Ismail Musa Ladu
6 November 2009
The government is partly to blame for the current high interest rates, Bank of Uganda Governor Emmanuel Tumusiime Mutebile has said.
The high lending rates, according to Mr Mutebile, have negatively affected investment since most people are unable to borrow.
"If the government does not reduce its appetite for deficit spending, interest rates will always go up," Mr Mutebile said.
Addressing manufacturers on Tuesday, Mr Mutebile said by selling risk free treasury bills and bonds to commercial banks, the government has in essence given the credit institutions options to shun local investors who are in need of long and short term financing.
"By the government issuing the treasury bills and bonds to commercial banks, they (banks) are now under no pressure to reduce their lending rates to the customers," Mr Mutebile said.
He said even Bank of Uganda's stringent fiscal policy over the years had failed to lower interest rates adding that the interest rates charged by commercial banks were hurting the development of small and medium businesses.
Solution
The central bank governor was optimistic that if government reduced its fiscal deficit (reduced its high spending), treasury bills and bonds would be relieved of high interest rates thus lowering lending rates across the spectrum of borrowers.
Regionally, Uganda has one of the highest interest rates, ranging between 18 and 25 per cent.Kenya and Rwanda have the lowest ranging between 12 and 16 per cent.
"High lending rates discourage potential borrowers whose businesses can generate modest but secure profits," he said. "Many potentially profitable and socially valuable investments do not take place because the cost of credit is too high."
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