In today’s article, I put into perspective the recent move by the Central Bank of Uganda of reducing the CBR in order to jumpstart the economy. Enjoy the read…
Over the past months, Uganda’s economy has experienced a massive slowdown in its growth. A number of events have played a significant role in this economic downturn, for instance, an increased unemployment rate relative to population growth, a prolonged drought at the beginning of the year, and a reduction in money supply within the Ugandan market. Many businesses are downsizing while some are even closing because of the inaccessibility to credit. In other words, the interest rates have been very high and therefore not favorable for the local entrepreneurs who also have limited collateral security. The populous has also reduced its demand for goods and services due to a shortage in their disposable income. Meaning that majority of the population can no longer afford to spend as much as before but are rather focusing on making their ends meet.
In a bid to revive the economy, Bank of Uganda (BoU) has reduced the Central Bank Rate (CBR), that is, the rate at which the commercial banks borrow money from BoU. The reduction from 12 percent to 10 percent is essentially meant to reduce lending rates, encourage the private sector to borrow money from commercial banks, increase local investment, and in turn increase the amount of money circulating within the economy.
However, oftentimes bankers have stated that the CBR is just a signal rate and doesn’t automatically translate into the lowering of lending rates to its level. In addition to that, most of the players in the private sector are skeptical to establish new and expand already existing investments. The high costs of production are pushing them to downsize their businesses with the hope of at least breaking even. Another reason why many local investors are not rushing to borrow is that the commercial banks might actually not follow suit to reduce their lending rates.
While addressing a press conference the other day, the Kampala City Trader’s Association chairperson, Evaristo Kayondo, had this to say; “Bank of Uganda has been reducing its rate for a year now but interest rates remain high. Businesses cannot be borrowing at a rate of 20 percent and expect to survive! For the last one year, bank’s have taken over the business property because of these high rates. We don’t expect a lot to change.”
In my humble opinion, I think that fiscal and monetary policy measures like reducing the Central Bank Rate can only do much in the short-term. Therefore, to achieve a sustainable and long-term jumpstart in Uganda’s economy, the populous needs to save, organize and pool together the available financial resources in their respective sectors. This should be done with an intention to specifically support local investments. Eventually, the economy will be able to support itself to a good extent using resources from within.
Thanks for reading, until next time…