BOU Deputy Governor, Dr. Michael Atingi-Ego
The Ugandan borrowing public will continue enduring a high cost of credit for as long as the current inflation and foreign exchange rates continue skyrocketing, according to the Bank of Uganda. This is in response to calls by the private sector, especially the manufacturers, that they need easier and cheaper sources of financing to grow output, increase exports and in turn help the speedy recovery of the economy.
At the beginning of July, the industry regulator raised the Central Bank Rate (CBR), a rate that signals the movement of the cost of money for the next two months to 8.5 percent.
This, however, came just a month after the previous increment due to the spike in inflation, unlike the usual reviews that happen after every two months.
BOU Deputy Governor, Michael Atingi-Ego told the business leaders in the banking, manufacturing, and tourism sectors, that if the rates of borrowing are not controlled by making money costly, it will create worse effects for the private sector. He says that specifically, planning by both the government and the private sector, as well as savings would be hurt by uncontrolled inflation.
Speaking at the Uganda Bankers Association (UBA) Annual Conference, Dr. Atingi-Ego said the BOU would continue supporting banks, especially in consumer-friendly innovations as well as helping them maintain liquidity.
His remarks coincided with the revelation by the bankers’ association of a Shillings I trillion credit facility that is aimed at helping the manufacturers increase their production for export promotion and import substitution. The Chairperson of the association said the Export Credit Facility would be a “specially structured and customized regional facility to support manufacturers involved in regional export.”
The Permanent Secretary at the Ministry of Trade, Industry and Cooperatives, Geraldine Ssali warned that unless the banks made it easier for the private sector, especially SMESs through affordable rates and less red tape, the facility would not be embraced.
According to Ssali, red tape has already frustrated many people including a group of Europeans who had come to start rice production but ended up relocating to Tanzania.
Later, however, the Executive Director of the UBA, Wilbrod Owor explained that the facility was being structured to be much cheaper compared to the available options on the market. This, according to him will be possible because of the several financial institutions that are involved, which means the facility will be a hybrid of banking products, with details to be unveiled at the product launch, next month.
He admitted that until now, trade has benefited more from the banking industry, but that with the lesions from Covid-19, there is a need more to promote local production.
But the manufacturers faulted the banking industry for concentrating on trade, and when its production, they fund primary processing. According to the Uganda Manufacturers Association (UMA), this has seen the country’s manufacturing industry remain dominated by small processing factories.
Richard Mubiru, the Chairman of the Policy and Research Committee, said for example, that if the government funded the steel and lime mining industries, it would have far-reaching impacts on the import of steel products and inputs for the cement industry.
He said the country cannot develop with the available source of financing being commercial banks.
Mubiru, also Corporate Affairs Director at a textile company, Nytil, gave his case for the low level of the industry’s development despite the country being suitable for cotton production. In 2020/2021, the country exported 90 percent of the cotton lint produced, and therefore, only 10 percent was for value addition.
According to industry figures, raw lint earned the country 29 million dollars, while the 10 percent value-added product fetched about 50 million dollars. Mubiru said that focus can be put on promoting value addition to cotton, especially by providing long-term capital, the textile industry would be a top sector in the economy.
The director of economic affairs at the Ministry of Finance, Planning and Economic Development, Moses Kaggwa admitted that credit in Uganda is very expensive, but that adding that even what they have put in the Uganda Development Bank is being outstripped by demand.
He said the government is trying to introduce and streamline the venture capital industry where international investors can bring capital into the country, but that this has run into legal challenges which they are working on currently.