The signs are glaring for anyone alert enough to catch double-digit inflation, expensive loans; a high unemployment rate, businesses shutting down, stagnant wages; and a not-so-conducive political climate.
All tell-tale signs of a hanging dark economic cloud. This is further reverberated by Bank of Uganda’s [BoU] Monetary Policy Statement for October, and financial news reports highlighting the Central Bank rate at 10 per cent, Bank rate at 14 per cent, and Rediscount rate at 13 per cent.
Simply put, the rate BoU charges other commercial banks when lending is in double digits, 14 per cent [bank rate], and the rate it charges banks/financial institutions for short-term/ overnight loans is 13 per cent [rediscount rate]; whereas the base for BoU’s monetary policy operations when injecting liquidity [central bank rate] is 10 per cent.
In layman’s terms, the cost of credit is going to be expensive because banks are going to transfer this burden to their stakeholders, you and me, their customer. These rates have shot up from August where the CBR was nine per cent, rediscount rate 12 per cent, and bank rate 13 per cent; or, as August’s monetary policy statement affirms, “the margins on the CBR for the rediscount rate and bank rate will remain at 3 and 4 points, respectively”.
Hikes in the CBR, bank, and rediscount rates mean that BoU’s major focus currently, is fighting inflation that is at 8.1 per cent core inflation from 7.2 per cent in September; while headline inflation [indicating changes in food, and fuel] is double digit – 10 per cent. The economic jargon, and statistics are likely to get the average Ugandan’s mind giddy. What they should take away from this display of figures is their aftermath, which is: credit is going to become expensive as banks and other credit institutions are going to charge high interest on loans, because they are going to be borrowing from BoU expensively.
The banks will then transfer this burden to their customers in form of high interest rates, expensive loans. Hikes in interest rates encourage the public to save their money, rather than spend it. Also, they offer lenders a handsome return, thereby attracting foreign capital from foreigners who will want to cash in on the high interest rates. This affects the exchange rate of the shilling which will rise against other currencies, making domestic goods more costly than imports.
In BoU’s quest to reduce the volume of money in circulation to curb inflation, the economy is going to be slowed, driving down demand for goods and services [GDP] hence a recession, which is a period of negative growth in an economy. This was forecasted by the Deputy Governor BoU Micheal Atingi-Ego: “Economic growth is expected to remain below its long run trend until financial year 2025/2026”. “[…] tighter financial conditions will likely weigh on domestic economic growth,” this he mentioned at the reading of the Monetary Policy Statement for October 2022.
Not only this, businesses are going to shut down, owing to the fact that they won’t be in position to afford these expensive loans and, as a result, people are going to lose their jobs — the rate of unemployment is going to shoot further up. Workers are going to be told to take pay cuts, and in the case of Uganda, many in the workforce will go for months unpaid. Salaries will be frozen without increment because businesses will be straining to make profits.
This scenario means people will have less money to spend negatively impacting GDP growth. Further, the number of non-performing loans [NPLs]: that is loans whose payments are going to be defaulted on is going to increase because the debtors won’t be able to keep up with their scheduled ‘expensive’ payments. Couple this with the decreasing number of people taking out loans, and you have yourself a perfect storm for the banking sector.
Banks/tier I financial institutions without a sizeable total asset base are going to be hit, shut down even, closely following in the path of Afril-and First Bank that closed operations earlier this year because of increasing financial losses. In spite of that, It is not all doom and gloom because by tightening monetary policy, inflation is likely to be brought under control. Also, corporate banking: banking services for clients whose needs are more complex than in commercial banking is going to experience an up- ward trajectory.
Syndicated loans are going to be on the rise since banks will be more willing to share business risk amongst themselves. Loans for infrastructure and industrial projects are going to be demanded by high-end clients, as governments will constantly be looking to borrow from banks for their unending financial shenanigans.
Nonetheless, a key challenge facing BoU’s monetary policy as it strives to achieve price stability is the political wing of government that (un)intentionally unbinds what BoU binds. For instance, presently the central bank has hiked rates to reduce the volume of money in circulation to cool off the economy that is heated up [inflation].
On the other hand, government is downplaying BoU’s efforts by massively borrowing; It was reported in The Observer on the October 28, 2022 that government was in the process of borrowing two trillion shillings [€455.03 million] to finance its budget for the current financial year!
This manouvre is going to increase money supply by the borrowed amount because government isn’t going to bank it; rather, it’s going to inject the borrowed money into the economy for infrastructure projects and as a consequence — inflation. Therefore, BoU’s attempt to control inflation in this instance is almost definitely futile because it has been countered by the political wing of government; and for this reason, it looks like Uganda is going to be grappling with inflationary pressures, and what comes with them for the foreseeable future.
So, it’s my civic duty to run a public service announcement calling on all my countrymen to buckle up; it’s going to be a bumpy ride the rest of the year, and the next. Because if I don’t forewarn you, who will?
The Observer News
