Government to cut borrowing to stimulate banks’ appetite to lend to locals

The Ugandan government is set to cut domestic borrowing to increase banks’ appetite to lend to the public, President Museveni has revealed.

“The high interest rates of commercial banks are due to two actors: the commercial banks which want high profits and don’t care about wanainchi and the government (finance) gives high priced treasury bills to the world in order to borrow from the public, ”he said.

Museveni told the nation on Friday night that the government discussed this distortion and realized that endless borrowing was part of it.

“We should minimize government borrowing,” he said.

Domestic financing is executed mainly through the issuance of longer-term securities with fixed interest rates, while external financing comes from concessional funding sources, using the currently large undisbursed balances of multilateral and bilateral creditors in the external debt portfolio.

Driven by the government’s record financing needs and its preference for safe assets, the share of private sector loans in total commercial bank assets fell from 48% in March 2020 to 41% in March 2021.

During the same period, the share of public debt increased from 20% to 25%, with government bonds accounting for 50% of the annual growth of banks’ business assets.

With bond yields remaining high, lending rates remained stable, further weakening the effectiveness of the monetary policy transmission channel.

Interest rate

Museveni said that each year the government “pays Tn Shs 15.16 for debt repayment and Tn Shs 4.9 is interest, that is, money that has never been paid. used in our country ”.

“We now know where the problem with high interest rates is coming from. It will be gradually approached. The enemy you are prepared for loots little.

Museveni’s remarks come against the backdrop of a public outcry over high interest rates from commercial banks that prevent millions of people from accessing affordable credit.

Interest rates typically range between 22% and 25%, and depending on the length of the loan, consumers can end up paying more than double the value of the original amount.

Well-functioning financial systems around the world enable financial institutions to provide affordable credit and other financial services to more people.

This, in turn, stimulates the growth of existing businesses and encourages the emergence of new ones.

At the household level, it enables individuals and families to better balance their spending and savings, to invest in their children’s education and access to good health care, and to accumulate physical assets and others to guard against shocks, such as the locust invasion and COVID-. 19 pandemics that were recently experienced in Uganda.

Together or individually, all of these issues play an important role in achieving higher levels of economic growth and shared prosperity.

The International Monetary Fund (IMF) recently said that Uganda’s fiscal policy should seek to balance recovery support and sustainable public debt while reducing reliance on domestic financing to ease crowding out private sector financing.

The IMF said the short-term fiscal framework should aim to improve the composition of spending by reducing the share of security spending in favor of increased social spending.

Experts believe that in the medium term, and from fiscal year 21/22, fiscal consolidation should aim to bring public debt below the authorities’ target of 50% of GDP, as codified in the Authorities’ Budget Responsibility Charter (CFR), while implementing structural reform measures aimed at improving public finance management and expenditure efficiency.

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