This photo taken on September 8, 2023 shows US dollars. PHOTO/AFP
A new report by the Bank of Uganda (BoU) indicates that Uganda lost more money than it brought in at the time.
This indicated that the country got itself into a situation where it was receiving less forex than it was giving away, prompting it to go bullish in order to reverse the mayhem.
The central bank says the nation's deficit for the 2023/2024 fiscal year was $1.155b, a significant increase over the $50.4m deficit from the previous year. The current account deficit, a crucial component of Uganda's balance of payments (BoP) that examines how exports affect imports, services like transportation, and money entering and leaving the nation, increased by 8.2 percent during the period. This means Uganda spent more money on debt, foreign goods and services, and other expenses than it brought in from exports and other sources of income.
Uganda had to pay more for services like shipping goods and business-related services from overseas, something that widened its deficit in services—things like business and transportation services—by 21.8 percent. The country also saw a deficit increase on its primary account, which tracks things like interest Uganda pays on its foreign debts. This deficit increased by 2.6 percent, meaning Uganda paid more interest on the money it has borrowed from other countries during the time.
When you amalgamate all these categories of deficits, it was bad news for the apex bank, whose role is to stabilise the country’s macroeconomics. The BoU received a reprieve from its secondary income account, which tracks money coming in without goods or services being exchanged, like aid or money sent back by Ugandans living abroad.
Unfortunately, this income had also decreased last financial year (FY) by 11.8 percent to $1.819b partly because the country received less project aid because it still has issues with donors because of human rights and absence of constitutional and electoral reforms and fewer personal transfers from abroad.
Doom and gloom
Collectively, this means even the cash that the central bank would have leveraged to offset all these deficits was also hit with hiccups mainly because it had to pay more for services like shipping and business needs, increased interest payments on foreign debt, and received less aid and personal remittances.
But the central bank was relieved a little bit because the country’s investments from foreigners and loans registered a surplus of $2.639b, even though this was also 23.7 percent lower than the previous year’s surplus of $3.359b.
A surplus means more money was coming into Uganda than leaving, but the amount shrank significantly compared to last year. This, BoU says, was because the country received fewer loans from other countries or international organisations and yet it had to pay back larger portions of the loans it had borrowed in the past, and that investors who had put money in Ugandan stocks, bonds, or other financial assets pulled their money out.
It should be remembered that the state’s external cash resources dwindled tremendously last FY mostly from the decline in the concessional loans and the aid the country was receiving from both the International Monetary Fund (IMF) and the World Bank.
A $1 billion programme from the IMF was secured in 2021, but the state missed out on its final disbursement from this three-year extended credit facility because it did not meet important programme objectives that were stipulated by the multinational lender.
By the time the lender completed its most recent appraisal in March, Uganda had already used $870m (Shs3 trillion) from the programme. The facility expired early this year prior to the sixth and final review, which deterred Uganda from accessing the remaining funds from the international lender.
This has resulted in significant government demand for cash in domestic market auctions since the first quarter, where the central bank has even taken more cash than it has offered to tender. But despite this cash inflow decline, the country saw 2.8 percent more Foreign Direct Investment (FDI)—money invested in long-term projects like businesses or infrastructure—reaching $3.033b. Most of this FDI was directed toward oil production and related projects, BoU data shows.
Impact on country’s reserves
Uganda’s forex reserves, which is the money set aside for emergencies and to support the economy, was badly hit as a result of the amalgamation of these financial hiccups.
The country had to use $1.155b from its reserve assets because of the problems with the BoP, like the deficits mentioned earlier, which means Uganda dipped into its savings to balance things out.
This action declined the country’s total reserves from $4.074b to $3.234b.
Reserves are also measured by how many months they can cover future imports (how long the country can pay for foreign goods and services with the reserves).
They were cut short to only three months of imports even as of now, down from 3.8 months the previous year. Importantly, this doesn’t include imports related to oil projects, which would make the situation even tighter.
