UGANDA

UGANDA
cessation of operations for several months. To prevent this kind of problem, we have established a
committee to supervise the works in reference to the implementation schedule and report
progress to Cabinet on a quarterly basis. In terms of financing, by the end of June 2016, the
China-Exim bank loans had been disbursed to 16.3 percent (or US$313 million) of the projects
cost.
5. Recent events in South Sudan continue to affect Uganda in a number of ways as Uganda
continues to host a significant number of refugees with support from the international
community, helping manage the humanitarian crisis. The slowdown in Ugandan exports to South
Sudan and the decline in worker’s remittances may continue to adversely affect Uganda’s
economic performance. In addition, many Ugandan traders are burdened with unpaid bills from
the South Sudanese government, which threatens their commercial viability.
6. Private sector credit growth decelerated to 3.1 percent year-on-year in September 2016,
driven largely by provisioning for bad loans--which has heightened risk aversion of banks—as well
as subdued economic activity. All sectors experienced a squeeze in loan disbursements with the
exception of lending to electricity and water and personal and household loans. Lending to the
manufacturing, trade, building and construction and the business services sectors was minimal,
resulting in net recoveries in the most recent period to September 2016. Foreign currency lending
which previously supported private sector credit has deteriorated significantly to a year on year
growth rate of minus 1.9 percent in September 2016 relative to a 3.1 percent growth in June 2015
(both adjusted for valuation changes). Local currency lending has on the other hand started
recovering after having bottomed out in March 2016.
7. Overall, the banking sector remains healthy, though Non-Performing Loans (NPLs) have
increased and Bank of Uganda (BoU) had to intervene in one bank. The sector remains
well-capitalized, liquid and profitable. However, NPLs as a ratio of gross loans increased from
4.0 per cent in June 2015 to a peak of 8.3 percent at end-June 2016, declining afterwards to
7.7 percent at end-September 2016. The main reasons for this increase according to a survey
conducted in the industry are government domestic arrears, diversion of borrowed funds, the
effect of political instability in South Sudan, insufficient cash flows resulting from the slowdown in
economic activity, fraudulent practices, increased cost of borrowing following monetary policy
tightening, and foreign exchange volatility that negatively affected repayment capacity of
borrowers with loans denominated in foreign currencies. Stress tests show that the system
remains resilient to shocks, including the impact of an increase in the industry average NPL ratio
to 12.6 percent on bank capital, default of the single largest borrower in each bank, a sudden
withdrawal of short-term deposits, a sudden withdrawal of the single largest depositor and the
3 largest depositors in each bank.
8. To ensure the stability of the financial system, BoU took over management of Crane Bank
on October 20 th 2016. Crane Bank, the fourth largest overall—and the third largest domestic
systemically important bank (D-SIB) —was undercapitalized following a significant increase in
NPLs. BoU appointed a statutory manager and suspended the Board of Directors. The next key
steps include ensuring that the bank’s capital base is restored and on this front, the new
30 INTERNATIONAL MONETARY FUND