Bank of Uganda (BoU) is set to make a much-anticipated announcement on its benchmark CBR on Monday, June 7th. (File photo)

FINANCE   ECONOMY

KAMPALA - The COVID-19 pandemic is revealing increased competition for bank money.

On one hand, is the government offering interest-free treasuries for projects under the national budget and on the other is the risky but necessary private sector and individuals; the latter group is likely to benefit from a further cut in the Central Bank Rate (CBR).

Bank of Uganda (BoU) is set to make a much-anticipated announcement on its benchmark CBR on Monday, June 7th. Stephen Kaboyo, a former Central Banker and Alpha Capital Partners CEO said BOU is likely to slash its policy rate.

A lower CBR rate works as a signal for commercial banks to slash their loan lending rates. Lower lending rates are meant to make bank loans more attractive to the private sector so as to spark employment and economic activity.

"During the upcoming MPC (Monetary Policy Committee) meeting, the odds are BOU will slash the policy rate for June. The decision will primarily be driven by the mounting fears of marked economic slowdown due to COVID pandemic," Kaboyo said.

"This will come against the backdrop of cooling domestic economic activity that is expected to hurt growth prospects coupled with subdued inflationary pressures in the recent months,

"In my view, I expect the statement to be embedded in a hawkish language; it will highlight the expected turbulence in the months ahead as effects of the pandemic weigh on domestic and external activity," he explained.

Hitherto, the Central Bank had slashed the benchmark CBR by 1 percentage point to 8% in April 2020.  The BoU warned that the COVID-19 pandemic has led to a severe contraction in economic activity due to a combination of global supply chain disruptions, travel restrictions, measures to limit contact between persons, and the sudden decline in demand.

"Consumer-facing sectors have been severely affected by social distancing measures and heightened uncertainty, while the manufacturing sector has declined on account of disruptions to the inflow of raw materials," the Central Bank said.

The Central Bank said that economic activity in the trade sector has also been weighed down by the decline in external demand and supply chain disruptions, while service sectors such as finance, insurance, and information and communications are affected by the general stall in business activity and investment.

Consequently, the Ugandan economy is projected to slow down drastically in the second half of Financial Year (FY) 2019/20, with GDP growth for the FY projected at 3 - 4%.

Meanwhile, the Uganda Bankers Association (UBA) has warned that lower than projected tax revenues and higher issuance of government treasuries is likely to see a crowding out of the private sector in the commercial bank loan markets.

In its annual report for 2019, UBA pointed out that the pandemic and measures to curb it such as the lockdown has had severe consequences on tax collection yet public sector financing needs are bound to grow.

"This situation will no doubt lead to further borrowing by Government which could push up borrowing costs for bank customers and crowd out private sector credit," the UBA report said.

UBA's concerns are echoed in a Central Bank state of the economy report which indicates that government is struggling to settle treasuries worth sh2.4 trillion before the end of FY 2019/20 given the mounting expenditure requirements amidst a constrained fiscal space.

The aggregate banking sector profitability improved by 22.8% from sh691.8b in 2018 to sh849.8b in 2019; however, this is expected to significantly drop in 2020 due to disruptions caused by the pandemic.

Eight banks made losses in 2019 largely brought about by provisions for non-performing loans; the Bank of Uganda has warned that sector capital could come under strain should the economy take long to recover from the pandemic.

The average industry non-performing loan ratio moved from 4.2% in December 2018 to 5.2% (sh749.2b) in December 2019 and expected to move further up in 2020.