How central banks in EAC can boost private sector credit

BoU to study corporations

Adam Mugume, the director for research at BoU said they are yet to come up with an option to stimulate PSC but added that they plan to first carryout a study about the demand for credit in the private sector.

“There are some of the special considerations that we have to put into place to stimulate demand. But which are those, we do not know yet,” he said.

“Those are the ones we have to think as technical teams  to see what are the special activities that we can put in place to stimulate demand for private sector credit.”

He said BoU plans to carry out deep analysis of these big corporations and companies to ascertain whether they are real constraints in accessing credit, why commercial banks are not willing to lend capital and probably come up with a solution.

Matters that will be beyond BoU capability, Mugume says will be forwarded to the government.

On Aug. 11, BoU maintained the Central Bank Rate (CBR), a benchmark lending rate for commercial banks at 10% compared with 14% at the same time last year, on account of low inflation levels in a bid to boost in economic activity.

Since last year, in line with the CBR movement, commercial banks have lowered their interest rates from an average of about 25% to around 22% today.

Analysts back Governors

Ramathan Ggoobi, a policy analyst and lecturer of economics at Makerere University Business School told The Independent in an interview that it is good that the debate about private sector credit has started to take place at a level of central bank governors.

He said it is unfair for central banks in the region and government to deny funding to struggling private companies involved in manufacturing because they are the engine of economic growth and development.

Last year, more than 65 companies in Uganda sought for bailout from the government citing hard economic times but the latter declined to extend the financial support claiming that they are private entities.

In neighbouring Kenya, the government has declined to support the cash strapped regional retail chain, Nakumatt Holdings, claiming that there is no legal basis to bailout private business entities.

“We need to be serious and look at this keenly and see the role that central banks can play,” Ggoobi said.

He said it is time for central banks and governments in the region to address issues of cheap long term finance for industrialization without politicizing the process.

“The government needs to put money in a development bank such that due scrutiny is done on each and every individual or company that attempts to borrow the money but not in the ministries,” he said.

The private sector, too, have welcomed the proposal but added that all stakeholders including government and the private sector need to take part in the decision making for the benefit of the economy.

“The problem we have in this country is that every institution – the central bank and the government – tries to prescribe its own solution to a problem independently,” said Moses Ogwal, the director for policy and advocacy at the Private Sector Foundation Uganda (PSFU).

He said the central banks and the governments need to come up with initiatives that stimulate aggregate demand for goods and services.

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