Why Uganda's private sector is squeezed out of credit market?
Data also shows that local telecommunications firms absorbed significant new loan facilities during the same period.
Growth in private sector credit slightly declined to 7.9 percent between January and March 2025, compared to 8 percent recorded between October and December 2024, according to the latest Bank of Uganda (BoU) data.
The growth rate for Ugandan shilling-denominated loans fell from 10.3 percent in the last quarter of 2024 to 10 percent during the first three months of 2025.
In contrast, growth momentum in foreign exchange-denominated loans slightly increased, from 2 percent between October and December 2024 to 2.3 percent in the first quarter of 2025.
The total value of commercial bank loans disbursed to the private sector rose by 4 percent to Ush21.5 trillion ($5.9 billion) between December 2023 and December 2024, while the industry loan default ratio fell to 3.9 percent over the same period.
The increased government borrowing is attributed to slow growth in tax revenues and a surge in government expenditure driven by supplementary budget requests.
Lenders also prefer lending to the government, as it offers higher returns, reducing their appetite for private sector lending as they seek to avoid risky loans.'Apart from domestic government borrowing raising rates for borrowers, its refinancing arrangements - through rollovers and not repaying principal amounts - reduce liquidity in financial markets, whose fund allocation is driven by market incentives,' said Dr Fred Muhumuza, a local economist.'It also diverts private investments from the real economy, which creates jobs and growth, to financial instruments that only generate financial wealth.'The real cost of borrowing incurred by private businesses seeking alternative sources of credit remains unclear.
Average yields on the 91-day Treasury bill rose from 9.9 percent in the quarter ending April 2024 to 10.9 percent in the quarter ending April 2025, according to BoU data. Yields on the 364-day Treasury bill increased from 14.6 percent to 16.7 percent over the same period.
The yield on the two-year Treasury bond rose from 13.3 percent to 15.5 percent, while that on the five-year bond increased from 14.8 percent to 16.2 percent. Similarly, the yield on the 10-year bond rose from 15.8 percent to 16.7 percent, and the 15-year bond yield climbed from 16.2 percent to 17.1 percent.
Local telecommunications companies, however, dominated private sector borrowing during the same period. Their infrastructure investment needs and quarterly dividend payments were cited as key drivers of significant borrowing, though details of specific transactions remained unavailable at press time.'Most of the lending directed to telecommunications companies is meant for new infrastructure investments and quarterly dividend payments.'Their loans are priced on the Structured Overnight Financing Rate (SOFR), tied to a three-month average plus four percent, equivalent to an annual interest rate of 8 percent on US dollar loans.'Some loans disbursed to the telecommunications sector have a five-year tenure. These companies play a big role in the economy and provide a reasonable gauge for monitoring the country's economic health. We are less worried about credit risks in the telecommunications sector at this time,' observed a financial analyst at Absa Bank Uganda, who requested anonymity due to confidentiality obligations.
Michael de Kock, an economist at Oxford Economics Africa based in South Africa, said that while precise data on borrowing costs from alternative sources was limited, tighter credit conditions suggest they are on the rise.'Despite tighter credit, April's PMI hit a five-month high, suggesting businesses are adapting to higher borrowing costs. The telecommunications sector's heavy bank borrowing reflects strategic confidence rather than financial distress.'The March 2025 network sharing agreement signed between MTN and Airtel further illustrates strategic capital optimisation while expanding coverage,' he explained.
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