BOU Executive Director for Supervision Dr Twinemanzi Tumubweine says the slowdown in borrowing is because there are lower business activities, while the commercial banks are also worried about the increasing risk to lending.
The Bank of Uganda has raised the Central Bank Rate, the rate the regulator uses to control the cost of money from the banking industry, to 9 percent from 8.5 percent, at which it has been for only five weeks.
The frequent Monetary Policy Statements announcing the upward adjustments are meant to control the spiraling inflation by discouraging borrowing by the private sector and households.
The latest increase follows the announcement by the Uganda Bureau of Statistics last week of a rise in annual headline inflation rate to 7.9 percent at end of July up from the 6.8 percent at the end of June.
The rising cost of living has been largely attributed to the high-cost imports, especially fuel and foodstuffs, and is being abetted by the rising food scarcity in the country.
BOU Deputy Governor, Michael Atingi Ego says they will do whatever it takes to bring down the inflation.
//Cue in: “The Monetary Policy….//
Cue out:…of five percent.”//
The use of the CBR adjustment has been criticized by independent analysts who argue that it can only apply where the inflation arises from local factors like more money chasing few goods.
However, in this case, inflation is being caused by importing high-cost commodities like fuel.
Dr Atingi-Ego says they expect the inflation to stay at a 7-7.4 percent as the current factors are expected to persist, or even get worse if the geo-political conflicts especially in Europe worsen.
//Cue in: “The BOU….//
Cue out: ….of the shilling.”//
He however, says there could be factors like better crop harvests, a global recession affecting global demand, as well as improved global transportation environment, which could help bring down the inflation.
//Cue in: “They are ….//
Cue out: …and goods prices.”//
The bigger worry however is the effect of these factors on economic growth, which has started recovering from the effects of the Covid-19 pandemic.
According to the Uganda Bureau of Statistics, UBOS, the economy contracted by 1.6 percent in the first quarter of the year 2022, when compared to the last quarter of 2021, as economic activity fell.
“All sectors of the economy contracted with the services sector taking the biggest hit," says the Deputy Governor. "In addition, the composite Index of Economic Activity has continued to signal a slowdown in economic activity.”
This, according to him, means that economic growth for the year 2022 will be lower than earlier projected, at 2.3 to 3 percent.
Later, next year, there is hope that if there is reduced inflation, lower global tensions and improved investor confidence, growth might pick up to above five percent and even higher in 2023, according to the DG.
//Cue in: “Economic growth…//
Cue out: ….the oil sector.”//
The economy is already suffering low demand for credit even as commercial banks raise their interest rates due to the hiking of the CBR by the BOU.
Commercial banks have been notifying the borrowing public of their intentions to raise the rates by an average of one percentage point starting this month.
This will take the average interest rates back to around 20 percent.
But the Executive Director for Supervision at BOU, Dr Twinemanzi Tumubweine says the slowdown in borrowing is because there is lower business activities, while the commercial banks are also worry of the increasing risk to lending.