Uganda’s Economic growth to remain below potential growth rate until FY 2022/23- BoU

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Increasing non-performing loans and high lending interest rates could delay recovery of Private sector credit extensions to pre-COVID levels, the Bank of Uganda says in its September 2020 state of the economy report
The report also notes that asset quality of loans worsened, reflected in an increase in the share of NPLs to total loans to 5.8% in June 2020 from 5.4% in March 2020 and 3.8% in June 2019.



According to the Bank Lending Survey, banks expect the default rates on loans to both enterprises and households to increase even further in the quarter to September 2020
The BoU also warns of uncertainties relating to the ensuing expenditure pressures, subdued economic activity and declining tax revenues, and a possible further decline in grants could lead to further borrowing on non-concessional terms.

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Below we bring you salient features of the report



Lending

Lending rates on Shilling denominated loans rose to 19.7 % in the quarter to July from 18.2 % in the quarter to April 2020.
Increases in the lending rates were driven largely by a rise in unsecured lending to individuals and households as well as lending to the riskier sectors such as Agriculture.
Lending rates on foreign currency denominated loans on the other hand declined to 5% from 6.5 % over the same time period
Although Bank of Uganda has steadily reduced the CBR, the pricing behavior of banks seems not to have changed with several consistently pricing below or above the industry rate.
The majority of banks with higher lending rates however tend to have higher non-performing loans (NPLs), a small market share and a large number of micro borrowers.
According to the Bank Lending Survey, banks expect the default rates on loans to both enterprises and households to increase even further in the quarter to September 2020



Private Sector Credit

Growth in private sector credit (PSC), remained subdued in the quarter to July 2020 on account of the decline in economic activity coupled with poor asset performance.
The average year-on-year growth in PSC averaged at 8.9 percent in the three months to July 2020, down from 10.5 percent in the previous quarter.
While growth in shilling denominated loans slackened to an average of 10.9% from 15.2 % year-on-year, foreign currency denominated loans grew by 5.1% up from 1.3% over the same period.
Annual PSC grew by 8.9% year-on-year in the quarter to July 2020, down from 9.5% growth recorded in the quarter to April 2020.
New net lending in the quarter to July 2020 mainly comprised of capitalized interest which rose to UGX 158bn in July 2020 up from UGX 96.6bn in April 2020 reflecting bank of Uganda’s credit relief measures in response to the COVID-19 pandemic.



Indeed, as at end-June 2020, loans worth 4.9 trillion or 30.6% of gross loans had been approved for restructuring.
Average annual credit growth to the agriculture, manufacturing, trade, personal & household and Building, mortgage, construction and real estate sectors grew by 9%, 0.6%, 3.4% , 5.8% and 12.7% in the three months to July 2020 from respective growth rates of 15.2%, 1.6% , 12.8% , 11% and 13.2% in the previous quarter.
In July 2020, 684,074 loan applications worth UGX 1,424 bn were received and 681,044 loan approvals worth UGX 711bn were approved. The discrepancy reflects increased risk aversion towards borrowers.

Asset quality

Asset quality of loans extended by commercial banks worsened, reflected in an increase in the share of NPLs to total loans to 5.8% in June 2020 from 5.4% in March 2020 and 3.8% in June 2019.
This deterioration in NPLs was on account of reduced personal and business income as a result of closures during the lockdown period.
Going forward, asset quality is likely to deteriorate even further.
COVID-19 pandemic: Majority of the businesses have been closed with no clear path of their resumption due to the slowdown in the economy, which has affected their cash flows and repayment schedules of borrowers.
This deterioration in asset quality however, will to a large extent be moderated by credit relief measures announced by BOU as loans that would otherwise be classified as non-performing are restructured and borrowers given an opportunity to repay at a later period



