Shilling loans subdued by interest rates
Bank of Uganda for the third consecutive month has maintained the benchmark lending rate at 12percent further pilling pressure on banks to ease lending rates to pre-June 2011 levels which averaged 18percent. Significantly though, despite lending to the private sector increasing year-on-year in December 2012 by 12percent, up from 4.4percent in August 2012, shilling denominated loans declined by 6percent.
In BOU’s monthly monetary statement for February 2013, Central bank governor Emmanuel Tumusiime-Mutebile notes that “growth in monetary aggregates [money supply] has continued to recover from the subdued growth rates, albeit at a slow pace,” and further points out that the recovery of loans in Uganda Shilling to the private sector “remain muted.”
Total outstanding private sector credit in shilling denominated loans were Ushs 4.6 trillion as of December 2012, compared to Ushs 4.9 trillion in December 2011, a decline of 6percent. If compared with December 2010 where shilling loans were Ushs 3.9 trillion, and rising to Ushs 4.9 trillion in December 2011, it translates into growth of 25.6 percent. Notably though, foreign currency denominated loans grew by 56percent.
“The shilling loans have been on a declining trend since June 2012 and this could reflect that households and SME’s that mainly borrow in shillings could remain credit constrained in the near future,” reads a monetary policy report for February 2013. Dr Adam Mugume, the for Director Research at BoU emphasizes that “the worry is on the shilling denominated loans” because it is the category for personal and housing loans, a category into which most Ugandans fall.
20percent of the all shilling dominated loans go to personal and housing loans, which only comes second to housing, building, mortgages and real estate at 22.8percent. Notably, personal and household loans as of December 2012 were Ushs 947billion from Ushs 1trillion in December 2011 a decline of 5.3percent. Furthermore, in December 2010 personal and household loans were Ushs 810billion rising to Ushs 1trillion in December 2011, indicating a growth of 23.4percent.
According to Dr Mugume though, increased foreign currency denominated loans is a result of “importing of by products by traders, the manufacturing sector and construction business.” Foreign currency loans as of December 2012 had expanded to Ushs 3.1trillion from Ushs 2trillion in December 2011, a rise of 56percent. In December 2010, these loans were at Ushs1.3trillion meaning they rose by 53.4percent to December 2011.
Foreign currency loans are largely dominated by the real estate sector at 25percent closely followed by manufacturing at 24.9percent. Overall lending to the private sector rose to Ushs 7.7trillion in December 2012 from Ushs 6.9 trillion in December 2011. Dr Mugume points out that shilling loans will recover only when interest rates from banks fall significantly. Current average lending rates for commercial banks are at 24.8percent (December 2012) for shilling loans, compared to 8.7percent for foreign currency loans.
In fact Mugume says that commercial banks should have reduced rates by now because the cost of money from BoU had remained the same since December 2012 at a reduced rate of 12percent the lowest rate over the last 12months. At the current benchmark lending rate level which is likely to remain between 12 and 11percent over the next 12 months as long as inflation remains within the 5percent target, interest rates are expected to be at least on average at 19percent, the rate before inflation spiraled in March 2011.
Banks though have also been cagy to lend to the private sector considering that the average rate of non-performing loans were at a seven year high of 4.9percent in November 2012, before declining to 4.2percent in December 2012. BoU expects the economy to pick rather slightly in the months ahead, however “the downside risk to economic outlook is the projection for continued subdued private sector credit growth and high lending interest rates, which have continued to impact on the private spending decisions.”
The central bank is also riding on the expectation that annual inflation remains around the 5percent mark and according to their forecasts it will “remain at a minimum policy target rate of 5percent per annum,” as long as risks to the rate don’t appear. “However, there are risks to higher inflation which include commodity price shocks and exchange rate depreciation pressures given the weak current account balance. This is balanced by continued weakness in domestic demand,” the policy further reads.