KAMPALA – A wiseman once told me, “those sitting at the high table wouldn’t imagine that anyone missed a meal because their table is decorated with an assortment of refreshments”. This analogy, best explains the situation of Bank of Uganda (BoU) that has been the concentration of financial power for too long, making it oblivious to the prevailing financial conditions at the core of society.
Bank of Uganda released a Monetary Policy Statement on 12th/8/2021 layered in rose-colored innuendoes reminiscent of a pot-bellied sugar daddy, lining up his naive prey for slaughter in fancy language, boasting of his achievements. All while painting a hunky-dory picture of the future.
As is with all sugar daddy stories, it’s hugs and kisses until a new catch is brought into the picture. Here is the catch:
First off, the policy statement opens with a bold declaration by the central bank of its retention of the Central Bank Rate (CBR) at 6.5%. The central bank rate or discount rate is the rate at which the central bank lends to other banks- commercial, investment banks. At 6.5%, the CBR is insanely high when compared to that of the US- 0.25%, UK- 0.1%, Rwanda- 4.5% and the Central Bank of Tanzania that reported a loan to commercial banks at 3% interest rate, to refinance and pre-finance loans to businesses in July 2021. When banks borrow at a high rate, they impose high-interest rates on borrowers thereby making loans expensive. Banks in Uganda like DFCU are charging up to 24% interest for loans to the public sector.
This bank rate is then followed by high yield regimes on Treasury bills and Government bonds caused by increased government borrowing. Currently, a 10-year bond has a 14% yield compared to a US 10-year bond yield of 1.2%.
Uganda’s 5-year bond yield is 12.5% compared to the US’s 5-year bond yield of 0.7% while Uganda’s 2-year bond yield is 11% and the US’s 2-year yield is 0.2%. The implication of this being that companies and individuals compete for loans with the government that is borrowing heavily thus the high interest rates, meaning BoU is complicit in the malefic scheme to levy high-interest rates, even though they have chosen to take a backseat and let the commercial banks suffer the public backlash singly.
In the Bank of Uganda Act 2000, under section 39(e), BoU is given the authority to prescribe maximum charges that financial institutions may impose on any banking transaction. Therefore, BoU can change this glitch by reducing government borrowing which will lead to lower bond and treasury bill rates; in addition to downscaling the bank rate and prescribing sober maximum rate charges.
The Bank of Uganda Act states one of the functions of the central bank as advising the Government on monetary policy in Section 32(3). BoU has failed in performing this function because of its indifference to Quantitative easing.
Quantitative easing (QE), simply put is the creation of new money by the Government through the central bank to boost the economy by stimulating lending and keeping interest rates low. Governments through central banks implement this Monetary Policy by buying bonds, financial assets and injecting money into the economy to get it going and prevent recessions. In a healthy economy, money moves freely between the central bank, banks and firms thereby stimulating growth. However, when panic hits, people, banks, hoard their money causing blockages and slowing growth. So the government pumps money to increase confidence for people to start spending, investing and for banks to lend.
QE, is very populist in nature and could buy the government goodwill from voters in addition to making the economy more liquid. The US has implemented QE through the COVID 19 Stimulus injecting $1.9 trillion into their economy. UK followed suit edging in £895 billion. In East Africa, Tanzania made a provision of $432 million (1 trillion Tanzanian Shillings) into her economy and yet they have all managed to keep inflation low with the US keeping inflation at 5.4%, UK 2.5% and Tanzania 3.8%. Therefore, BoU’s inability to sway the government into applying QE for the fear of inflation is unjustified because it is proven that it can be implemented while keeping inflation low.
The inaction by the central bank in its role as adviser in monetary policy to the government in the middle of a pandemic has resulted in banks sitting on a pile of idle cash; while other businesses starve or can’t get started because they lack credit. Ronald Muyanja, head of trading at Stanbic bank Uganda was recently quoted by a local daily saying “the banking industry is sitting on tonnes of cash that were estimated at 2.65 trillion Uganda shillings which they couldn’t lend due to lack of potential borrowers”. Meaning- the central bank has failed to bridge the gap through monetary policy failing “to take Muhammad to the mountain”.
In the statement, BoU reports that COVID 19 interrupted economic recovery. It’s important to remind the central bank that in the same period, Tanzania attained middle-income status in July 2020 right in the midst of the pandemic, not to mention the untimely death of their president and an unforeseen transition. So COVID 19 should not entirely be used as a scapegoat by BoU as currently, Tanzania has a low inflation rate of 3.8% and a GDP growth of 4.9% recorded in the first quarter of 2021 all without rolling out a vaccination program, only receiving their first batch of vaccines at the end of July 2021.
It is evident that the bank’s statement is overly optimistic of the oil sector as one of the factors that will return the economy to growth of 6-7%. Excessively expectant I must say of the Final Investment Decision (FID) as a 2020 Oxfam dossier – The Money Pipeline writes “Overall Oxfam estimates that the government of Uganda will miss out on $287m over the 25 years of exploitation of the project- for one Exploration Area only out of the four”. This is close to 5.7% of the overall potential government revenues from the projects as a result of Double Tax agreements. Is BoU blind to this fact or is covering it up?
From the policy statement, it’s evident that BoU’s priority is low inflation over the public interest- Liquidity. US, UK both have implemented QE and have still kept inflation low. The bank continues to register headline inflation which is the rise in the prices of household goods comprising fuel, food at 2.4%. This is puzzling because there has been a considerable perception of more than a 2.4% increase in foodstuffs and fuel. Echoing a prominent ongoing debate among industry pundits that governments lie about inflation. The report conveniently ignores mentioning the rampant corruption even during the pandemic as a major cause of inflation. Corruption leads to tax evasion, budget deficits which leads to increased borrowing which then leads to inflation.
In 1998, Prof. Mutebile then Permanent Secretary Ministry of Finance said “The debt NRM government inherited was relatively small, but much of it was siphoned into personal accounts abroad or spent in grandiose projects and non-performing public enterprises”. This corruption culture has exponentially grown periling the economy- spiking inflation.
The central bank has failed in its mandated position of the financial advisor to the government because despite acknowledging “food prices to go up” in coming months, and the prospective value of agricultural products, BoU has failed to advise the government to resuscitate the moribund Uganda Commodity Exchange. Agricultural products are on the upside especially with the ongoing revolution in alternative fuels from crops- Sugarcane fuel developed by Brazilians, maize fuel by Americans. Clearly, agriculture is going to be in the middle of the fuel revolution. Instead, BoU is steadily bent on steering the economy the way of the Dutch disease heavily focusing on the oil industry thereby making the agricultural sector less competitive.
In all fairness to BoU, it has come up with initiatives to combat the current situation like -The COVID 19 Liquidity Assistance Program (CLAP). CLAP has helped in the restructuring of loans affected by the pandemic for up to two restructurings per credit for a year. It has given borrowers the liberty to postpone payment for up to a year while encouraging them to accept credit relief with almost certain acceptance from the supervised financial institutions. The impact of this relief is minimal at best because the interest regimes remain unchanged.
Objectively, even after many governments have chosen to let central banks be independent, it is overly ambitious to state that BoU is autonomous and free from government influence. It is for this reason that they deserve the benefit of the doubt.
For BoU’s failure to transpose to cater to the needs of the time; exposing the economy to torment because of inflexibility, I implore President Museveni in his crusade to purge false prophets, to start at the central bank because it is a coven of them.
The author, Mark Kidamba is an Investment Analyst.