Fixed deposits declining as economy seeks stability

By Samuel Sanya

ANDREW Muhimbise is fast approaching 30 years. Like his contemporaries, thoughts about settling down and having family are beginning to set in.

In an economy that is slowing down, young investors and a slice of the older ones are asking: “If I placed my money in fixed deposit account, will I have enough to meet my goals tomorrow?”

Investors in the cloth of Muhimbise say that fixed deposits have become a bland investment since the banks are only offering up to 14% annual interest even as the economy feels the heat of runaway inflation.  

“Investing my few million shillings on a fixed deposit account for three years when the interest is far below the 28.3% inflation is a waste. I would rather invest it elsewhere for quicker returns,”Muhimbise notes. 

Bank of Uganda documents reveal that the average commercial bank lending rates for loans in shillings grew to 21.7% in August from 21.47% in July. 

Comparatively, rates on time (fixed) deposits increased to 14.2% from 12.99% while rates on demand and saving deposits remained at a lowly 1.2% and 2.3% in August.

Financial experts like Makee Jacko, the Standard Bank boss, argue that the only hope for the economy and the shilling to strengthen is if Ugandans learn to save before they spend; something the Chinese learnt a while back.

“I think that the Asian economies such as China, Malaysia and India have grown so massively because they knew how to use windfalls very well. Asia followed a stringent saving culture before expenditure – it is very different for many African countries,” he said. Increased savings, will encourage investment and production to ease inflationary pressures and bolster the shilling, at least according to the Central Bank.

“The Bank of Uganda is raising interest rates in order to curb bank credit growth and encourage higher levels of saving and to support the exchange rate,” Dr. Louis Kasekende the BoU deputy governor said at the release of the September Central Bank Rate.

However, despite the announcements money in circulation has continued to grow, crossing the sh2trillion mark in August as fixed and savings deposits took a 6.3% dive.

The nation has continued to takeout bank loans. In August, foreign currency loans grew to 74.1% from 71.2% with shilling denominated loans increasing to 35.1% from 31.5% in July to weaken the shilling further.

Jared Soro, the chief economist at the East African Development Bank, says the real rates, the gap between the interest rates on treasury bonds or time deposits and inflation were negative, resulting into lower investor participation. 

“The economy is growing at slower pace than its potential due to restriction of bank credit and a suffering shilling,” he explains.

“Something needs to happen to create stability in the money, foreign exchange, commodities and labour markets.”

Soro points out that changes in the interest and exchange rates, usually end up impacting the wages of labour in the later stages.  

He adds that there is no magic bullet for an instant economic turnaround. However, efforts in the commodities market, such as in agriculture and manufacturing, should see the country sail through the current economic storm.