- Manufacturing accounts for 16.5% of the GDP
- Banks asked to lower interest rates
Image: WASSWA DEO
The State Minister of Finance for Industry, David Bahati, has called upon banks to lower interest rates for manufacturers to stimulate growth in the sector.
Speaking at the two-day Financial Symposium at the Uganda Manufacturers’ Association’s multipurpose Hall, Bahati highlighted the significant contribution of the manufacturing industry to the country's economy.
He said the industry contributed approximately UGX5.5 trillion to the treasury in the 2021/22 financial year, out of the UGX21 trillion collected for the entire year.
Currently, he added, manufacturing accounts for 16.5% of the GDP, with the industry sector alone contributing 27.4% to this figure.
He emphasized the need for manufacturers to unite and advocate collectively for their interests, stating, that this would give them a stronger voice to articulate issues during negotiations with the government and other stakeholders.
The minister noted that although domestic credit stood at Shs42.3 billion as of March 2024, with 55.9% allocated to the private sector and 40.8% to the government, the high cost of capital remains a significant challenge facing the manufacturing sector.
“Despite being the largest consumer of available credit, manufacturers are burdened with an average interest rate of 17.4%, which is higher than the country's average rate of return of 18%. The cost of money is therefore still high, yet with the current technology and the history of the clients, we thought the banks would lower their rates because the exposure risk is also lower,” he said.
He nevertheless highlighted government efforts to reduce barriers to business, such as streamlining investment licensing processes and improving transport infrastructure to enhance market access for manufacturers.
The call by the Minister came as a concerted effort to support the manufacturing industry and drive economic growth through improved access to affordable credit.
In response, Godfrey Sebaana, CEO of the Diamond Trust Bank (DTB) shed light on the complexities and potential solutions regarding the issue of the bank's high interest rates.
Although he acknowledged that the interest rate of 18% is indeed high for sectors like manufacturing, Sebaana highlighted the need for a balance between monetary and fiscal policies to determine the underlying cost of liquidity in the country.
For instance, he noted that while the Uganda Development Bank may offer credit at 12% interest, this too may be high for the manufacturers, who at the moment, are seeking single-digit interest rates.
Image: WASSWA DEO
Sebaana stressed the importance of government intervention in infrastructure development to create a conducive environment for lower borrowing costs.
He pointed out the discrepancy between government borrowing rates, which currently stand at 17%, and the rates offered to manufacturers, emphasizing the need for alignment.
"At DTB, we recognize that typical manufacturing setups require patient capital with longer repayment periods. High rates of 18% are therefore unsustainable for such ventures," Sebaana stated.
As a solution, Sebaana advised manufacturers to consider equity financing, especially during the initial capital expenditure phase.
He highlighted the role of commercial banks in providing working capital through trade finance, leveraging contingent facilities to reduce borrowing costs.
"We have introduced various programs in partnership with Development Finance Institutions (DFIs), UDB, and the Bank of Uganda to assist manufacturers at different stages of their development," he added.
However, Sebaana acknowledged the limitations of UDB's funding capacity, suggesting that disruption of commercial bank interest rates would require a substantial increase in UDB's capital, an endeavor that is very challenging within the current fiscal framework.
Despite these challenges, Sebaana encouraged manufacturers to engage with banks, leveraging their expertise to navigate through high interest rates. He also pointed out the growing trend of green financing as an alternative funding source, offering potentially lower costs compared to conventional credit.
According to the chairman of the Uganda Manufacturers’ Association (UMA), Keto Kayemba, the financial symposium was organized to allow the manufacturers to meet with bankers to explore solutions to the financing challenges they face.
He said the symposium also aimed to highlight ways the manufacturers can reduce their costs, and increase production and competitiveness of their products within the regional and continental markets.
“As manufacturers, we are interested in exploring cheap financing models to compete effectively with our peers across the region, and the continent,” Kayemba said.