Finance Minister Warns Against Increased Government Borrowing

1421 Views Kampala, Uganda

In short
In order to cover the budget deficit left by donors at the beginning of the current financial year, the government decided to borrow 1 trillion Uganda Shillings from the public, through issuing treasury bills and bonds.

Finance Minister Maria Kiwanuka has warned against increased government borrowing that would see commercial banks ignore the private sector.
 
While closing an IMF and Bank of Uganda Conference at Munyonyo, which was attended by governors of central banks from the sub-saharan Africa region, the minister emphasized the need of governments like Uganda to work towards increasing their revenues.

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In order to cover the budget deficit left by donors at the beginning of the current financial year, the government decided to borrow 1 trillion Uganda Shillings from the public, through issuing treasury bills and bonds. On a quarterly basis, Bank of Uganda auctions these instruments, which are majorly taken by commercial banks, offshore investors and NSSF.

Kiwanuka explains that financial institutions will look not to risk their funds with customers in the private sector, who are likely to default, and opt to lend to the government because it has far less risk. This, she says, would slow growth that is supposed to be driven by the private sector.

Loan defaults from the private sector have increased, with latest BoU statistics placing them at 6.6percent in 2013 up from 4.2percent in 2012. Already, even Dr Louis Kasekende, the Deputy Governor, BOU at the conference admitted that private sector lending is still low.
 
The high interest rates at about 22percent on average, have kept slowed down borrowing by the private sector, which is worrying policy makers. Prof Emmanuel Tumusiime-Mutebile, the Governor BoU, requested for further independence of the bank, but also noted that as policy makers, they needed to be able to react when some of their policies backfire.

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he policy makers attending the conference continued to indicate their concern that, interest rates by commercial banks were not following the trend of the CBR, issued by BoU each month. Ms. Antoinette Saleh, the Director IMF African Division noted that more research was required to understand the “sluggish response of lending rates to the recent loosening of monetary policy.”

Most of the central bankers at the conference pointed out that the private sector needs to access to affordable credit, to boost consumer spending, in turn improve on the economic growth prospects for Uganda.