Traders under Kampala Capital City Traders Association (KACITA) recently warned against the continuous raising of the Central Bank Rate (CBR), saying it is making borrowing from commercial banks expensive. This has however not bothered BoU as it has set CBR for October at 10 percent as of yesterday.
While publishing the latest CBR for October, BoU Deputy Governor reasoned that a combination of global factors, the recent drought and a weaker shilling to U.S dollar exchange rate have driven inflation to the highest level recorded since 2012, and deteriorated the inflation outlook.
However, KACITA wants parliament to prevail over BoU, which continues to set high CBR as a measure to control what it says rising inflation, but this has led leading to high interest rates offered by commercial banks, sending away Kampala traders who contribute immensely to the economy of Uganda.
“The Central Bank Rate currently stands at 9 [September] percent compared to our counterparts in the East African Community; Rwanda (6 percent), Kenya (7.5 percent. This higher CBR means higher interest rates on bank loans to reduce the borrowing appetite by business people,” they said recently while meeting members of parliament.
Adding that: The higher CBR further affects production levels leading to scarcity of goods leading to high prices.”
An analyst has argued that if the CBR is increased further Uganda Revenue Authority will not be able to collect enough taxes required to fund government programmes as production will be low as investors fear high interest rates. “You remember the Commissioner General of URA was recently in the media saying they are not collecting enough taxes, which is forcing the government to continue borrowing at alarming rates,” he said.
KACITA led by their Chairperson, Thadeus Musoke, said due to the COVID-19 pandemic, several of their members lost property to banks due to unpaid loans and are struggling to get back to business, much as they are not happy with the current CBR of 9 percent.
The KACITA members say since they cannot borrow at high interest rates caused by the increase in CBR, loans on the other side continue to accumulate, but some members have had their properties attached. “Our loans accumulated, we tried to engage different government agencies and the banks but what was designed to help us was not effective enough because currently banks are auctioning buildings and property and the business communities cannot access top-ups,” Musoke said during the meeting held at Parliament Building yesterday.
Traders also are not happy that borrowing conditions at Uganda Development Bank (UDB) are stringent, sending away most of them, even though the interest rate there is lower than offered by a commercial bank. Government has given about Shs 600 billion to UDB in the last two years , lend at about 12 percent
KACITA members argue that the increase of the CBR and bank interest rates are forcing traders and other investors to downsize their workforce.
“Central banks set benchmark interest rates to guide borrowing costs and the pace of economic growth. Lower rates spur growth while higher ones restrain spending, investment, and stock market valuations. If rates rise too quickly, demand may decline, causing businesses to reduce output and cut jobs,” analysts add. KACITA says they have had to let off some staff to keep operations going.
In the quarter to April 2022, shilling lending rates in Uganda declined to an average of 19.0 percent compared to 19.3 percent in the quarter to January 2022 but most banks revised their lending rates upwards as BoU started raising the CBR in June 2022.