Increased government domestic borrowing is failing growth of private sector credit, according to the International Monetary Fund (IMF).
Growth in private sector loans, the IMF says, has remained in single digits in the last nine months as banks opt for more secure debt amid increasing risks resulting from Covid-19.
Banks have also maintained high interest rates, which drive away borrowers, yet Bank of Uganda has been reducing the Central Bank Rate as a way of creating accommodative interest rates.
However, lending rates have remained sticky impeding growth of private sector credit, which is critical in economic development, especially in regard to expansion of investments that generate income, jobs, goods and services.
In its country report, the IMF said, private sector credit grew by 8.7 per cent in 2020, down from 12.9 per cent a year earlier supported by more than expected growth in foreign currency denominated loans since mid-2020.
However, the IMF noted, during the period, there was significant growth in non-performing loans, especially in trade, noting the expected increase in default rates could explain banks’ continued tight credit standards.
“Credit demand has been increasing since June last year but approvals remain below applications which reflects commercial banks’ risk aversion that had not improved by April 2021,” the IMF report says, noting that the share of commercial banks’ assets had declined from 48 per cent in March 2020 to 41 per cent in March 2021.
Government’s domestic borrowing during the period, according to the IMF, especially through treasury bills and bonds, rose from 20 to 25 per cent due to high yields on bonds, which has forced lending rates to remain sticky, dampening further efforts by the Central Bank to bring down interest rates.
The report also noted that whereas the Central Bank had put in place a number of measures to mitigate financial stability risks emerging from Covid-19 disruptions, there have been various threats to stability.
The Central Bank has since April 2020, introduced a number of measures, key among them liquidity support and credit relief, which has seen at least 21.3 per cent of loans restructured by the end March 2021.
Npl increase
Non-performing loans have increased to 5.4 percent of the total loan portfolio even as bank sector solvency ratios averages at 22.2 per cent, with stress tests indicating adequate capital and liquidity buffers to support the sector even if non-performing loans double from current levels.