CBR Cut May Not Boost Private Sector Credit – Economist

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In short
Reacting to the Bank of Uganda BoU reduction of the Central Bank Rate CBR, Razia Khan says given recent banking sector developments, with the authorities intervening in former Crane Bank, it is not clear that easing the CBR alone will be able to drive a robust private sector credit recovery in the near-term.

Standard Chartered Bank's Chief Economist for Africa, Razia Khan, says she is doubtful the recent central bank easing of its benchmark lending rate will drive up private sector credit and boost economic growth.
Reacting to the Bank of Uganda (BoU) reduction of the Central Bank Rate (CBR), Khan says given recent banking sector developments, with the authorities intervening in former Crane Bank, it is not clear that easing the CBR alone will be able to drive a robust private sector credit recovery in the near-term.   
The BoU last week cut the CBR from 11.5 percent in February to 11 percent in April, citing dismal growth in the first two quarters of the fiscal year that gave a bleaker view of the economy.
The BoU in February projected that the economy would grow by 4.5 percent in 2016/17, down from the December 2016 projection of five percent.
The CBR is a signal rate by the central bank which determines inter-bank lending as well as lending to the private sector. The import is that by reducing the CBR there would be increased private sector borrowing which would in turn increase aggregate demand and subsequently boost economic growth.
While announcing the CBR reduction last week, the Governor of the Bank of Uganda, Emmanuel Tumusiime-Mutebile said "the anticipated lower growth in the financial year 2016/17 is largely driven by supply side factors, notably the impact of adverse weather conditions on agricultural output".
The Governor said the agricultural sector contracted on average by about two percent quarter-on-quarter for four consecutive quarters to the second quarter of 2016/17, impacting negatively on the economy.
In October 2016, the BoU also took over management of Crane Bank because it was undercapitalized. Crane Bank, which was early this year sold to dfcu Bank, was Uganda's third biggest bank responsible for 10 percent of private sector credit growth.
According to Razia Khan, owing to these and other developments in the economy, they had expected the policy rate to remain on hold in April.
She said given food price pressures in the near term, they had expected that the central bank would instead make CBR cuts at the June and October Monetary Policy Committee (MPC) meetings.
The MPC is the high level body that scans the economy and decides on whether to stay, increase or reduce the CBR. It comprises, among others, the governor, his deputy Louis Kasekende, the Executive Director for Research and Policy, Adam Mugume, as well as an adviser from the International Monetary Fund.
The BoU reports that commercial bank credit to the private sector dropped in 2016 compared to 2015. In August and September of 2016, private sector credit was in negatives. It started picking up in October 2016 and by February 2017 it had risen to 7.2 percent, year-on-year.
Meanwhile in the forex market, the Uganda Shilling held firm in a short trading week with markets having a knee-jerk reaction following BoU's rate cut with expectations that it was likely to stimulate demand for foreign currency.
Trading was in the range of 3600/3610. In the money market, overnight rates averaged 10 percent while one week was 12 percent.
According to Stephen Kaboyo from Alpha Capital Partners, watchers of the money market, outlook point to mild weakening of the shilling as pockets of demand are expected to emerge as markets open after a long Easter weekend.


About the author

David Rupiny
In his own words, David Rupiny says, "I am literally a self-trained journalist with over 12 years of experience. Add the formative, student days then I can trace my journalism roots to 1988 when as a fresher in Ordinary Level I used to report for The Giraffe News at St Aloysius College Nyapea in northern Uganda.

In addition to URN for which I have worked for five years now, I have had stints at Radio Paidha, Radio Pacis, Nile FM and KFM. I have also contributed stories for The Crusader, The New Vision and The Monitor. I have also been a contributor for international news organisations like the BBC and Institute for War and Peace Reporting. I am also a local stringer for Radio Netherlands Worldwide.

I am also a media entrepreneur. I founded The West Niler newspaper and now runs Rainbow Media Corporation (Rainbow Radio 88.2 FM in Nebbi). My areas of interest are conflict and peacebuilding, business, climate change, health and children and young people, among others."