Government in sharp cut back on domestic borrowing

June 8, 2016 in Business, Finance, Financial Services, Investment, Markets, Policy by Editor

Kampala June 8- As Ugandan Finance Minister Matia Kasaija prepares to present budget proposals for the new financial year, commentators are hailing the governments stated intention to cut back on domestic borrowing, a move likely to create more room for growth in credit to the private sector.

This government plans to borrow only Ushs 600bilion in fiscal 2016/17, less than half the Ushs 1.4 trillion that was budgeted in the last financial year.

Kenneth Mugambe, the Director of Budget at the Ministry of Finance says reduced domestic borrowing by the state is expected to have a dampening effect on lending rates, keep inflation in check and also give room to the private sector to grow.

The economy witnessed a spike in interest rates that nearly touched 28percent, impacting firms capacity to borrow and expand output as the central bank hiked its basic rate in a bid to tame inflation. Meanwhile the government was also active in the credit market, crowding out the private sector.

For the most of the last fiscal year, interest rates remained high as the Central Bank tightened monetary policy in the face of heightened inflation expectations. In response, commercial banks weighted lending rates rose from 20.4 percent in March 2015 to 24.3 percent in December 2015 making it very difficult for the Private sector to borrow money and do business.

Some lenders such as Stanbic took a deliberate decision to pull back on lending to some segments as a way of minimizing the risk of default.

“We thought it would be irresponsible on our part as a lender, to extend credit under circumstances we knew did not favour a client to meet his obligations to us,” Stanbic Uganda CEO Patrick Mweheire told a media briefing in April.

Buliisa County MP Stephen Mukitale a former chairperson of the parliamentary committee on the National Economy told 256BN that scaling down on government borrowing in the domestic market was a good move because such borrowing had in the past impeded private growth.

“The Private sector is still nascent and needs room to grow but it becomes very difficult if it is competing with the government for loans from local banks. If government borrows from banks then the loans become expensive and because of this the private sector shy away from procuring loans that would otherwise help them grow their businesses,” Mukitale says.

He added that government also suffers reduced tax revenues when private firms fail to grow.

While the decision to cut back on domestic borrowing is partly informed by the need to live within available resources, Uganda is navigating a difficult financial course. The economy is expected to grow at just 4.6 percent this financial year while near term prospects remain subdued.  Finance Minister Matia Kasaija is today expected to present a Ushs 26.3 trillion budget for 2016/2017 but almost a quarter of this will go to servicing Uganda’s $7 billion debt.