Prof. Emmanuel Tumusiime-Mutebile, the BoU Governor
Ugandans are increasingly seeking bank loans but interest rates largely remains high in comparison to the Bank of Uganda’s Central Bank Rate (CBR), a benchmark lending rate. However, despite increased loan applications, loan approvals remain low.
According to Bank of Uganda’s Monetary Policy Report for December 2021, lending rates increased in quarter ending October 2021 to an average of 19.0% from 17.61% in the quarter ending July 2021, reflecting increased risk aversion and the expiry of the Credit Relief Measures.
“On a monthly basis, lending rates increased from 19.05% in September 2021 to 19.66% in October 2021,” the report says, adding that increases were registered across all sectors, with trade, manufacturing and personal loans registering the highest increases.
“Prime Lending rates averaged 17.1% in quarter ending October 2021, down by 0.1 percentage points from the previous quarter,” the report says.
It adds that Private Sector Credit (PSC) increased in the quarter ending October 2021 partly driven by a pick-up in economic activity following the easing of lockdown measures.
“Total PSC grew by 9.2% in the quarter ending October 2021 relative to 7.9% growth in the quarter ending July 2021(Including Uganda Development Bank, PSC grew by 11.9% relative to 10.8%,” the report says.
It adds that the number of applications approved dropped, but the value of loans extended increased particularly in the manufacturing and trade sectors.
“The number of loan applications approved fell to 1.15 million applications in the quarter ending October 2021 from 1.31 million in the quarter ending July 2021,” the report says, adding that the value of loan approvals rose to Shs2.76 trillion from Shs2.18 trillion in the quarter ending July 2021.
In the monetary policy statement for December 2021, Prof. Emmanuel Tumusiime-Mutebile, the BoU Governor announced that the CBR was kept unchanged at 6.5 percent.
“This would be consistent with meeting the inflation target of 5 percent sustainably in the medium term,” Mutebile said.
He said the uncertainties and risks of the inflation forecast are two-sided: Stronger global cost-push inflation pressures, stemming from sharply rising prices and limited supply of production inputs could result in higher domestic inflation, especially so, if combined with a weaker shilling. If the exchange rate were to depreciate significantly than currently being assumed, it would increase the overall inflation pressures and foster a need for higher interest rates.
On the downside, a faster resolution of global supply chain disruptions, lower international commodity prices, and another round of good food crop harvest could cause inflation to remain subdued.
“Because of the excess capacity, the economy continues to require considerable monetary policy support,” he said, explaining why the CBR was kept unchanged.