LEGISLATORS explained that the decision to recapitalize the central bank is important, but follow-up legal arrangements are needed to bring BOU capital in line with its liabilities
By Umaru Kashaka
PRIVATE sector credit is skewed towards foreign currency loans and in order to avoid commercial banks from breaching the 80% limit on the loan to deposit ratio in foreign currency, the central bank must ensure that foreign currency lending is limited to foreign currency income earners, MPs have said.
They made the appeal on Friday during a House sitting to adopt the report of the committee on national economy over the performance of the economy during the financial year 2012/13.
Legislators noted that large corporations and rich individuals benefiting from foreign currency lending, account for nearly all the increase in private sector credit growth, something that had resulted in some banks breaching the 80% limit.
They further noted that although the banking sector remains solvent, liquid and profitable, non-performing loans are increasing in the banking system and asked Bank of Uganda (BOU) to strengthen its regulation of the financial sector to reduce the non-performing loans.
“Moreover, with nearly new credit over the financial year extended in foreign currency, indirect credit risk is likely to increase in the periods ahead,” national economy committee chairperson and Buliisa County MP, Stephen Mukitale, added.
He stressed that weak economic performance especially during the financial year 2011/12 had tended to increase non-performing loans, thus weakening the associated provisions and putting banks’ earnings and balance sheets under pressure.
“Consequently deteriorating balance sheet positions has caused banks to stifle credit supply, which has a circular effect to further reinforce weak economic activity,” Mukitale told the House.
Legislators explained that the decision to recapitalize the central bank is important, but follow-up legal arrangements are needed to bring BOU capital in line with its liabilities, guarantee independence of policy instruments, end central bank financing of the budget, and in general avoid any threat to fiscal dominance.
They said although the reduction of the central bank rate had led to slight reductions in commercial lending rates, interest rates including on government securities remain high, raising the cost of financing the government budget through issuance of government securities.
“While this financing is critical for smoothening expenditure during budget execution, the continued use of this source of financing requires adequate preparations to improve efficiency in execution and therefore reduce the indirect cost to the economy,” the House noted.
They said Uganda continues to lag behind other East African countries in terms of the tax to gross domestic product ratio calling for a close attention to increase the tax base as urgent as possible.
“The continued rise of domestic arrears, despite the commitment control system; budgeting and expenditures on arrears remained low by 78% compared to the financial year 2011/12 expenditure. In addition, domestic arrears arise largely due to under budgeting,” lawmakers stated.
They urged government to consider alternative sources of financing public investment including public–private partnerships, equity financing and infrastructure bonds so as to overcome the shallow domestic financial market that has led to high interest costs to the budget.
MPs also called upon the government to boost revenue performance to help shield public finances from revenue shocks, and fundamental reforms especially for value added tax in an effort to reduce many exemptions accumulated over the years.
MPs want independent Central Bank