent in the three months to July 2020, down from 10.5 percent in the previous quarter. New net lending in the quarter to July 2020 mainly comprised of capitalized interest which rose to UGX 158 billion in July 2020 up from Shs 96.6 billion in April 2020 reflecting Bank of Uganda’s credit relief measures in response to the COVID-19 pandemic.
The report says a look at credit transfer reveals slower growth in lending to major sectors of the economy during the quarter to July 2020 as average annual credit growth to the agriculture, manufacturing, trade, personal & household and Building, mortgage, construction and real estate sectors declined to 9.0 percent, 0.6 percent, 3.4 percent, 5.8 percent and 12.7 percent respectively in the three months to July 2020. “Weak credit disbursement to major economic sectors poses challenges for private investment and consumption and may further constrain economic growth prospects.”
The number and value of loan applications and approvals declined in the quarter to July 2020 as business activity slowed down non-performing loans increased. In July 2020, 684,074 loan applications worth Shs1,424 billion were received and 681,044 loan approvals worth Shs 711 billion were made. The significant discrepancy between loan applications and approvals reflects increased risk aversion towards borrowers amidst rising NPLs. Asset quality of loans extended by commercial banks worsened with a share of NPLs to total loans of 5.8 percent in June 2020 from 5.4 percent in March 2020 and 3.8 percent in June 2019
Govt fiscal operations constrained
Meanwhile, government’s fiscal operations in FY2019/20 were constrained by a shortfall in domestic revenue and slow execution of infrastructural projects in part due to COVID-19. Government expenditure amounting to Shs 28,392.58 billion which was Shs4,718.22 billion lower than the programmed levels due to a shortfall in development expenditure indicating slow absorption of government projects. Government revenue (including grants) amounted to Shs 18,442.20 billion, which was lower than programme levels by Shs 4,104.20 billion. The shortfalls in domestic revenue were largely attributed to the underperformance in both domestic and international trade taxes reflect a fall in consumption and production due to the measures put in place to manage the spread of COVID-19.
The fiscal deficit amounted to Shs 9,950.3 billion of 7.2 percent of GDP. The deficit was financed largely externally through large take-up of loans earmarked for countering the effects of COVID-19.
Total public debt rises
The total public debt stock stood at Shs 56,526.2 billion, 40.8 percent of GDP, as at end June 2020 which is an increase of 20.5 percent relative to June 2019. The increase between June 2019 and June 2020 was mainly due to a Shs 6,362.3 billion increase in external debt largely attributed to borrowings from the IMF, Trade and Development Bank (TDB), and Stanbic Bank towards countering the economic distress brought about by the COVID-19 pandemic. “Public external debt continued to maintain the dominant share of 66.2 percent of the total public debt. External and domestic debt increased by 18.0 percent and 19.4 percent, respectively in FY2019/20.”
Despite the increase in borrowing, BoU says the country’s debt levels remain sustainable with low risk of debt distress; however, significant vulnerabilities are evident. “Although the multilateral creditors have put in place facilities to dampen the adverse effects of the COVID-19 pandemic, uncertainties relating to the ensuing expenditure pressures, subdued economic activity and declining tax revenues, and a possible further decline in grants could lead to further borrowing on non-concessional terms. The associated increase in interest payments will be a substantial drain on resources that could have otherwise been used to finance development.”