Prime
Bank of Uganda: The journey and role in a liberalised economy
Bank of Uganda headquarters in Kampala. The Bank’s major role in a free market economy is to issue currency notes and act as banker to government and commercial banks. In 1995, the Bank secured independence as the Constitution gave it autonomy of influence. PHOTO BY MICHAEL KAKUMIRIZI
Kampala- When the National Resistance Movement (NRM) took over power in 1986, they came with an ideology that was inclined towards Marxism. In other words, the ideology emphasised collectivism where government had a role in doing business by owning and managing business entities.
Birth of neoliberalism
However, that changed and NRM had to abandon Marxism for neoliberalism.
Neoliberalism is a policy model of social studies and economics that transfers control of economic factors to the private sector from the public sector or government.
The country, then, started embracing capitalist ideology and the economy became more private sector driven.
As the NRM government settled in, a group known as the International Development Research Centre of Canada (IDRC) was brought in to plan for Uganda’s economic recovery. This was at the invitation of President Museveni.
Economic reforms
According to a book, Uganda’s Economic Reforms, in a section written by current Bank of Uganda (BoU) governor, Emmanuel Tumusiime-Mutebile, “He (President Museveni) knew a number of academics associated with the IDRC who had worked in Tanzania and had reputations as liberal economists.”
The majority of the team recommended that government lifts controls on the economy. However, some members of the team who felt otherwise presented a minority report that was largely adopted.
Dr Suleiman Kiggundu, who was appointed BoU governor in 1986 was from the minority group too. All the central bank did at the time was to implement the ousted regime currency controls with the hope that it would curb inflation.
However, this did not work. Between May 1986 and May 1987, inflation rose from 120 per cent to 240 per cent.
IMF/World Bank agreement
In 1987, the International Monetary Fund (IMF) and World Bank signed an agreement with Uganda government that, in part, recommended currency reforms, devaluation of the Uganda Shilling, and other changes such as letting go of controls in the coffee and cotton sectors.
The first move was for the currency to be devalued and two zeroes were knocked off. BoU undertook this role as Uganda paced through to become a liberal economy.
Public expenditure struggles
However, still, BoU could not control inflation on its own because of public expenditure in the presence of low exports and limited government revenues.
The IMF and World Bank had also recommended some structural adjustments in the then fragile economy.
“There was considerable uncertainty and disagreement within government about how to respond to the economic problems. Central planning rhetoric continued. The ministry of Finance was not entirely committed to macroeconomic stabilisation and structural adjustment,” Mr Mutebile writes in the book.
Even more troubling, the ministry of Planning and Economic Development (MPED) did not have control over public expenditure.
Kibanda market
The economy continued to be in disarray and still for BoU, the exchange rate was firmly in the hands of the “kibanda market” (some form of black market) that they had no control over.
A crisis meeting was held in 1989, that brought together academics, politicians, and civil servants.
Their role was to chat a way forward for the country on stabilising the economy, structural adjustment and the parallel exchange rate – kibanda market.
The MPED made the case budgeting with inflation in hindsight, export promotion by liberalising the exchange rate and then devaluation of the rate. There was approval for this plan and in 1990, the “kibanda market” became official.
“This was one of the most significant milestones in Uganda’s economic history and marked the start in earnest the economic reform programme,” Mutebile adds.
Free market forces
Indeed, from then on, the Central Bank leaves the exchange rate to market forces. On several occasions, people have demanded that BoU intervenes when there is runaway depreciation of the Uganda Shilling.
Last year, when the Shilling was depreciating rapidly, BoU insisted it couldn’t intervene in foreign exchange market.
BoU intervention
BoU says it only intervenes when the movements in the exchange rate are speculative. In fact, there is a famous quote Mr Mutebile used in June 2011 as the speculators were driving down the value of the Uganda Shilling. He said: “I have the capacity to burn their fingers.”
More so, in 1992, President Museveni ordered the merger of the Ministry of Finance and that of Economic Planning and Economic Development.
The new ministry officials were also blunt and insisted that in order to manage inflation, military indiscipline had to stop.
Economists in control
Economists were now in charge of fiscal policy, which gave room for BoU to manage the monetary policy side of the economy. And in 1995, the Bank secured independence as The Constitution gave it autonomy of influence.
Banks close
As the economy became liberalised, the regulation of the banking sector toughened. Between 1995 and 2001, several banks were shut down for putting depositors at risk.
Greenland Bank, International Credit Bank, and Cooperative Bank are some of tche banks closed at the time.
In 2001, BoU oversaw the sale of Uganda Commercial Bank (UCB) to Standard Bank of South Africa. To-date, there is still divided opinion on whether UCB should have been privatised.
Tough stance
The Central Bank also toughened on ownership of banks, limiting families and individuals from taking major stakes. The reasoning for this was to reduce the risk of collapse.
BoU’s regulation of the banking sector comes to ensure the sector is sound and doesn’t pose risks of failure.
However, BoU doesn’t control interest rates but provides a benchmark rate through its two-month setting of the Central Bank Rate, popularly known as the CBR. CBR is only an indicative rate.
The Central Bank started setting the CBR in 2011 as part of a measure called Inflation Targeting.
Using this measure, the Central Bank argues it has a firm control over inflation because when the risk of it rising appears, BoU raises the rate. The rate is reduced when the inflation projection is deemed less risky.
BoU faulted
BoU has been faulted for not reigning in commercial bank lending rates considering that when the CBR is raised, bank interests go up rapidly.
When the CBR is reduced, rates go down like a feather – very slowly.
The tightening of monetary policy is also criticised for slowing the economy and curtailing economic activity.
In 2011, Mr Mutebile disagreed with President Museveni over $400m (Shs1.3 t
rillion) meant to finance the purchase of fighter jets.
However, the money was later released.
Still, in 2011 at the heat of election campaigns, BoU was used to raise money through Treasury bills and bonds for purposes that remained unclear to the country.
