High Interest Rates Expected to Squeeze Businesses Despite CBR Reduction

Despite the Bank of Uganda (BoU) easing monetary policy in October 2024, interest rates remain high, posing challenges for businesses across the country.

Last Thursday, BoU maintained the Central Bank Rate (CBR) at 9.75%, aiming to control inflation while fostering economic growth. However, due to the fiscal policy stance, interest rates have remained elevated, making it harder for businesses to access affordable credit.

According to BoU, Private Sector Credit (PSC) growth slowed in the last quarter of 2024. In the three months leading to December, PSC grew by 7.8%, down from 8.9% in the previous quarter.

Loans denominated in Ugandan shillings declined slightly from 10.3% to 10.0%, while foreign currency-denominated loans dropped significantly from 4.9% to 2.0%.

Meanwhile, commercial bank lending rates fell only slightly, from 18.6% in September to 18.3% in December, keeping credit costs high.

How High Interest Rates Are Impacting Businesses

Expensive Loans, Slower Expansion

With borrowing costs remaining high, many businesses struggle to secure funds for expansion, technological upgrades, or hiring additional staff.

This limitation affects productivity and slows Uganda’s overall economic growth.

Increased Operating Costs

Businesses that depend on loans for day-to-day operations face higher repayment burdens.

As profit margins shrink, some enterprises delay expansion plans, while others pass increased costs onto consumers leading to rising prices for goods and services.

Economic Outlook: A Tightrope Walk

Despite these concerns, BoU remains optimistic about Uganda’s economic trajectory. The central bank projects GDP growth of 6.0%–6.5% in FY 2024/25, with expectations of reaching 7.0% in the coming years.

Inflation has followed expected trends, supported by a stable exchange rate, favorable food and energy prices, and a relatively low global inflation environment.

However, BoU warns that risks remain high. Global trade tensions and increased government spending pressures could disrupt inflation control and economic stability.

As businesses brace for the effects of elevated interest rates, the coming months will be crucial in determining how well Uganda navigates these financial hurdles while maintaining economic momentum.