Janet, a public relations manager and single mother has seen her life savings dwindle to a pittance as she has had to plunder her account to make ends meet this year.

“It’s ridiculous what’s happening to prices, in recent days food prices seem to have improved but a month, two months ago I was really on tenterhooks, however much I tried my salary was not making it to the end of the month, ” she said.
She started to draw down her savings she had started building since she started working five years ago.

“I had plans for that money, big plans but those will just have to wait.” Janet is not alone it turns out, the central bank reports a drop in savings deposits in the banking industry.

“The continued growth in currency in circulation and the fall in saving and time deposits are likely to be among the main contributors to the liquidity tightness in the banking sector,” the Bank of Uganda reported last month.

Currency in circulation is the money outside the formal financial sector – the money in everyday use and is often the total currency issued net of bank deposits. Bank holdings  are normally split into demand, time and savings deposits with the holding periods increasing respectively.

The central bank said time and savings deposits fell by 6.3% in August – a trend that has continued according to industry sources, and warned that this did not bode well for the industry.

The Bank of Uganda attributes the drop in time and savings deposits to a shift in the National Social Security Fund portfolio to government securities and demand deposits.

A drop in savings and time deposits are likely to constrain banks ability to lend and in the event of this banks have in the past resorted to the interbank money market, where banks lend to each other.
“The liquidity in the money market has been very tight with the rate up to 29% now up from 7 to 8% a year ago,” Crane Bank boss A.R. Kalan said.

The rates have jumped in response to the central bank’s aggressive attempts to rein in inflation since the beginning of the year.

Inflation, which is too much money chasing too few goods is fought in the medium to long term by producing more goods or in the short term by reducing money supply, which the Bank of Uganda has been doing this year.

Until October the central bank issued a third more worth of  treasury bills, which uses to mop up excess liquidity in the market, selling sh1,700b in treasury bills compared to sh1,350b during the same period in 2010.

This step up in treasury bill issues was driven by jump in inflation to 30% in October the highest it has been in nearly 20 years. Inflation slipped just below 30% in November suggesting the Bank of Uganda’s actions are taking root.

In addition to increased treasury bill issues the Bank of Uganda has raised it Bank Rate – an indicator from which banks take a cue how to price their loans, to 23% from 14% earlier in the year.

With an illiquid money market and falling deposits gloom hangs over the banking industry.“We have got over this year relatively ok but next year will be very challenging. When our clients suffer we also suffer,” Kalan said, pointing to higher interest rates which might not budge much next year.

The major part of banking revenue comes from lending to individuals and interest from government securities. Interestingly bank lending continues to grow but industry players say they are beginning to experience a slowdown.

“In month on month terms lending continues to grow but not as fast as the same time last year. At this rate it is not inconceivable that we will begin to experience negative growth rates by the first quarter of next year,” one bank credit manager said.

Governor Emmanuel Tumusiime Mutebile confirmed this.  “The latest data available to the BOU indicates that the growth of bank lending began to decelerate in October and that this deceleration continued through the first half of November, as a result of the increases in bank lending rates,” he said in a recent statement, adding that inflation will slow down as a result.