Cheaper credit essential for 10-fold growth - Government urges Ugandan banks

The Ministry of Finance has called upon commercial banks to cut lending rates, as a key step in facilitating economic expansion towards the $500 billion target by 2040.

Finance minister Henry Musasizi warned on Friday that high financing costs could constrain investment in the businesses and productive sectors expected to deliver the government's Tenfold Growth Strategy.

Speaking as chief guest at the ninth Uganda Bankers Conference at Kampala Marriott Hotel in Nsambya, the minister acknowledged the steps already taken steps by banks to reduce lending rates but challenged them to go further.

He noted that achieving the US$500 billion by 2040 target will require large investments in production, value addition, infrastructure, technology, tourism and mineral development.

“First: Bring down the cost of credit. I want to thank you for the steps you have already taken to reduce lending rates. But I believe we must be even more ambitious,” he said.

The minister wants lenders to improve credit assessment and make better use of data from institutions such as the Uganda Revenue Authority and National Identification and Registration Authority, within the law.

He said better information could help lenders assess borrowers more accurately and reduce the risk premium attached to loans.

Musasizi also called for wider use of credit guarantees and risk-sharing arrangements through institutions and programmes such as Uganda Development Bank and the Agricultural Credit Facility.

“Every reduction in the cost of credit matters. Every one percentage point reduction can unlock significant additional productive investment in our economy,” Musasizi said.

“So let us work together to make affordable credit a central pillar of tenfold growth.”

Uganda's Tenfold Growth Strategy seeks to expand the economy to $500 billion by 2040.

Under the Fourth National Development Plan, the government wants the economy to double every five years between the 2025/26 and 2039/40 financial years.

The strategy requires Uganda to double national savings from 20 per cent of GDP in 2022 to 40 per cent by 2040, matching a targeted investment rate of 40 per cent of GDP.

The government also wants to raise annual foreign direct investment from $2.9 billion in 2022 to $50 billion by 2040.

Exports are another major part of the plan. The strategy seeks to increase exports from 12 per cent to 50 per cent of GDP and raise the contribution of manufactured goods to merchandise exports.

Government has placed agro-industrialisation, tourism, mineral development including oil and gas, and science, technology and innovation at the centre of the strategy. The four areas are collectively known as ATMS.

NDP IV, which runs from 2025/26 to 2029/30, is the first of three five-year development plans expected to deliver the target.

Musasizi said the current financing structure cannot provide enough capital for the scale of investment required.

He called on banks to join the government in an ATMS Financing Compact intended to mobilise money for the priority sectors.

“Uganda's tenfold growth will ultimately not be measured by the size of budgets we approve. It will be measured by the lives we transform, the jobs we create, the factories we build, the farmers we commercialise, and the exports we generate,” he said.

He pointed to Uganda's emerging oil and gas industry, a regional market of about 300 million people and an estimated one million young people entering the labour market each year as opportunities that will require financing.

Bank of Uganda Governor Michael Atingi-Ego also challenged financial institutions to rethink how they finance the economy.

Atingi-Ego said the issue goes beyond simply increasing the volume of bank loans. Uganda must develop financial institutions, balance sheets and long-term sources of capital capable of supporting an economy many times its current size.

He described the Tenfold Growth Strategy as an opportunity to transform the economy within a generation but warned that existing financing structures would not be enough.

Atingi-Ego said macroeconomic stability must remain at the centre of the transformation because investors committing money over long periods need confidence that their capital will retain value.

Uganda's annual headline inflation stood at 4.1 per cent in August, against Bank of Uganda's medium-term target of five per cent.

The governor said different sectors would also require different forms of financing.

Agriculture needs capital that goes beyond farming to processing, value addition and infrastructure connecting producers to markets.

Minerals, oil and gas require long-term structured financing because projects can demand large investments and take years to generate returns.

Technology companies present another challenge because many depend on intellectual property, ideas and future earnings instead of traditional collateral such as land and buildings.

Atingi-Ego said this would require greater use of venture capital and other forms of risk financing.

He also said commercial banks cannot provide all the money required for the transformation.

Pension funds, insurers, development finance institutions and capital markets will have to provide complementary sources of long-term financing.

UBA chairman Michael Mugabi shared that view.

Mugabi said Uganda cannot achieve tenfold growth through government plans alone.

“Economies do not grow tenfold through policy documents alone. They grow when capital finds productive opportunities, when risk can be shared, when businesses become investment-ready, when long-term savings are transformed into long-term investment, and when financial institutions are prepared to finance the future rather than do business as usual,” he said.

Mugabi said the $500 billion ambition presents a financing challenge as much as it presents questions about productivity, infrastructure, markets and skills.

He said the banking industry wants to expand private-sector credit while helping mobilise other forms of capital.

These could include equity financing, pension savings, diaspora capital, venture funds, impact investment, blended finance and other risk-sharing instruments.

The Netherlands ambassador to Uganda also urged the financial sector to take advantage of opportunities in agriculture, tourism, mining, science, technology and innovation while responding to risks such as climate change.

Former Asian Development Bank nominated commissioner Lodewijk Govaerts, who delivered the keynote address, said financing ATMS sectors will also require investment in supporting infrastructure.

He cited transport, energy, logistics, digital infrastructure, water, processing capacity and human capital among the areas needed to support faster economic growth.

The government's official Tenfold Growth Strategy says achieving the target will require more than increasing output. Uganda will need to accumulate financial, physical and human capital while attracting investment and dramatically expanding value-added exports.

For Musasizi, lowering the cost of borrowing is one of the places the financial sector can start.