The Variation of Interest Rates in Uganda

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THE VARIATION OF INTEREST RATES IN UGANDA. Interest rate: the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor) for example, a small company borrows capital from a bank to buy new assets for its business, and in return the lender receives interest at a predetermined interest rate. The average interest rate in Uganda is said to be about 11.5% for most of the commercial banks. Reasons for the change in interest rates. Political short-term gain: Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. Taxes: Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss. Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail. The current economy and how it becomes expensive to borrow money. Uganda's years of political turmoil left the country with substantial loan repayments, a weak currency, and soaring inflation. During the 1970s and early 1980s, numerous foreign loans were for nonproductive uses, especially military purchases. Even after the Museveni regime seized power, debts climbed while the productive capacity of the country deteriorated. To resolve these problems, the government tapped both external creditors and domestic sources, crowding out private-sector borrowers. The Museveni government then attempted to reduce the percentage of government borrowing from domestic sources and to reschedule payments of foreign loans. The government also
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