July 2020 Performance:
Domestic revenue collections during July 2020 amounted to Shs 1,201.52 bn which was higher than the target by 17.5%.
This performance was explained by the payment of some taxes that were supposed to be paid in FY 2019/20 but spilled over into July 2020 due to; delays in filling for taxes of imported goods as movement was restricted during the lockdown, which explains the performance of international trade taxes
Public Debt
The total public debt stock stood at UGX. 56,526.2 bn (40.8% of GDP), as at end June 2020 which is an increase of 20.5 % relative to June 2019.
The increase between June 2019 and June 2020 was mainly due to a UGX. 6,362.3bn increase in external debt largely attributed to borrowings from the IMF, Trade and Development Bank and Stanbic Bank towards countering the economic distress brought about by the COVID-19 pandemic.
Public external debt continued to maintain the dominant share of 66.2 % of the total public debt.
External and domestic debt increased by 18% and 19.4%, respectively in FY2019/20. External debt made up the bulk of the total public debt, accounting for 66.9%



Despite the increase in borrowing, Uganda’s debt levels remain sustainable with low risk of debt distress; however, significant vulnerabilities are evident.
Uncertainties relating to the ensuing expenditure pressures, subdued economic activity and declining tax revenues, and a possible further decline in grants could lead to further borrowing on non-concessional terms.
The associated increase in interest payments will be a substantial drain on resources that could have otherwise been used to finance development

Exchange Rate Developments

In August 2020, the Uganda Shilling continued to strengthen. The Shilling appreciated by 0.7% on monthly basis to an average midrate of UGX 3,678 per US Dollar in August 2020, supported by higher inflows from export receipts, NGOs, personal transfers and offshore investors, amidst subdued demand.
On annual basis, the Shilling appreciated by 0.4% in August 2020.
On annual basis, the Kenya Shilling and Rwanda Franc both depreciated by around 4.7%, while the Tanzania Shilling appreciated slightly by 0.1% during the same period.



Going forward, the exchange rate is likely to remain stable on account of matched corporate activity; with a bias towards depreciation due to COVID-19-related market uncertainty.
Domestic Economic Activity
Uganda’s economy significantly slowed in FY2019/20. Economic growth remained subdued, as real GDP grew by only 3.1% compared to 6.8% in FY2018/19.
As the easing of the lockdown continues, the economy is expected to slowly recover, reflecting the effects of a slow rebound in both foreign and domestic demand and, subdued confidence on the part of households and firms.
Many consumers are expected to be hesitant to resume their previous spending patterns, partly due to fears of contracting the virus and uncertainty about earnings. Moreover, even those whose incomes were not affected may increase their need for precautionary savings.
Furthermore, low exports of goods and subdued tourism receipts are projected to continue to weigh on economic growth given weaker global demand.



Therefore, economic growth in FY 2020/21 is projected in the range of 3.0-4.0%, further increasing to 5.06.0% in FY 2021/22. Economic growth is consequently expected to remain below the potential growth rate until FY 2022/23.
The economic outlook is extremely uncertain, largely because of the unpredictable intensity and duration of the pandemic.
In addition, increasing NPLs and high lending interest rates could delay recovery of PSC extensions to pre-COVID levels.
On the upside, economic growth could turn out stronger than projected if the spread of the virus is contained, or if a vaccine or an effective treatment is available earlier than is currently being assumed. Such a scenario could lead to greater business and consumer confidence, factors which would likely lead to stronger economic growth.



Conclusion

As the easing of the lockdown continues, the economy is expected to slowly recover, reflecting the effects of a slow rebound in both foreign and domestic demand and, subdued confidence on the part of households and firms.
In addition, many consumers are expected to be hesitant to resume their previous spending patterns, partly due to fears of contracting the virus and uncertainty about earnings.
Moreover, even those whose incomes were not affected may increase their need for precautionary savings.
Furthermore, low exports of goods and subdued tourism receipts are projected to continue to weigh on economic growth given weaker global demand.

Economic growth is consequently expected to remain below the potential growth rate until FY 2022/23

more about the author: Moses kaketo

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