Inside Story: Why Museveni is Bitter with Commercial Banks

President Yoweri Museveni

President Museveni has continued to express his frustration with commercial banks’ high interest rates and failure to support growth in key economic sectors such as manufacturing.

While Bank of Uganda has been painting a picture of a booming economy, physician the high interest rates in commercial banks have discouraged borrowing which has led to stagnation in growth of businesses.

Such a situation usually leads to fewer investments, pilule collapse of businesses and high levels of unemployment since employers can only afford to maintain a small labour force.

Without enough capital to spur growth of businesses, tax revenues shrink, leading to slow economic growth and development.

In his State of the Nation Address on Tuesday in Kampala, Museveni said it “it is erroneous to think that you can modernize agriculture and industrialize the country using Commercial Banks.”

He said government, however, will intensify the efforts to capitalize Uganda Development Bank (UDB).

“Uganda Development Bank will be capitalized so that it gives low-interest loans to agriculture and industry (manufacturing). The services sector is already employing about 430,000 people,” revealed Museveni.

“We shall work with our partners abroad to increase the number of tourists to, at least, four million per annum instead of the present 1.3 million tourists per annum.  Again, on the issue of financing, the NRM had the foresight to leave UDB out of the privatization.”

Hundreds of businessmen have lost property to banks due to high interest rates.

Both banks and borrowers contribute to subdued borrowing through interest rates and reduced demand respectively.

Museveni said by privatizing the Uganda Commercial Bank (UCB), he wanted to see whether the involvement of the private sector in Banks, would lower the interest rates because of “competition” and the “efficiency” of private actors.

“Well, the facts show that it has not.  Even when the inflation rate is 5 percent, the Banks lend at 23.5 percent as of now.  It is these Commercial Banks that are fuelling the craze of importing by giving endless loans to importers (abagula).  Abakola ebintu (manufacturers) and the abatunda (those who sell) do not feature much in the lending scheme of these Commercial Banks,” said Museveni.

“22 percent of their lending is to importing.  Should we say that the commercial banks are part of the haemorrhage?  Fortunately, we have the option of UDB that will come to our rescue.”

Effect of IMF/World Bank reforms

After seizing power in 1986, Museveni was compelled by the World Bank and IMF to carry out structural reforms in the economy that saw a massive privatization of government parastatals.

In essence, this meant that economic direction of Uganda would be planned, monitored, and controlled in Washington.

Trade was liberalized, leading to dumping of cheap and substandard products from outside.

Such items as clothes, shoes, creams are just amongst many others that have flooded the Ugandan markets.

This has greatly undermined local industries that produce or intend to produce the same products.

In his address, Museveni observed that Uganda was fast turning into the world’s “supermarket.”

According to James Sackey, former World Bank Country Representative in Sierra Leone, the institution gives instructions to developing countries which include privatization, trade liberalization and high interest rates.

Africa’s infant industries fail to take off under extensive trade liberalization.

This is also very critical with respect to imported food such as rice, wheat, milk, amongst others.

Developed countries which have excess of these food items reduce their prices and export them to Africa as a way of getting rid of them. If such situations were not conditioned, Africa would never be able to produce its own food.

Privatization, on the other hand, and its effects on government enterprises that do not function well cannot be challenged.

But wholesale privatization of everything that is government owned cannot also be justified.

In any case, there are few difficulties such as the limited indigenous business to take over government enterprises; the shortages of local private capital to pay for the running cost of privatized enterprises and the greater importance of the services to the people of some enterprises as compared to being profitable.

What often happens is that it is the so-called soft sectors of education, health, and housing amongst others that will suffer from the cut in government expenditure.

Also high interest rates increase the incentive to save money, but they also encourage speculative investment that brings quick paper money profits to a few people while adding nothing to the productive capacity.

High interest rates and high credit also make capital to start new business get difficult to come by. Therefore, they result in stagnation.

Again the cut in government expenditure in some cases could be necessary. However, what often happens is that it is the so-called soft sectors of education, health, and housing amongst others that will suffer from the cut in government expenditure.

Most governments do not reduce expenditure on the army or on their non-productive and unnecessary areas. The result is that cut in government expenditure ends up harming the welfare of the people.

Another very important factor is the devaluation of currencies which is supposed to increase self sufficiency by making imported products more expensive and African exports cheaper.

Since most African countries do not produce these products, it is not possible to replace them with locally produced ones.

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