KAMPALA, February 7, 2017 – Today, the World Bank launched its new Economic Update for Uganda, titled “Step by step - Let’s solve the finance puzzle to accelerate growth and shared prosperity”. It shows the country has made great strides in expanding the financial sector with more than half the adult population accessing formal and regulated financial services. This is thanks in part to the rising growth of mobile money and opening of a credit reference bureau in 2008. About 8 million adult Ugandans own a bank account. This pushes the share of the adult population with access to financial services to 52 percent, up from 28 percent in 2009. With 7 million active users, mobile money, has greatly increased access to cost effective financial services, such as saving, money transfer, and paying bills. Confidence in the formal financial system however remains low, and the high interest rates make borrowing very expensive for businesses and households.
According to the Uganda Economic Update, the puzzle manifests in the mismatch between the low return on savings and the high cost of borrowing. Savings attract 3-6 percent annual return while interest rates on loans range between 22 and 25 percent. Low credit rates support household and business spending, while high returns on deposits encourage more savings. Uganda currently ranks at 120 out of 138 countries in affordability of financial services by the World Economic Forum’s Global Competitiveness Report (2016-2017). The high cost of credit, and other short comings like limited financial market infrastructure, and costly access to physical infrastructure that enables financial services, have made formal regulated services unattractive to many consumers. This is also preventing Uganda’s financial sector from reaching its potential to support economic growth.
“Increasing access to low cost and safe financial products for firms will spur business investments and economic growth. Similarly, financial products targeted at the informal sector, rural households and women will create jobs and build resilience against shocks,” said Ms Christina Malmberg Calvo, World Bank Country Manager for Uganda.
Uganda’s economy is not performing according to expectations. Growth declined by 0.2 percent in the first quarter of 2016/17. The economy had been anticipated to rebound strongly on the back of planned public spending on infrastructure, and increase in private sector credit to raise productivity. However, the continued weak domestic economic environment, worsened by the low commodity and fuel prices in international markets, the crisis in South Sudan, and severe drought have continued to strain investment and exports, and hence slowed down growth.
According to the Update, Uganda’s economy will need to continue adjusting to these shocks and strengthen the financial system, which remains jittery due to the high level of non-performing assets and the Central Bank’s recent takeover and resolution of Crane Bank, previously the third largest bank. If the economy overcomes these shocks and grows at an average of 2.5 percent per quarter, the overall rate of growth for FY 2016/17 could rise to 4-5 percent. However, this rate of growth is far below the over 10 percent required for the country to outpace the population growth rate and realise its development aspirations to achieve middle income status by 2020.
Undertaking reforms aimed at stimulating consumers’ access to a wide range of services, and reducing the cost of credit could boost growth and insulate the economy from risks and the impact of negative shocks during an economic downturn like the current one. Continuing efforts to strengthen the legal, regulatory, institutional and supervisory framework of the financial sector to ensure it is safe and sound is equally important in restoring consumer confidence.