In recent times, many people in Uganda are holding onto their money and avoiding taking out loans or making investments. After years of extensive borrowing, Ugandans are now prioritizing debt repayment over new investments, which could potentially slow down the country’s medium-term economic growth.
The Ugandan economy had heavily relied on credit for various purposes, including real estate, vehicles, high-risk ventures, and new properties. Now, Uganda faces a prolonged period of deleveraging, where debtors are allocating their income to repay debts instead of spending and investing it.
According to the Bank of Uganda’s 2021/2022 annual report, the ratio of non-performing loans to gross loans in the banking sector increased from 4.8 percent in the 2020/2021 financial year to 5.3 percent over the following period. This was aggravated by the operating deficit in the sector for the fiscal year ending on June 30, 2022, which rose to Shs233 billion from Shs42 billion in the previous year.
Mr. Michael Atingi-Ego, the Deputy Governor of the Bank of Uganda, cited global interest rate increases, high inflation, and monetary policy tightening by developed market central banks as factors negatively affecting the country’s sovereign reserve holdings. Additionally, government foreign expenditure and market interventions to stabilize foreign exchange rates limited the bank’s ability to take advantage of rising interest rates.
While private sector credit growth has increased slightly, it remains below pre-pandemic levels, leading to lenders’ risk aversion and decreased borrower demand. However, Uganda’s national treasury predicts an economic expansion of 6.0 percent in the 2023/2024 fiscal year.
As consumers and local governments focus on debt repayment, there is reduced spending on various projects, which may hinder the growth of the gross domestic product (GDP).
In the second quarter of 2023, commercial banks tightened credit standards for certain business sectors while relaxing them for households. This shift comes amid expectations of increased demand for credit from both businesses and households, but also an anticipated rise in loan defaults due to recent legislative changes.
The Bank of Uganda’s survey showed that most banks expect their lending rates to remain largely unchanged, with only a minority predicting rate increases in the quarter leading up to September 2023. The central bank attributes the net tightening of credit standards to reduce non-performing loans, increased default rates, and a slowdown in economic activity.
Financial statements from banks like Bank of Baroda and Stanbic Bank have revealed an increase in bad debts and non-performing loans, reflecting the challenges faced in the lending sector. These changes in the financial landscape are indicative of Uganda’s economic condition and its aftermath from the COVID-19 pandemic.
Mr. Stephen Kaboyo, a financial markets expert, explained that rising non-performing loans during macroeconomic shocks are also associated with rising capital costs. Many businesses are still struggling to recover and adapt to the post-COVID environment, and banks are becoming impatient, leading to collateral sales and provisioning to cover bad loans using shareholders’ funds.
