The Ugandan central bank kept its key interest rate unchanged at seven percent on Wednesday. This is a strategic move that promises stable lending rates in the face of increased loan default levels and renewed appreciation of the Ugandan shilling against the US dollar.
While a persistently soft political stance is putting pressure on the Lending rates charged by commercial banks since last year has decreased, an increase in the credit default rate is mainly due to several cases of distressed borrowers unable to service their loans after temporary loan holidays have left average lending rates unchanged as lenders struggle absorb huge provisions for credit losses in their business.
Despite easing of Covid-19 lockdown restrictions in July 2020, many small businesses are still grappling with the challenges of low sales resulting from the increasing job losses and attributable to lower household spending – a negative situation that has affected their ability to repay loans and clear supplier debt.
The credit default rate for the banking sector is estimated at more than five percent, while the average key interest rate for Loans currently range from 16 to 18 percent, according to industry statistics. Given the slow economic recovery trends, the effects of consistent loose monetary policy measures on local consumer demand remain unclear.
“High-frequency economic indicators for the first quarter of 2021 point to a gradual strengthening of economic activity but still in a subdued pace. Therefore, the GDP growth prospects in FY2021 / 22 remain unchanged at 4.0-4.5 percent. A high degree of uncertainty is associated with the economic outlook, with many possible downside and upside risks, but a downside risk.
“The main risk remains the virus and possible Variants. The infection could rise again despite the ongoing Covid-19 vaccinations and this would dampen economic recovery, especially in the near future (12 months in advance) as this would reduce the improvement in demand conditions and delay the return to normal ” , according to the last monetary policy statement published on Wednesday.
However, the Ugandan shilling is expected to rise in the coming weeks due to the low import demand and the increased dollar supply from offshore investors compared to the US dollar recovered The sovereign debt market and positive investor sentiment resulted from the signing of the most important EACOP-P project agreement (East African Crude Oil Pipeline) between Uganda, Tanzania, Total E & P and the China National Offshore Oil Corporation (CNOOC) on April 11th. The Ugandan shilling traded below $ 3,600 against the US dollar during midday trading on Wednesday, local financial traders said.
“Commercial banks are currently cashless but can’t lend much of Money because loan default rates are still high. The Ugandan shilling has stabilized in recent months due to very low consumer demand in many sectors, which has led to a decline in imports. The strong dollar supply from offshore actors and non-governmental organizations has also boosted the local shilling against the US dollar.
“The Bank of Uganda’s recent policy rate decision was predictable as many central banks are still doing this are trying to revive their economies, which were hit by the Covid-19 pandemic with loose monetary policy, “said Benoni Okwenje, General Manager for Financial Markets at Centenary Bank Limited.