Kampala, Uganda — Uganda's economy grew faster in the last financial year than previously anticipated a good sign for the Bank of Uganda, which is attempting to control the surge in commodity prices.
Gross domestic product, the broadest measure of economic output, rose 5.3% for the Financial Year 2022/23 higher than the revised growth rate of 4.6% for the Financial Year 2021/22, according to the latest Bank of Uganda annual report released this month. That is a 0.7 percentage point higher than the central bank initially estimated.
"Growth was largely driven by services and industry sectors," the central bank said, noting that the services sector grew at 6.2%, 2.1% percentage points higher than the previous fiscal year growth owing to an increase in trade, real estate, education and repair activities. The industrial sector grew at 3.9% driven by manufacturing and construction activities with 80% combined contribution to the industry growth.
However, there are signs that the growth momentum is beginning to wane reflecting low domestic demand as high interest rates weigh on the activities.
"Indeed, high-frequency indicators of macro-economic activity point to a softening in the growth momentum in the three months to June 2023, with Purchasing Managers Index declining to 56.4 in June from 57.4 although this reading remains above the 50-mark," the central bank said.
"Going forward, prospects for domestic economic growth are diminishing impacted by adverse global economic developments, tighter domestic monetary and financial conditions, and falling consumer and business confidence.
The local currency has recently come under pressure especially from the US dollar, primarily due to global factors like heightened uncertainty kindled by the Russia-Ukraine war and now Hamas and Israel, supply chain disruptions that spiked commodity prices, and portfolio investors exiting the domestic debt market due to tight global financial market conditions as central banks in advanced economies hiked their interest rates to reign in surging inflation.
Similarly, to combat inflation, the BoU raised the central bank rate from 7.5% to 10% in three steps starting July to October 2022 and maintained it at 10% until June 2023. This triggered commercial banks to increase their lending rates to the customers to more than 20%.
Banks remain resilient
Despite inflation and geopolitical tensions, Bank of Uganda Deputy Governor, Dr. Michael Ating-Ego says the banking sector remained resilient. This is partly explained by the fact that under the new legal instrument, the minimum required paid-up capital for financial institutions effective December 2022, was increased to Shs 120bn and Shs 20bn from Shs 25bn and Shs1bn for commercial banks and credit institutions, respectively and to Shs 150bn and Shs 25bn in June 2024.
For that, the bank's total assets grew by 8.4% to Shs48.3 trillion for the year ending June 30, 2023, due to holdings by the government securities which rose 12.2% as well as an increase in minimum capital requirements despite a slowdown in credit growth.
"Concerns about slowing economic growth (also) induced greater caution in banks towards extending loans to the private sector," BoU said, adding that as a result, commercial banks' gross loans increased by a merely 4.7% to Shs19.4 trillion, which was lower than the 12.2% growth posted in the previous year.
Private sector credit surges
On the other hand, private sector credit rose to an annual average growth rate of 10% last financial year from 9.5% in the previous year, with both shilling and dollar-denominated loans growing by 12% and 4.7% from 10.9% and 6.2% respectively during the same period under review. However, despite the growth in private sector credit, it remained below the 12% pre-COVID historic levels.
Moreover, the growth in private sector credit was uneven across all sectors with agriculture, transport and communication, electricity and water, building, mortgage, construction and real estate slowing down. Manufacturing, trade, business services as well as personal and household loan sectors recorded sharp growth.
Relatedly, the ratio of Non-Performing Loans to gross loans edged up from 5.32% in June 2022 to 5.76% in June this year but had come off of a high of 5.89% in April this year mainly on the back of improving liquidity conditions and a pick up in the economic activity.
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Interestingly, customer complaints against supervised financial institutions reached 433, 258 which were lower than 917, 938 raised during the last financial year. The biggest number of complaints were in the mobile money and mobile banking category, accounting for 40% of the complaints raised, followed up by loan processing at 12.8%, agent banking at 9.8% and debit cards at 6.9%.
Overall, mobile money recorded a faster growth in complaints partly as a result of an increase in the uptake of mobile money services promoted by financial inclusion campaigns.
As the Bank of Uganda issued more currency to meet the economy's demand, currency issuance costs also increased by 16% to Shs 199.3 billion during the same period under review. Moving forward, BoU projects the economy to grow in the range of 5-6% in the Financial Year 2023/24 riding on continued economic recovery and the developments in the oil and gas ahead of production.
