DENIS TUKAHIKAHO Ph.D: Why we should all get worried over Central Bank Rate of 10.25 percent

Denis Tukahikaho Ph.D.  is an expert on Cooperatives, Financial Inclusion and Renewable Energy Investment

Denis Tukahikaho Ph.D. is an expert on Cooperatives, Financial Inclusion and Renewable Energy Investment

KAMPALA – Uganda’s Economic growth has accelerated slightly despite external shocks. GDP grew by 5.3% during the first quarter of FY24, supported by an oil-related construction boom and robust growth of agriculture, despite volatile weather conditions. An uptick in private investments and employment growth reinforced domestic demand deeper into the year, with sustained increases in output, new orders, and employment. Hence GDP is expected to grow by an estimated 6.0% in FY24.

While Uganda’s exports surged with increased volumes of production and improvement in terms of trade, resumption of gold trade, and recovery of tourism, imports grew stronger supported by demand from investments into the country’s oil development program, hence weakening the current account (World Bank 2024). The Bank of Uganda (BoU) – the central bank – tightened monetary policy in March 2024 to curb possible passthrough effects of a fast-depreciating shilling. Low inflation, averaging 2.9% during the first half of FY24, benefitted both investments and poor households.

During the second half of FY24, inflation increased – gradually to 3.4% in February 2024 but is forecast to accelerate towards the target of 5%, partly on account of the shilling depreciation recently driven by intensified portfolio outflows. Hence, on March 6, 2024, BoU raised its Central Bank rate rate to 10.25% from the 9.5% maintained since August 2023.

Accordingly, the evolution of inflation remains challenging, influenced by factors such as the shilling exchange rate, supply-side shocks, global inflation, and domestic food supply.

However short-term projections show that inflation may rise to between 5.5% to 6% within the 12 months ahead with a return to medium term target of 5% anticipated in the second half of 2025. Basically, the Bank of Uganda is typically basically exercising is constitutional mandate of setting inflation targets and implementing monetary policy measures to control inflation and stabilize prices.

The implication of increased Central Bank rate (CBR) is immediate and biting on borrowers and hence deteriorating standards of living for majority Ugandans.

Higher borrowing cost is of the most immediate effects and that borrowing becomes more expensive and this impacts both individuals and businesses who have loans with variable interest rates or who are seeking new loans as interest rates rise, the cost of servicing existing debt increases, and new loans come with higher interest payments.

Reduced Borrowing and this because higher interest rates tend to discourage borrowing, Individuals and businesses may rethink their borrowing decisions or delay new investments or purchases due to the increased cost of borrowing and this will lead to a decrease in consumer spending, business investment, and economic activity in general.

The borrowers with mortgages are at a high risk and especially those with variable rate mortgage, an increase in the central bank rate usually translates into higher mortgage payments and this is going to strain household budgets and may lead to difficulties for those who are already financially stretched. Debt Servicing and increased default rates as Individuals and businesses with existing debt may find it more challenging to service their debt obligations as interest rates rise and this will lead to increased default rates, particularly among borrowers with high levels of debt or those operating on tight margins.

My expert advice to borrowers or those intending to borrow is that they should be producent enough on lending terms and conditions. Floating loan rates are highly discouraged as this will give financial institutions especially commercial Banks undisputed opportunity to adjust/increase the loan rates on existing clients.

The best banking practice should be, new loan rates should affect only new loan clients and the existing loan clients should approach their lenders for favorable loan restructuring with new terms and conditions in order to avoid debt stressing. Ugandans are strongly advised to look at the alternative savings and lending channels through investment clubs, Savings and credit Cooperative Organizations (SACCOs) as their investment vehicle for business sustainability and they should only borrow if it is necessary and an avoidable.

“If people feel lost and alone and helpless and broken and hopeless today, what will it be like if the world really begins to come apart at the hinges?”


The writer, Denis Tukahikaho is a Ph.D. Student in Islamic Banking Philosophy, he holds a Ph.D.in Environmental Management & Economics, Master of Oil & Gas Law-Energy & Policy, Executive MBA-SME, BBA -Banking and Finance and Diploma in quantitative Economics and with 17 years of consulting Expertise Banking, Microfinance, Cooperatives and ESG.


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