Central Bank Deputy Governor attributes high interest rates to loan defaults and government domestic borrowing

KAMPALA, UGANDA – The Deputy Governor of the Bank of Uganda, Michael Atingi-Ego, has revealed that over UGX 6 trillion is locked up in courts due to loan defaults, leading to increased risk and high interest rates charged by commercial banks.

Atingi-Ego made these remarks while appearing before the Parliament’s Committee on Commissions, Statutory Authorities, and State Enterprises (COSASE) to respond to queries raised in the December 2023 Auditor General’s report.

“Yes, the CBR is at 10.25%, but when commercial banks are lending, this CBR plays a very minimal impact. What plays a bigger part is the rate at which they are lending to government, because government is considered a competitor to the private sector. If government is out there borrowing a lot of money from the market, it means the rate at which government borrows money goes up. Now remember, government is considered a risk-free borrower, so if they are going to lend to you and I, they are going to mark up the rate at which government borrows,” Atingi-Ego explained.

The Deputy Governor attributed the high interest rates to the large amount of money locked up in courts and the government’s high appetite for borrowing, which disadvantages the private sector. “If government decreases its appetite for borrowing in the domestic market, then the markup base will go down, but right now, it can’t come down,” he added.

Atingi-Ego assured Ugandans that the absence of a substantive Governor at the Central Bank for close to three years has not affected the bank’s operations, thanks to strong governance structures in place. “I think the bank has been delivering; is there anything to suggest that in the absence of the Governor, the bank hasn’t been performing? I think what is happening is that we have a Board, we have senior management, and we have very capable staff. We have policies and guidelines to run the bank; the governance structures in the bank are performing, and that is why we are able to deliver,” he said.

However, MP Medard Sseggona wondered if it was time to scrap the position of Governor to save taxpayers’ money, considering the bank’s ability to operate without a substantive Governor. “There is a big issue of running a country without a bank because that position is created under the constitution, but as a frugal person who doesn’t want to spend a lot of money, because if we can run without somebody, why don’t we delete it so that we don’t risk having somebody come and eat that money?” Sseggona asked.

Atingi-Ego countered that the bank’s governance structures are functional, with a Board and senior management in place, ensuring the bank’s continued performance. “You can’t run an institution that doesn’t have the head, but the shoulder. You don’t have a Board because we haven’t amended the law to remove the Governor as Chairperson of the Board. You can’t be a Deputy Governor when you aren’t deputizing anyone. Have you read the case of Sam Kutesa and Others against the Attorney General on the question of the constitution of IGG? Go and refresh it and come back. Once one person isn’t there, you don’t have a body. Of course, I am not saying this to blame you because you aren’t the appointing authority, but in your advisory capacity,” Sseggona noted.

The discussion highlighted the need for effective loan recovery mechanisms and responsible government borrowing to reduce the risk of lending and promote a more favorable business environment.