Experts have urged government to choose from cutting its expenditure or continue borrowing heavily to finance its huge expenditure.
Giving a keynote address at a Baraza organized by Kigo Thinkers about the closure of bankers held at Golden Tulip Hotel, Dr. Fred Muhumuza, a senior economist said with raising revenue becoming complex, government ought to cut its expenditure.
"Government consumption has for many years been increasing yet imports from Tanzania which has come up as one of the biggest sources of imports to Uganda are not taxed. The bulk of imports from Tanzania are not taxed and until you cut down expenditure to compensate for that lost revenue, the country won't move anywhere," Muhumuza said.
"With that loss of revenue, government has either got to scale down itself through rationalization to make itself leaner or borrow more, including to pay debts."
Dr.Muhumuza said this state of affairs has also seen investments by the private sector greatly reduce in Uganda from 24.8% to 22.7% in the last nine years.
He noted that these affairs in the economy have also played in other sectors, including banking system with ripple effects.
According to the senior economist, the state of the economy affects banks through the quality of their assets, mainly loans and cost of mobilising funds and related lending as interest rates rise.
"Interest rates have remained high and trending up mainly due to the need to anchor inflation on the medium term target and government borrowing. Some banks have been faced with liquidity challenges as uptake of the Standing Lending Facility rose to shs26.2 trillion in the three months to May 2024 from shs19.0 trillion in the three months to February 2024," he said.
He added that the cost of mobilizing funds was on the increase as the 7-day interbank weighted average rate rose to 12% from 10.8% in the same period.
On the closure of EFC Uganda Limited and Mercentile Credit Bank for failure to meet the new BOU capitalization requirement, Dr. Muhumuza said that more banks might be in line for closure.
"There might be 25 banks in the but the five top banks control more than 50% of the market share and when you increase those to 10, you go to almost over 80% of the market share. This means there are very many small banks. They might find stress and strain to manage in that small market share," Dr.Muhumuza said.
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He said that those that cant do mergers or get acquisition by larger international banks might end up being closed.
BOU increased the minimum paid-up capital requirements for major financial institutions operating in Uganda that all financial institutions were given a deadline of June, 30 2024 to comply.
The minimum paid-up capital requirement for Tier I financial institutions(commercial banks) was increased from shs25 billion to shs120 billion by December,31, 2023 and shs150 billion by June,30, 2024.
