Wednesday, February 25, 2009

Policy Options: Mutebile’s high interest rates now ridiculous

Bank of Uganda has successively increased its lending rates in Uganda since the third quarter of 2008. When the Central Bank started increasing the rates, Uganda was registering record high inflation rates, and the upward swing in interest rates was warranted.

Last month, the central bank further increased its bank rate to commercial banks from 17.20 to 18.42 per cent. Consequently, banks like DFCU and Barclays adjusted their lending rates above 19 per cent per annum citing high costs of borrowing in the market -which makes sense.

To the ordinary Ugandans who borrow from these banks it means that they now have to pay higher charges on loans compared to the past months. With the ‘madness’ among commercial banks, rates will shift from the 16-27 per cent bracket, to that of 19-35 per cent. I know, the Central Bank is convinced that the high interest rates will mop up the “excess liquidity” and eventually translate into single digit inflation, in a bid to achieve price stability and a sound economy but, should it come at the expense of growth during a downturn?

When BoU was increasing the cost of borrowing last year, most global central banks like the European Central Bank and Federal Reserve were doing the same –it made sense. Most nations were aiming at reducing the high inflation that emanated from very high food and fuel prices. This was because China and India, the fastest emerging powers of Asia were buying too much of everything and the impact of their demand was felt worldwide.

In September, what many non-Americans thought was a United States’ mortgage crisis turned out to be a global financial crisis. A month later it was obvious the crisis was spreading like the Australian bush fires instantly burning stock markets, and exchange rates yet remittances were nearing their worst decline. Mr Emmanuel Mutebile, the Governor BoU took some steps to rescue our weakened shilling.

Together with Ex-Finance Minister Mr Ezra Suruma, they further painted a grimmer picture of 2009 remittances, Foreign Direct Investment (FDI) and donor aid. To my surprise, the prophets of doom have stuck to the rigid principles of macro-economics to overcome the ripple effects of the recession in the West and our national slowdown. Yet, the founding fathers of capitalism are reversing their doctrines to address the commotion in their economies.

Clearly now is not the time to fight inflation by hiking interest rates, as Mr Mutebile is doing. Globally, Uganda now seems to be alone on this battle front. Mr Mutebile knows high rates undercut the amount of credit/money people can access. He also knows that in the next weeks and months, FDI, remittances, tax revenue and companies’ earnings will dwindle.

What this means is that there’s going to be less cash available to Ugandans to spend. But the Central Bank is now making it harder for many poor Ugandans to access cash by making it more costly and -stubbornly keeping it in the hands of a few. So, it’s not by accident that banks now prefer to venture into petty products like school fees loans for cash-strapped parents.

We should know that sticking to text-book economics in these tough times is fiscal suicide. BoU should for a while shelve the catastrophic philosophy of economics and consider thinking outside the box. Now is the right time to ease rates to place cash in the hands of more people to stimulate investment by locals, to create more jobs and spur the economy into positive growth.

Our 2009 GDP growth rate has been revised to about 7.4 from about 8.9 per cent last Financial Year. That’s a contraction of 1.5 per cent, with such a decline, Mutebile should instead focus on cutting lending interest rates by over 1.5 per cent and transfer the high rates to government securities, to woe buyers. It doesn’t seem sound for a central bank to worry about high inflation when fuel and some food prices that sparked off abnormal inflation rates are now easing?

To mop up “the high liquidity”, as a nation, we need to halt our unnecessary external borrowing, reduce public administration costs especially the fuel and communication bills by utilizing Dr. Ham-Mulira’s e-government project to attend meetings, and limit the amount of food exports to Sudan among others. It is also important that government starts sensitizing Ugandans about the economic slow down and advise them to reduce their unnecessary expenses and increase their sources of finance.

For a government that will not unlock even a million dollars as an economic stimulus package to strengthen its economy these are options.

Walter Wafula
Walter is a Ugandan Journalist.
+256 773 459765.

Bank of Uganda reversed its decision on the increased Bank rate of 18% (probably this article was part of the pressure), the current Bank rate is 15%.
Thank you.

Monday, February 16, 2009