Bank of Uganda warns on huge Gov’t borrowing appetite as public debt hits UGX88tn

Bank of Uganda raised a red flag on the Government’s huge appetite for loans, warning that if the trend isn’t addressed, the cost of credit in Uganda will remain high, with commercial banks preferring to lend to the government rather than the private sector.

*Michael Atingi-Ego, Deputy Governor of the Bank of Uganda*, issued the warning while appearing before Parliament’s National Economy Committee, where he had been summoned to update Parliament on the performance of Uganda’s economy and indebtedness.

Atingi-Ego informed Parliament that as of August 2023, provisional data indicates that total debt stock stood at *UGX88.807tn, representing a 2.8% increase compared to June 2023, with the rise in debt primarily driven by a 19.1% increase in domestic debt*.

However, a section of lawmakers raised concern over the high cost of credit in Uganda compared to other regional markets, wondering why banks are lending at an interest almost double the central bank rate.

Atingi explained that although the Bank of Uganda is also concerned about the high-interest rates, it doesn’t mean that when the Bank of Uganda lowers the Central Bank Rate, this would automatically follow the entire interest rate structure and see it come down by the same amount, and went on to cite several factors to explain the high cost of credit in Uganda.

The Government borrowing appetite is enormous. If you are borrowing through one one-year treasury bill, at around 12%, if I can lend to the Government at 12-13%, how much will you lend to the guy on the street? Why would you bother lending to the guy on the road at 9% or a farmer at 10%, yet the Government can pay you 12%? So, we need to have a conversation on how the government can reduce its borrowing appetite. The Bank of Uganda doesn’t have control over this. We can only advise, but I think you (MPs) wield more power, said Atingi.

The Deputy Governor also blamed the high interest rates on the risk borne by financial institutions in lending to the private sector, citing the over UGX5tn value of cases in courts resulting from some borrowers suing banks as an attempt to elude paying up their loans. He said,

Some [borrowers, when] they take money from banks, instead of repaying, they run to court. The court puts a court injunction. The latest numbers I got from the Uganda Bankers’ Association is that the [number] of resources locked up in court is over UGX5tn. It takes a long time to resolve a borrowing case in court, and these are depositors’ money, and the banks must honor their obligations. So the commercial banks [must]look for a way to provide for that money locked up in the courts.

*Anti-Gay Bill Weakened Uganda Currency*

Bank of Uganda also revealed that following the pronouncement by the World Bank to stop approval of any new loans to Uganda after the passing of the Anti-Homosexuality Act 2023, the Uganda shilling depreciated within two days of the pronouncement, and the depreciation has remained stagnant to date.

[We were following] the pronouncement by the World Bank regarding new financing because of the Anti-Homosexuality Act that they wouldn’t be funding any new loans in Uganda, that had an impact on the exchange rate. We saw the exchange rate depreciating from about 3650 to nearly 3750 in two days. So it has…remained there, so there are all those pressures and uncertainties regarding the currency [because of] the passing of the Anti-Homosexuality Act, said Atingi-Ego.

In August, the World Bank threatened to withhold funding to any new projects in Uganda following the passing into law of the Anti-Homosexuality Act on grounds that the controversial legislation fundamentally contradicts the Bank’s values and for the World Bank to achieve its vision of eradicating poverty on a livable planet, this can only succeed if it includes everyone irrespective of race, gender, or sexuality and the Anti-Homosexuality Act 2023 undermines those efforts.

*Bank of Uganda Speaks Out on Fraud in Commercial Banks*

*Hon. Jonathan Ebwalu (MP, Soroti West Division)* asked the Central Bank to update Parliament on the steps taken to address recent complaints in public about fraud in commercial banks, remarking,

Recently, several customers came up complaining of fraud in different commercial banks, for you as the controller of all these commercial banks, has the Bank of Uganda taken any steps to investigate these claims by the customers in respect to these claims in different banks, for example, Equity Bank?

The Deputy Governor replied by saying that when a commercial bank is putting in a product, the Central Bank ensures that the commercial bank has put in sufficient risk management frameworks, which are scrutinized during the off-site and on-site inspections, that seek to establish how adequate the risk management frameworks are, in these institutions.

Bank of Uganda can’t be in each commercial bank querying every transaction the bank is doing, but we are guided by the risk management framework so that if there is fraud, the first thing we look at is how robust the risk management framework that was put in place, was it robust enough, was there insider participation. We ensure that if the mistake was made by the bank, to what extent has the bank compensated the customer for that mistake, particularly where there is insider trading, but if you lose your PIN, you bear the risk, explained Atingi-Ego.

Lawmakers also cast doubts on the figures submitted by the Bank of Uganda that Uganda’s economy grew by 6.8%, questioning why this purported growth isn’t reflected in the lives of average Ugandans whose purchasing powers they said were reducing daily.

This was after the Deputy Governor said the Ugandan economy had shown signs of resilience despite numerous shocks. Quarterly estimates by the Uganda Bureau of Statistics indicated that the Ugandan economy grew by 6.8% in June and 5.6% in June 2022. This growth was driven by services and industry output, which grew by 7.0% and 8.8% respectively.

However, several MPs cast doubts on these figures, wondering why this growth isn’t being felt in the pockets of Ugandans, arguing that although the economy had grown, some Ugandans are growing poorer.

In response, Atngi-Ego said that the Bank of Uganda’s role in addressing the issues of the poor lies in minimizing the erosion of purchasing power by ensuring that inflation doesn’t rise significantly.

“In my meeting with the Ministry of Finance, I can maybe say this, but for me to say I am the adviser of Government on poverty, it wouldn’t be in my mandate. It’s you who does the appropriation of resources; if you know that climate change will affect the poor, to what extent are you pushing for more appropriation of resources to mitigate climate change? You should interrogate the government budget to see how it promotes exports so that we have a stable currency so that we are able to service our debt, explained Atngi-Ego.

Source: Parliament of Uganda

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