Many Ugandans are directing their efforts towards repaying their debts, causing a slowdown in the country’s medium-term economic growth. In previous years, Uganda heavily relied on borrowing to finance various expenditures, including real estate, automobiles, risky businesses, and new apartments. This has led to a period of deleveraging, where debtors are prioritizing debt repayment over investment and spending.
The ratio of non-performing loans to gross loans in the banking sector increased from 4.8 percent in the 2020/2021 financial year to 5.3 percent in the 2021/2022 period, according to the Bank of Uganda’s annual report. The banking sector also experienced an operating deficit, which grew to Shs233 billion in the fiscal year ending on June 30, 2022, from Shs42 billion in the previous year.
Various factors contributed to this situation, including a rise in global interest rates, increased government foreign expenditure, and intervention in domestic markets to stabilize foreign exchange rates. As a result, the country faced challenges in managing its sovereign reserve holdings.
Private sector credit growth, although on the rise, remains below historical averages, mainly due to subdued economic activity, causing lenders to be cautious and borrowers to demand less credit. However, Uganda’s national treasury anticipates an economic expansion of 6.0 percent in the 2023/2024 fiscal year, thanks to effective fiscal consolidation strategies that have reduced public debt as a percentage of GDP.
Many consumers and local governments are cutting back on spending, which impacts the country’s ability to fund new projects that could drive GDP growth. Commercial banks have tightened credit standards for certain sectors while relaxing them for households, anticipating increased demand for credit. However, non-performing loans are on the rise, driven in part by recent legislation that may result in the suspension of funding for some NGOs.
The majority of banks expect lending rates to remain unchanged, citing alignment with the central bank rate and a need to reduce non-performing loans as reasons for their credit tightening. Some banks have reported increased bad debts and non-performing loans, indicating a growing exposure to credit risk.
Commercial bank lending rates have increased, making repayments challenging in a tight economy. These challenges are exacerbated by post-pandemic economic conditions, where many businesses struggle to recover and adapt, and commercial banks grow impatient as they attempt to cover bad loans using shareholders’ funds.
