By JOINT REPORT The EastAfrican
In Summary
- The World Bank says the shift from local to foreign currency loans is likely to dilute the effectiveness of monetary easing on the real economy, particularly in the event of a depreciation of the currency, which will make it more expensive for borrowers.
- Economic growth in Uganda over the past 18 months has been mainly driven by the services and construction sectors, followed by the manufacturing and then the agricultural sector but the construction and manufacturing sectors have been some of the major recipients of foreign currency-denominated loans.
- The World Bank says that the sectoral concentration could worsen as commercial banks increasingly facilitate loans in foreign currency, whose share of all loans has rapidly grown to a total of 41 per cent, up from approximately 29 per cent two years ago.
The World Bank has raised concerns about the
growth of foreign currency-denominated loans in Uganda, arguing that it
could destabilise the economy.
The Bank of Uganda (BoU) began restricting foreign
currency-denominated loans this year, leading to a marginal contraction
of 3.9 per cent to Ush3.04 trillion ($1.17 billion) as at the end of
June this year, from Ush3.17 trillion ($1.18 billion) as at the end of
December 2012.
The restrictions, which include ensuring that
foreign currency-denominated loans are either short-term or are
disbursed to borrowers with foreign currency income streams, came after
the value of these loans peaked at the end of December last year.
Foreign currency-denominated loans, whose value
stood at Ush826.94 billion ($401.4 million) at the end of June 2009,
have been consistently growing at a rate faster than Uganda
shilling-denominated loans; indeed between December 2011 and June 2012,
shilling-denominated loans started contracting while the former hit
all-time highs.
The World Bank, in its Uganda Economic Update
Report released recently, says the shift from local to foreign currency
loans is likely to dilute the effectiveness of monetary easing on the
real economy, particularly in the event of a depreciation of the
currency, which will make it more expensive for borrowers.
“Vulnerability arises from the fact that borrowers
who hold their loans in foreign currency, can have difficulty repaying
loans when the shilling is volatile,” said Rachel Sebudde, senior
economist for Uganda at the World Bank, who was the lead author of the
Economic Update.
She said that what is required is a stable
environment, including not only low and stable inflation, but also a
stable currency, adding that the restriction on denomination of loans
should not necessarily affect availability of credit to growth drivers,
so long as these sectors can still access this credit in local currency.
Uganda’s currency gained 3.63 per cent between
January and June this year, a period when BoU indicated that it was
pushing for lower interest rates through cuts in the benchmark rate.
ALSO READ: Will BoU’s rate cut raise demand for credit?
The currency had however depreciated by 8.04 per
cent between December last year and June 2012 when interest rates
remained high
.
.
Ms Sebudde said that a stable currency will ensure
that even if the borrowers wanted foreign-denominated loans to transact
in foreign currency, for example to import goods, they can still borrow
in shillings and convert to foreign currency without incurring major
costs.
Economic growth in Uganda over the past 18 months
has been mainly driven by the services and construction sectors,
followed by the manufacturing and then the agricultural sector but the
construction and manufacturing sectors have been some of the major
recipients of foreign currency-denominated loans.
BoU data for the period ended December 2012 shows
that the building and construction sectors were the major recipient of
loans with 25.4 per cent, followed by the manufacturing sector with 22
per cent and trade and commerce sector at 20 per cent.
The World Bank says that the sectoral
concentration could worsen as commercial banks increasingly facilitate
loans in foreign currency, whose share of all loans has rapidly grown to
a total of 41 per cent, up from approximately 29 per cent two years
ago.
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