Uganda’s Central Bank kept its benchmark policy rate unchanged at seven percent Wednesday in a strategic move that promises stable lending rates amidst increased credit default levels and renewed strength in the value of the Uganda shilling against the US dollar.

Whereas a continued soft policy stance has eased pressure on lending rates charged by commercial banks since last year, a rising loan default rate, mainly caused by several cases of distressed borrowers unable to service their loans after receiving temporary credit holidays, has left average borrowing rates flat as lenders struggle to absorb huge credit loss provisions in their operations.

Despite easing of the Covid-19 lockdown restrictions in July 2020, many small businesses are still grappling with challenges of low sales attributed to surging job losses and diminished household spending – a negative situation that has impaired their ability to repay loans and clear suppliers’ debts.

The banking industry loan default ratio is estimated at more than five percent while average prime lending rates lie in the range of 16-18 percent to date, according to industry statistics. Faced with slow economic recovery trends, the impact of consistent loose monetary policy actions on local consumer demand remains unclear.

“High frequency economic indicators for the first quarter of 2021 indicate a gradual strengthening of economic activity but still at a subdued pace. Therefore, the GDP growth outlook remains unchanged at 4.0-4.5 percent in FY2021/22…A high degree of uncertainty surrounds economic outlook, with many possible downside and upside risks, but with balance of risks tilted to the downside.

“On the downside, the main risk is still the virus and possible variants. Infection could take off again despite the ongoing Covid-19 inoculations and this would dampen the economic upbeat, especially in the near term (12 months ahead) as it would diminish the improvement in demand conditions and delay the return of normalcy,” states the latest monetary policy statement issued on Wednesday.

However, the Ugandan shilling is forecast to rally against the US dollar in coming weeks on the back of low import demand, increased dollar supply from offshore investors in the government debt market and positive investor sentiments derived from the April 11 signing of crucial East African Crude Oil Pipeline (EACOP) project agreements between Uganda, Tanzania, Total E&P and the China National Offshore Oil Corporation (CNOOC). The Ugandan shilling traded below Ush3,600 against the US dollar during midday trading on Wednesday, according to local financial traders.

“Commercial banks are flush with cash right now but cannot lend a lot of money because credit default rates are still high. The Ugandan shilling has stabilised in the past few months because of very low consumer demand in many sectors which has led to reduced imports. Strong dollar supply from offshore players and Non-governmental organisations has also boosted the local shilling against the US dollar.

“Bank of Uganda’s latest policy rate decision was predictable because many Central Banks are still trying to revive their economies that have been ravaged by the Covid-19 pandemic through use of loose monetary policies,” said Benoni Okwenje, General Manager for Financial Markets at Centenary Bank Limited.