On June 16, 2021, Bank of Uganda (BoU) announced that it was reducing the Central Bank rate to 6.5% from 7%, the lowest ever in a bid to kickstart the economy that has been battered by the effects of the COVID-19 pandemic.
“Indeed, the Uganda Bureau of Statistics (UBoS) in its June 2021 real GDP estimates indicate economic growth of 3.3 percent in Financial Year (FY) 2020/21, slightly higher than initial projections of 3.1 percent, owing primarily to stronger household consumption. However, contraction in private sector investment is persisting, partly reflecting heightened Covid-19 induced uncertainties. The real Gross Domestic product growth outlook remains unchanged at 4.0-4.5 percent in FY2021/22,” BoU said.
But it remains to be seen if commercial banks are ready to follow suite and lower their lending rates.
In 2020, BoU wrote to commercial banks in July, asking them to reduce interest rates on the ground that the CBR – the key lending rate – had reduced to 8 per cent in April and 7 per cent in June, commercial banks only reduced these rates to 17.7 per cent in April. But in May, the interest rates rose to 18.9 per cent before climbing to 20 per cent.
Mr Wilbrod Owor, the executive director of the Uganda Bankers Association, says their hands are tied.
“Ideally the reduction in the CBR would mean a downward review of lending rates to stimulate growth in the economy but we are in a difficult situation of high non-performing loans and subdued economy,” he explains.
He adds that most non-performing loans are recorded as such to date because several sectors like education, transport, trade are currently underperforming because of the partial coronavirus induced lockdown.
Owor says banks are planning to schedule a meeting to review BoU’s monetary policy action in line with their market strategies to come up with resolutions that are good for all players in the economy.
“We would like to support the economy to recover…but you cannot expect a uniform response because individual financial institutions differ,” he says.
Corti Paul Lakuma, a research fellow at the Economic Policy Research Centre at Makerere University, says bank might respond by lowering their interest rates going forward not because of the strength of the central bank but because they are stuck with money.
“There is limited economic activity, people are saving…and that means banks might want to attract borrowers…that could partly be one of the reasons,” he says.
Lakuma said going forward, authorities must work towards rectifying the financial market to have a level playing field for both indigenous and international banks for monetary policy signals to yield results.
Lakuma insists, that a reduction in interest rates alone may not entirely cause a fast recovery of the economy unless everybody does their part.
“The Central Bank has done its part,” he says, adding that those in charge of revenue collections must deliver results, and those in charge of spending what is collected must to it carefully to revamp the shaky economy.
BoU and Uganda Bureau of Statistics data indicates that the high frequency indicators of economic activity indicates that the momentum of economic activity for the quarter to May 2021 was moderate.
Data indicates that economic growth of 3.3% in FY2020/21 is slightly higher than initial projections of 3.1% owning primarily to stronger household consumption. However, data indicates that contraction in private sector investment is persisting partly reflecting heightened COVID-19 induced uncertainties. The GDP growth outlook remains unchanged at 4.0-4.5% in FY2021/2022.