Hard times ahead after World Bank cash freeze

Yet again, the private sector could be crowded out of the credit market as government turns to domestic borrowing to cover gap left by the World Bank, a move likely to slow down growth, writes ALON MWESIGWA.

Ugandans will find it hard to borrow if government chooses to get money from the domestic market to fill the gap left by the World Bank’s recent cash freeze, a Bank of Uganda official has warned.

Appearing on Capital Gang radio show last Saturday, Thomas Bwire, a senior principal banking officer at BOU, said:  “Their [World Bank’s] getting out implies [government] will put more pressure on the domestic borrowing.”

Ironically, the development lender’s concern is that Uganda has failed to absorb most of the money the former has advanced to it. The bank announced last week that it had decided to stop new lending to Uganda, as it reviews ongoing projects.

“The World Bank group took a decision to withhold new lending to Uganda effective August 22, 2016 while reviewing the country’s portfolio in consultation with the government of Uganda,” it said in a statement last week.  It asked “Ugandan authorities to address the outstanding performance issues in the portfolio, including delays in project effectiveness, weaknesses in safeguards monitoring and enforcement, and low disbursement.”

As of April 2016, the World Bank’s Uganda portfolio included 17 national active operations with a $2.1bn commitment, according to a statement on WB’s website. The suspension will not affect ongoing projects. The government announced in the 2016/17 budget that it would only borrow Shs 600bn domestically this year.

This was deliberate to allow the private sector borrow more and shower up growth. When government borrows a lot domestically, most banks rush to lend to it instead of giving money to private businesses and individuals because it offers no risk.

But it also means interest rates, currently averaging 23 per cent, are likely to remain high for the risky borrowers. Previously, government domestic borrowing has always hovered around Shs 1.4tn.

According to BOU, credit growth in the first half of 2016 averaged 3.9 per cent, compared to 9.6 per cent in the same period of 2015.

GROWTH CUT

And when private businesses aren’t borrowing, it slows down the economy’s growth. In a speech to ministers and ambassadors at a government retreat in Munyonyo recently, Matia Kasaija, the finance minister, said Uganda will grow at 4.8 per cent this financial year, lower than the earlier projected five per cent. It grew at 4.6 per cent last financial year.

Kasaija told The Observer that issues ranged from expensive credit to unfavourable weather conditions, which hamper this financial year’s growth. The World Bank’s 2016 Uganda economic update, released in July, said the country was not getting value for money on investments on most public projects over the past decade. It added that this will not transform the country into a middle-income status soon.

The WB said Uganda’s projects were characterized by “endemic delays in implementation, cost overruns, and corruption means that sometimes projects come twice the original cost.”

Some of the projects are given as political gifts and no thorough assessment is done.

Christina Malmberg Calvo, the World Bank Uganda country manager, said: “Over the past decade, for every shilling invested in the development of Uganda’s infrastructure, less than a shilling [about 70 per cent of a shilling] of economic activity has been generated. That’s not good and will not translate into a transformed middle-income country anytime soon.”

MORE PROJECTS

While Uganda continues to borrow, billions of shilling from other lenders remain unconsumed, yet taxpayers continue to pay interest. In the 2014/15 auditor general’s report, out of 73 loans assessed, 15 were at zero absorption, while 58 were performing below 20 per cent.

When he appeared before the parliament’s Public Accounts Committee (PAC) Secretary to the Treasury Keith Muhakanizi blamed procurement gaps and inefficiency in ministries for the low absorption rate.

He said “Uganda was the worst in Africa” when it came to loans absorption.

President Museveni said at the Munyonyo retreat that ministries fail to use the money because “officials wand enjawulo [kickbacks]”.

Government officials deliberately delay to implement some projects as they buy time in a bid to profiteer from them.

amwesigwa@observer.ug