Excessive govt local borrowing starves private sector of credit
Slow growth of tax revenue and a reduction in donor support has seen government increase domestic borrowing to support budget activities. Photo / Edgar R Batte
What you need to know:
- The report by the European Investment Bank indicates that with banks choosing to lend to government, many businesses have been left in the open with on source of credit
A report by the European Investment Bank indicates that excessive government domestic borrowing has severely impacted the private sector, with many borrowers left with no sources of credit.
The report, titled: Finance in Africa, Unlocking Investment in an Era of Digital Transformation and Climate Transition, notes that whereas Uganda is one of the most financially included countries in East Africa, the increased supply of public debt has crowded the private sector out of the credit market with the country registering the lowest credit growth across East Africa.
Data indicates that East African countries, including Kenya, Tanzania, Rwanda, and Burundi, registered an average private sector credit growth of 23.25 percent, which was way above Uganda’s 8 percent.
“Uganda experienced the lowest credit growth at 8 percent, due to excessive government borrowing that crowded out private sector credit … the surge in domestic sovereign borrowing resulted from the World Bank freezing financing for new projects after the country passed a controversial anti-LGBTQ [Anti-Homosexuality] law in May 2023,” the report reads in part.
Domestic borrowing has been increasing as government seeks to mobilise resources to fund budget activities, amid low tax revenue and dwindling donor financing.
Ministry of Finance data indicates that the stock of domestic public debt had by June 2024 risen from Shs34.5 trillion to Shs40.6 trillion, representing a growth of 5 percent.
The increase signals a shift in resource mobilisation strategy with focus on the domestic market.
The report, released early this week, further indicates that Uganda is the only country to register private sector growth of under 10 percent in East Africa, noting that, in addition to an increase in government borrowing, financial institutions continue to be risk averse due to tight financial conditions.
Kenya and Rwanda, according to the report, registered private sector credit growth of 15 and 18 percent, respectively, while Tanzania and Burundi, registered the highest rates of 26 and 37 percent, respectively.
The report further indicates that Uganda is the second most financially included country in East Africa. Kenya leads the region with 79 percent of the adult population having an account in a bank or other type of financial institution or using a mobile money services, followed by Uganda at 66 percent and Tanzania at 52 percent.
However, the report warns that African banks are exposing themselves to potential losses by heavily investing in government debt while starving the private sector of credit, whose impact has been severe in East Africa, where governments have amassed debt that threatens repayment capabilities.
“African bank holdings of domestic sovereign debt increased sharply to 17.5 percent in 2023 from 10.3 percent in 2010, raising the potential for bank losses in the event of default. At the same time, there is a decreasing trend in banks’ private sector lending to 38 percent in 2023 from 42 percent in 2010, posing concerns about the severity of crowding out,” the report says
In much of Africa, the report notes, the private sector has been significantly crowded out of the credit market driven by higher public debt issuance with many governments facing an increase in financing needs as international investor appetite declined.