How BoU stepped in
The central bank had to intervene to balance things out really through the Interbank Foreign Exchange Market (IFEM), which is where banks exchange currencies. This is not BoU’s space but it was forced to participate there mainly to buy US dollars to increase its reserves. It bought $249.6m to boost its reserves. Additionally, it made targeted purchases (probably to address specific needs) amounting to $80m.
To preserve its reserves, the BoU avoided any sale of the US dollars it held, even when the Ugandan Shilling was under pressure and losing value. Usually, central banks sell foreign currency to stabilise their local currency, but BoU chose not to intervene.
In total, BoU’s actions led to a net purchase of $329.6m, which means it bought more US dollars than it sold, something that was targeted to buffer up the country’s reserves.
Managing liquidity
To manage interest rates in the money market, the central bank used specific tools to align them with the Central Bank Rate (CBR). Some of these were the Repurchase Agreements (REPOs), BoU bills, and the Standing Lending Facility (SLF) — that were mainly used to manage short-term interest rates.
REPOs are a method where BoU lends money to commercial banks with the agreement that the banks will repurchase the securities at a later date. BoU Bills are short-term securities issued by the BoU to control liquidity. A Standing Lending Facility (SLF) is one where banks can borrow funds from the BoU to meet their short-term liquidity needs.
The amount of money borrowed through the SLF decreased to Shs69.5 trillion (945 borrowing transactions) in the FY2023/2024, down from Shs71.3 trillion (1,006 transactions) in 2022/2023. The central bank interprets this decline as a sign of improved liquidity in the domestic market, meaning that banks had better access to cash and didn’t need to rely as much on the SLF for short-term funding.
One of the main reasons for this improvement, BoU official documents show, was significant maturing treasury securities (government debt that reached its repayment date) and coupon payments (interest payments on government bonds) in the second half of last FY. These payments injected cash back into the financial system, giving banks more liquidity.
In addition, the average seven-day interbank money market rate (the interest rate for very short-term loans between banks) declined slightly (to 10.99 percent) compared to the FY2022/2023 (11.24 percent), something that indicates a small easing in the cost of borrowing for banks, reflecting the BoU’s monetary policy actions.
Collectively, these tools helped ensure the rates at which banks lend to each other (interbank rates) stay close to the CBR, which is the BoU’s main policy rate.
“As such, BoU periodically intervened during the second half in a bid to mop up the excess liquidity by using REPOs and BoU bills. The use of the latter instrument rose to Shs1.3 trillion in the 2023/2024 FY compared to Shs1 trillion observed in the FY2022/23. However, issuance of the REPO declined to Shs7.7 trillion in FY2023/2024 compared to Shs14.2 trillion observed in FY2022/2023,” BoU says.
“The resultant monetary policy costs (in the form of interest paid) from the periodic use of these liquidity withdrawing instruments were offset by gains from the SLF,” it adds.
Background
Eventually, the Uganda shilling remained relatively stable against the US Dollar throughout the 2023/2024 financial year. It only depreciated by 0.6 percent, to an average mid-rate of Shs3, 776.6 per US Dollar from an average of Shs3, 754.1 per US Dollar in the 2022/2023 financial year.
In the first half of the [last] financial year, the shilling had faced some depreciation pressures arising from higher corporate demand from the oil exploration & production, telecommunication, and manufacturing firms amid portfolio outflows as offshore investors sought higher returns from competing markets as advanced economies tightened monetary policy.
“These depreciation pressures were contained by the tight monetary policy stance pursued by the BoU, which supported the shilling in the year’s second half [of the financial year]. Indeed, the shilling has followed an appreciation trend since March 2024, following two successive increases in the central bank rate that lured back offshore investors. The appreciation was also supported by increased inflows from coffee export receipts and Non-Governmental Organizations (NGOs) remittances, which outweighed the strong demand observed over the same period,” BoU says in its new report for the 2023/2024 financial year.
