How can central banks in the East African Community boost private sector credit that has since last year slowed down?   That was one of the issues that the Central Bank Governors in the region deliberated on during the 21st Ordinary East African Community (EAC) Monetary Affairs Committee held in Kampala on Aug. 25.

Emmanuel Tumusiime-Mutebile, the Governor of Bank of Uganda and the current chairperson of the Monetary Affairs Committee told his guests that they have attained a lot of progress towards the operationalisation of the East African Common Market protocol but there have been a number of emerging issues which pose serious challenges to our integration efforts.

“Some partner states have faced a slowdown in economic growth, both in the growth of private sector credit and the economic activities coupled with an increase in the non-performing loans,” Mutebile said.

He said further reduction in private sector credit could weaken aggregate demand going forward and threaten the continent’s fastest-growing region.

As such, he said, central governments in the region should do whatever it takes to encourage private sector access credit.

But while the Governors said they do not have immediate plans to stir private sector credit uptake and improve economies of their respective countries, outgoing governor, Bank of Tanzania, Prof. Benno Ndulu, tried to offer a solution.

He said at the time he assumed the job in 2008, the Tanzanian economy was in turmoil characterised by low private sector credit as business firms were unable to either access or repay bank loans acquired.

This, he said, forced the Bank of Tanzania in consultation with the government to come up with special packages to rescue both the business community and the banking sector.

“At that time, we had two or three things that helped us,” he said, “We had the rescue package for those firms that disastrously suffered losses because of commodity price shocks, helping most of those entities to come back to health. We didn’t give them money but paid off part of their loans to the banks and thus help them grow and also keep credit growing.”

He said the central bank and government came up with another initiative of a loan restructuring plan where the government extended grant guarantees to financial institutions to cover loans that had been given to companies that were unable to repay the debts as a result of the financial crisis in addition to negotiating with the financial institutions not to charge interest rates for the period under guarantee.

He added that the two institutions also provided affordable capital to businesses as a stimulus package to the private sector through commercial banks.

“So, we (central banks) need to do more than to just play spectator role in trying to jump start credit growth again,” he said. “Of course NPLs is one part of the story but we need to work on effective restoration for demand for credit.”

He said it is through the increase in private sector credit that companies are able to produce more, expand and ultimately create jobs for the local population. This improves people’s standards of living while at the same time supporting the banking sector, Prof Ndulu said.

Available data shows that the private sector credit in Tanzania slowed to 7.2% in 2016, far below the 15-17% yearly growth average in the previous years, according to the country’s Bank Governor.  But the non-performing loans grew from 6.5% as at the end of March 2015 compared with 8.3% in the same period last year.

In Uganda, credit to the private sector grew by an average of 7.5 % in the year to 2016 down from 18.9 % in the period to October 2015, according to BoU. NPLs increased to 10.5%, with the defunct Crane Bank alone recording 4.3% last year, up from 5.3% in 2015.

In Kenya, private sector credit slowed down from 17 % at the start of 2016 to 4.3% in December 2016 following strengthening of supervision by the Central Bank of Kenya.

Things were no different in Rwanda.  The PSC slowed down from 30.19% in 2015 to 7.8% in 2016, with NPLs rising from 6.2 % to 7.5% during the same period under review, according to the International Monetary Fund report for Rwanda released in July this year.

This development comes at the time EAC states are working towards the East African Monetary Union (EAMU) set to be achieved by 2024.

Already, the regional bloc has made various progress including harmonization of policy frameworks, micro-economic statistics, monetary and exchange rate operations, rules and practices governing bank supervision and financial reporting, modernization and integration of payment systems and capacity building in preparation for the EAMU.

Adam Mugume, the director for research at BoU said they are yet to come up with an option to stimulate PSC but added that they plan to first carryout a study about the demand for credit in the private sector.

“There are some of the special considerations that we have to put into place to stimulate demand. But which are those, we do not know yet,” he said.

“Those are the ones we have to think as technical teams  to see what are the special activities that we can put in place to stimulate demand for private sector credit.”

He said BoU plans to carry out deep analysis of these big corporations and companies to ascertain whether they are real constraints in accessing credit, why commercial banks are not willing to lend capital and probably come up with a solution.

Matters that will be beyond BoU capability, Mugume says will be forwarded to the government.

On Aug. 11, BoU maintained the Central Bank Rate (CBR), a benchmark lending rate for commercial banks at 10% compared with 14% at the same time last year, on account of low inflation levels in a bid to boost in economic activity.

Since last year, in line with the CBR movement, commercial banks have lowered their interest rates from an average of about 25% to around 22% today.

Analysts back Governors

Ramathan Ggoobi, a policy analyst and lecturer of economics at Makerere University Business School told The Independent in an interview that it is good that the debate about private sector credit has started to take place at a level of central bank governors.

He said it is unfair for central banks in the region and government to deny funding to struggling private companies involved in manufacturing because they are the engine of economic growth and development.

Last year, more than 65 companies in Uganda sought for bailout from the government citing hard economic times but the latter declined to extend the financial support claiming that they are private entities.

In neighbouring Kenya, the government has declined to support the cash strapped regional retail chain, Nakumatt Holdings, claiming that there is no legal basis to bailout private business entities.

“We need to be serious and look at this keenly and see the role that central banks can play,” Ggoobi said.

He said it is time for central banks and governments in the region to address issues of cheap long term finance for industrialization without politicizing the process.

“The government needs to put money in a development bank such that due scrutiny is done on each and every individual or company that attempts to borrow the money but not in the ministries,” he said.

The private sector, too, have welcomed the proposal but added that all stakeholders including government and the private sector need to take part in the decision making for the benefit of the economy.

“The problem we have in this country is that every institution – the central bank and the government – tries to prescribe its own solution to a problem independently,” said Moses Ogwal, the director for policy and advocacy at the Private Sector Foundation Uganda (PSFU).

He said the central banks and the governments need to come up with initiatives that stimulate aggregate demand for goods and services.

Source: The independent

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