Bank of Uganda should rethink yardstick for measuring economic success

Bank Of Uganda Governor Emmanuel Tumusiime Mutebile with his deputy Dr Louis Kasekende recently: NET PHOTO

By Muheereza Kyamutetera

On its website, Bank of Uganda says it “100% owned by the Government of Uganda” and conducts all its activities in close association with the Ministry of Finance, Planning and Economic Development (MoFPED).

Their stated mission is fostering price stability and a sound financial system, but more importantly, it is mentioned that their vision is to be a “center of excellence in upholding macroeconomic stability.”

Bank of Uganda Deputy Governor, Dr. Louis Kasekende has come under public criticism over his ‘miracle’ assumptions on the economy

In my basic understanding, “macroeconomic stability” describes a situation where citizens and businesses are protected from adverse shocks in their everyday life, which in turn increases their prospects for sustained but more importantly, inclusive growth.

Inclusive growth presupposes equitable opportunities for all players in the economy with benefits incurred by every section of society. For Uganda to achieve rapid and sustained poverty reduction, we require a deliberate all-inclusive growth that allows people to contribute to and benefit from any economic growth.

Otherwise the rich will continue getting richer and the poorer, poorer till a point when the poor will have nothing left to eat, but the elites and the rich.

I was therefore perturbed by Bank of Uganda Deputy Governor’s speech during a dinner to mark the 20-year anniversary dinner for the Uganda Securities Exchange (USE) Kasekende in which he denied that the insolvency of Crane Bank was “not caused by any problems in the wider economy” but rather by “its own mismanagement, not least by its extensive insider lending.”

BoU Governor, Professor Tumusiime Mutebile and his deputy, Dr Louis Kasekende have faced intense criticism over their handling of the Crane Bank issue and most recently over their mismanagement and misrepresentation of the economy

Kasekende goes on to wiggle some carefully selected banking sector industry figures that purport to show the banking industry is stable and growing and uses this to chest-thump about how well the Central Bank is doing a good job.

At this point I could not stop wondering for whom does the Kasekende and his kind at Bank of Uganda, work for- the people of Uganda who pay his salary or the banks, many of whom are not even Ugandan owned?

Even if I know that Dr Kasekende already knows this, let me take this opportunity to remind him that banks in Uganda have always enjoyed an inverted relationship with the people of Uganda- always taking every opportunity to profit at the expense of the economy in which they operate.

For starters, the very foundation of the banking industry is extortionist. They raise deposits very cheaply from the public and lend the very same deposits to the public, including the very owners of those deposits, at exorbitant rates- with the blessing of the Central Bank (read as supervision)

For the time that Kasekende has been Deputy Bank Governor, since January 2010, banks have averagely paid 3.3% interest on customer deposits and yet charged on average 22.6% as prime lending rate- of course prime lending rate is for the advantaged few- the majority of the citizens borrow at much higher rates. And they have come up with a beautiful name- Net Interest Margins, to sanitize this theft.

As a result, year in, year out, Banks have grown faster than the rest of the economy, fattening themselves as the rest of the economy struggles.

For example while industry profitability grew by 17.2% and 11.5% in 2014 and 2015 respectively, Uganda’s GDP only grew by 5.2% and 5% respectively. But in 2016 the sins of the industry- namely high and unsustainable interest rates caught up with them- causing a 44.2% dip in industry profitability. But even then the industry made a massive Shs302.1 billion in profits.

Profits galore for banks in 2017

Private sector lending and interests rates are perhaps the only good parameters that can be used to measure the performance of an economy and I would have loved to hear Kasekende talk more about this. As it is the banks, aided by the Central Bank’s adamant policy on inflation-targeting have kept interest rates high, thus starving the economy of the much needed credit.

But trust the bankers, they will lend less money, yet make more profits through a deliberate strategy to lend to a few people but at exorbitant rates and Kasekende can do nothing about it.

According to a BoU report, private sector credit between January 2017 and January 2018, only grew by 6% from Shs12.96 trillion to Shs12.65 trillion, this is despite an 18% rise in customer deposits. Even though all the banks have not yet released their 2017 results, preliminary gross loans to total deposit ratios (this ratio measures what percentage of a bank’s deposits are actually being lent out for productive use) for Stanbic Bank and dfcu bank show a reduction from 82.7% in 2013 to 60.7% in 2017 and 88% to 67% respectively. In other words the banks are hoarding money to sustain their high interest rates.

To compensate for this deliberate reduction in lending, the banks in 2017 deliberately kept their lending rates very high. Despite the Central Bank easing on the CBR by 21 percentage points from 12% in January 2017 to 9.5% in December 2017, the banks did not reduce their interest rates by as much. Shilling based interest rates went down by only 9.4 percentage points from an average 22.4% to 20.3% while USD based loans reduced by just 11.84 percentage points from 8.6% to 7.9%.

As a result 2017 is slated to be a good year- for the banks only of course.

The Central Bank industry Earnings & Profitability report shows that return on assets doubled from 1.33% in 2016 to 2017. Shareholders are also set to smile all the way to the bank as return on equity has also nearly doubled from 8.33% to 16.39% in the same period.

Already net profits for 2017 declared by 2 of the 24 banks- Stanbic (UGX200.5 billion) and dfcu bank (Shs106.2 billion) are larger than total industry profitability in 2016 (Shs302.1 billion).

Kasekende, should be more concerned that today, interest rates are at 22.56%- much worse than the 19.57% he found in place when he became Deputy Central Bank Governor. In fact Uganda today, is home to the highest interest rates in the EAC region, with the exception of Burundi and South Sudan, making our exports uncompetitive.

Rather than flaunting superficially rosy growth figures, Kasekende should be more concerned that 7-8 years ago, when he joined the central bank, private sector credit grew averagely by 29% percent annually and last year it only grew by 6%.

He should be concerned that since he joined the Central Bank, the Shilling has depreciated by 89% from Shs1935.6 in January 2010 to Shs3,660.1 in March 2018 and that this has disastrous impact on inflation and Ugandan based businesses that have to import inputs.

Perhaps, most importantly, he should be very alarmed that Ugandans are getting poorer; the number of poor people in Uganda increased by 51% from 6.7 million in 2012/2013 to 10.1 million people in 2016/2017.

And for all these, instead of engaging in selective amnesia and chest thumping about some selective and isolated indicators such as bank deposits, I would be proposing some serious radical solutions instead of glossing over the misery and pain of Ugandans.

Of course he also has an option of enjoying his fat paycheck quietly and wait to end his 5 year contract in 2020 and retire quietly.

Muhereza Kyamutetera is a social commentator, communications specialist and journalist.

Muheereza Kyamutetera is a senior journalist based in Kampala



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