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Assessing Bank of Uganda’s performance without a governor

KAMPALA –Globally there are 214 recognised central banks.

Of these, only one — Bank of Uganda [BoU] has been running without a governor for 18 months; this being the first time the central bank has functioned without a standard-bearer since it was opened on August 15 1966.

The appointing authority, the president of Uganda, has to this day not singled out a replacement for the deceased governor Emmanuel Tumusiime-Mutebile creating an unignorable vacuum at the top of the central bank.

Despite this abnormality, BoU has radiated a calmness signalling a smooth running of the affairs of the bank even though this restfulness holds water only if it’s backed by good performance.

To make an approximate judgement of the effectiveness of the central bank, one must take a closer look at its balance sheet.

It doesn’t help that only one has been re- leased in the last 18 months! In this, BoU should adopt the practice of publishing its balance sheets or parts of it at a higher fre- quency because it remains the best place to understand the central bank’s policy implementation.

The most notable indicator of BoU’s performance in the period dating back to February 2022 is the increment in the bank rate from 10.5 percent to 14 percent in April this year. The bank rate is the interest rate BoU charges domestic banks to borrow.

The 3.5 percent increment means that banks have had to increase the interest rate they charge for the loans they extend to their customers to make it worthwhile for themselves.

This has resulted in illiquidity as borrow- ing has become more expensive. A 3.5 per cent increase in the short period of a year and a half coming off a pandemic; and the effects of the Russia-Ukraine war almost certainly will plunge Uganda’s economy into a period of negative growth — recession.

Because expensive capital results in illiquidity which causes businesses to shut down, unemployment, and the shrinking of the economy. In like manner, the Uganda shilling has notably dropped by 209 shillings, six percent, against the US dollar in the last 18 months from 3,518 shillings in January 2022 to 3,728 shillings in March 2023 as per BoU’s bureau weighted average.

A shrinking shilling speaks to a depleting foreign exchange reserve, translating into falling investment returns, and the drop in value of assets in Uganda because our as- sets are valued in the local currency; not to mention costly cross-border trade because the US dollar is the international reserve currency, and with it gaining against the shilling, you need more units of the shilling to get your worth of the same units of a dollar in goods and services.

It is BoU’s role to control the stability of the shilling through effectively managing foreign ex- change reserves. In conformity with BoU’s annual report 2021–22, “The level of foreign exchange reserves fell during the year closing the period at USD 4,089.88 million...”

This marked a 2.95 percent fall from the close of June 2021. Foreign exchange reserves are the health metre of a country as they include foreign currencies, gold reserves, financial market instruments and the like.

In lay terms, a diminishing foreign ex- change reserve translates into a drop in value of the shilling, paints a bad picture of Uganda at the international level as countries that trade with Uganda cannot be certain it will honour her financial obligations, and this turns away foreign trade. Declining reserves further undermine the ability of BoU to defend the shilling on a sustained basis, or if the shilling crashes.

Foreign reserves are an important indicator of the ability of a country to pay its foreign debt. Therefore, a depleting reserve and a bulging public debt of 51.7 percent of GDP have pushed Uganda to a B- Fitch credit rating, subliminally suggesting to investors that Uganda is a high-risk debt country.

It’s interesting to note that in the last year, Uganda’s Fitch credit rating has dropped from B+, to B- with a ‘negative outlook’ loosely translated as ‘Uganda’s negative creditworthiness is not about to change in the foreseeable future’. This type of rating drives away risk-averse investors, and mostly attracts those who are willing to invest what they are comfortable losing, which isn’t much.

It doesn’t help that the central bank’s comprehensive income has fallen by 119 billion shillings ($32 million), its foreign liabilities increased by 1.7 trillion shillings ($462.5 million), and its domestic assets have decreased by 542 billion shillings (over $146.1 million).

This isn’t a performance befitting of applause for BoU’s administration, which is overseeing a bank whose return on foreign assets experienced a slump from 0.62 percent to -0.89 percent at the close of June 2022. This haemorrhage punches a hole in what would be availed to the government to spend.

In a nutshell, President Museveni needs to find a governor to fulfil BoU’s mandate, guard the value of the shilling, act in public interest and earn it a profit without significant financial risk, even though BoU’s intention isn’t entirely profit.

In fairness, BoU hasn’t entirely cooked its goose because it has shown tenacity in how well it has implemented its monetary policy to lower inflation from double digits to nine percent headline inflation, and 7.8 percent core inflation for April 2023.

Foreign assets have gone up by 713.6 bil- lion shillings ($192.5 million) in the period leading to June 2022 giving the country a better image while sending a positive message to trade partners the world over.

There has been a significant bump in yields of bonds which has been an attrac- tion to foreign investors on the money market because the returns are good.

For instance, the yield for a two-year bond in February 2022 was 10.4 percent, and in April 2023, the yield for that same bond has shot up to 13.5 percent. Likewise, the yield for the 10-year bond has risen to 15.75 percent from 13.5 percent owing to BoU’s monetary tools.

Ultimately the evaluation of how well BoU executes its business should take into consideration the high-handed yet hid- den role the government plays in forcing redundant financial maneuvers, and how little of wiggle room the central bank is given to operate independently especially at a time like this when the higher-ups at BoU are auditioning for the top job.


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