On Tuesday this week, the Central Bank of Uganda (BoU) for the second time increased the Central Bank Rate (CBR) from 7.5% to 8.5%.
A CBR is a rate at which commercial banks borrow from the BOU in situations where they need money to lend outside. This borrowing is done by commercial banks is done as the last resort.
This comes just one month after the same bank increased the CBR to 7.5% from 6.5%, where it had stalled since 2018.
At 6.5% CBR, the commercial bank was lending funds to businesses at a rate of 18%, an indication that a 2% increment will lead to an adjustment to the final borrowers. 8.5% means commercial will lend to final borrowers at around 20%.
Micheal Ating-Ego, the Deputy Governor of BoU said that this has been done to contain the sky-rocketing inflation, which he said continues to rise, largely influenced by external cost pressures stemming from higher global food and energy prices, persisting global production and distribution challenges, as well as rising domestic food crop prices due to dry weather across the country.
There is no signal that this inflation will come down since its increasing daily according to the Uganda Bureau of Statistics (UBOS) monthly performance.
The June Consumer Price Index (CPI) from the Uganda Bureau of Statistics (UBOS) indicated that the annual headline and core inflation rose to 6.8% and 5.5% in June 2022, up from 6.3%t and 5.1% in May 2022, respectively.
Annual food crop inflation has sharply risen from 0.7% in February 2022 to 14.5% in June 2022.
The rising food and energy prices, intensified by a weaker Uganda shilling, have worsened the inflation outlook for the remaining part of 2022 and into 2023.
Atingi-Ego said that the escalation of global inflationary pressures could ease much faster than currently assumed, resulting in a decline in imported inflation.
“The June 2022 preliminary GDP estimates by the Uganda Bureau of Statistics (UBOS) indicate that the economy grew by 4.6% in Financial Year (FY) 2021/22 from a revised growth rate of 3.5% the previous year,” he said
BoU’s measures are aimed at reducing the money circulation in the economy, which will in turn reduce inflation by 6%.
To the dismay, experts, however, argue that BoU is ignoring the fact that Uganda is experiencing a cost pull inflation where they are both high prices and at the same time low-income levels amongst the masses.
Experts believe that such measures can work in a situation where the economy is experiencing demand-pull inflation, where there is a lot of money circulation, competing for the available static goods and services.
“While the inflationary pressures are likely to be temporary, the MPC assessed that a markedly higher policy rate is needed to stabilize inflation around the target. Accordingly, the MPC raised the CBR to 8.5 percent and maintained the band on the CBR at +/-2 percentage points,” Atingi-Ego said
“The margins on the CBR for the rediscount and bank rates remain at 3 and 4 percentage points, respectively. Consequently, the rediscount and bank rates are now 11.5% and 12.5%t, respectively,” he said
He added that the BoU also increased the Cash Reserve Requirement by 2% to 10%, effective 23 June 2022. The MPC considers that the monetary policy stance will have to be tightened even further so as to ensure that inflation eases back to target in the medium term.
Comparison with Last Month
In its April MPR, BOU said that the borrowing rate by customers had substantively fallen due to these exorbitant charges.
“Major declines were registered in the Personal and Households loans, Transport and communication, Agriculture, Manufacturing and Trade sectors with declines ranging between 30 to 130 basis points in that order to averages of 19.9, 16.3, 20.7, 16.2 and 17.9% respectively,” the report read in part.
“On the other hand, lending rates increased for electricity and water sector, building, mortgages, construction and real estate sector, and other activities. Nonetheless, the lending rates in most sectors exhibit significant volatility and as such it’s hard to predict their future trajectories,” it adds.
This according to the BoU led to the reduction in the credit to the Private Sector Credit (PSC) growth rate.
“Although the February 2022 reading seems to mark a reversal of the declining trend, it is not clear whether this is not temporary given the wave of global supply shocks that are exerting upward pressure on prices and downward pressure on output,” the report states.
According to BOU, the large drop in the value of loan applications could indicate that borrowers are uncertain about the future trajectory of economic activity.
“Year-on-year growth in PSC fell to an average of 8.5% in the quarter to February 2022. Adjusting for the exchange rate changes, year-on-year growth in PSC averaged 9.7% in the quarter to February 2022 compared to 10.8% in the quarter to November 2021. Over the same period, growth in foreign currency-denominated loans improved to 5.6% compared to 3.6% in the previous quarter, while shilling-denominated loans fell to an average of 9.8% from 12% over the same period,” the report stated.
Atingi-Ego said that the Composite Index of Economic Activity (CIEA) growth in the three months to May 2022 decelerated to 0.9% from 2.1% in the three months to February 2022.
“Overall, economic activity is projected to remain modest as the shocks to commodity prices, production and distribution disruptions, and global inflation continue to dim the prospects for domestic economic growth,”
The risks to the growth outlook, which are tilted to the downside, he said among others include; weaker global growth, escalation of geopolitical conflicts, heightened global economic uncertainty, and higher inflation. Other downside risks are a further decline in consumer confidence, heightened exchange rate volatility, and weakening investor optimism.
Nonetheless, in the medium-term, the economy is projected to grow in the range of 6.5%-7%, supported by public and private investments in the oil sector.
What Commercial Banks Say
In an exclusive interview with DaParrot, Wibrod Humphreys Owor, the Executive Secretary of the Uganda Bankers Association (UBA), an umbrella body that unites all commercial banks said that BOU’s CBR is just a benchmarking but many other things go into the cost of funds.
“The cost of mobilizing it, operations, and you see how much we spend talking about investment in banking, the non-performing loans and a lot of regulatory compliance requirements all factored in including risks, premium to arrive at the price and in every economy, the lending rates are determined by other macro-economic factors or example if somebody doesn’t pay, how long does it take me to recover, Court process and so on, all those are factored into pricing and that’s how we arrive at the 18% rate,” he said
“As we get more efficient, and invest more in technology, we have seen interest rates have come down from 26% and shall continue to come down,” he added.
