Ugandan businesses surf offshore markets, finding sweet relief.

Businesses in Uganda are turning to offshore borrowing as interest rates on loans in the country remain high. Small businesses and risky borrowers are facing rising costs as interest rates increase, but larger corporations have avoided the impact. The Bank of Uganda’s fourth quarter bank lending survey for 2023 reveals that commercial banks have made it more difficult to process loans for sectors such as building, construction, and real estate. As a result, businesses are seeking relief in offshore markets, attracted by the low interest rates and relaxed regulations that often accompany offshore borrowing. Although offshore institutions can be used for illicit purposes, they are not considered illegal. The decision to raise interest rates was prompted by an attempt to control inflation, which exceeded the country’s medium-term target of less than 5% in 2023. Consequently, interest rates have increased, making borrowing more expensive for businesses. This has led commercial banks to increase their lending to the government in order to meet core capital requirements and make provisions for non-performing loans. However, this has put pressure on the domestic borrowing market, prompting businesses to look abroad for loans. The government is also avoiding borrowing from foreign markets due to high interest rates and associated risks. The growth of private sector credit has slowed, and this, coupled with declining aggregate demand locally, has prompted businesses to invest in government papers instead of local industries. The private sector’s reliance on foreign currency-denominated loans, combined with the government’s borrowing in foreign currency, has reduced the availability of dollars from domestic lenders and increased reliance on offshore borrowing. This has led to a depreciating currency and an increase in loans dominated by foreign currencies. In the quarter leading up to November 2023, the Ugandan shilling remained relatively stable, but this was mainly due to higher corporate demand and outflows of portfolio capital.