Only a fool does things the same way but expects different results.
There’s been a raging debate in parliament and in the media regarding the recapitalisation of Bank of Uganda.
According to Ministry of Finance requests to parliament, BoU is in need of at least UGX474 billion for recapitalisation, which according to BoU officials and Keith Muhakanizi, the Finance Ministry Permanent Secretary is largely a result of years of operating losses on account of “monetary policy” and “currency costs”.
BoU and finance ministry officials say the need to recapitalise is urgent.
But in my view what perhaps is of an even bigger significance and urgency should be treating the actual underlying causes, especially systemic causes that led to these losses thus the need to recapitalise. Merely rushing to recapitalise without treating these real issues is akin to treating headache and high temperatures caused by malaria without giving medicine to the patient that kills the malaria-causing plasmodium parasites.
Here is my four (4) reasons why we should focus on reforms before recapitalising BoU.
Revise BoU’s mandate beyond merely Monetary Policy
Let us talk about BoU’s monetary policy first that is said to be responsible for these losses.
For starters, BoU’s monetary policy stance has been subject to a host of criticisms by several economists as being shallow, with just a focus on managing inflation.
For example, Patrick Ayota, the NSSF Deputy Managing Director at the recently concluded NTV Uganda’s Economic Summit 2018, said there was an urgent need to consider “expanding the mandate of Bank of Uganda from just price stability/inflation to also look at expanding the economy and growing jobs.”
“Unshackle BOU to also look at maximising jobs as well,” he said.
Ayota was supported by fellow panellist, economist and capital markets expert and former Presidential Advisor, Mr. Onegi Obel who said BoU’s mandate needs to be review to include jobs growth.
“It is jobs which grow the economy. Our monetary policy today favours jobless growth. It does not acknowledge the role of jobs in growth- jobs as a component of monetary policy. Creating jobs should be an underlying trigger for realizing middle income,” he said.
Obel said that experience has shown, that countries where central banks have a dual mandate- to manage inflation but also cater to economic growth have done better than countries where central banks have single mandates.
Economist and former advisor to Maria Kiwanuka, the then Minister of Finance whose criticism of BoU’s narrow monetary policy is well documented, has previously said that BoU’s fixation with managing inflation at the expense of everything else has often led to high interest rates thus severely constraining credit growth, which is the blood of economic growth.
At the same summit, Samuel Ssejaka, another economist said that: “With high interest rates, the return on investment is out of sync and the cost of doing business goes high.”
High costs of doing business makes Uganda an uncompetitive destination for FDI and severely limits the competitiveness of Ugandan exports, thus killing jobs.
Against this background, it would be important that before the MPs consider recapitalising BoU, they should look at revising the Bank of Uganda Act so as to give BoU a dual mandate, short of which recapitalising BoU every now and then could be the order of the day.
Fix corporate governance gaps at Bank of Uganda
The recently ended Parliamentary Committee on Statutory Authorities and State Enterprises (COSASE) probe into BoU oboserved that whereas the “Constitution of Uganda, in article 161 (4), provides that the Governor and deputy Governor shall be Chairperson and Vice Chairperson of the Board respectively, good corporate governance principles would require that the position of Chairperson and vice Chairperson of the Board is separated from the position of Chief Executive Officer and his Deputy.”
“In line with G20/OECD Principles of Corporate Governance 2015 it is observed that in countries with single Tier Board systems, objectivity of the Board and its independence from management may be strengthened by the separation of the role of the Chief Executive and Chair. Separation of these two positions is generally regarded as good practice, as it can help to achieve an appropriate balance of power, increase accountability and improve the Board’s capacity for decision making independent of management. It is the recommendation of this committee therefore, that article 161 (4) be reviewed to separate the offices of the leadership of the Board and top management of BoU.”
The importance of this recommendation cannot be overstated as we now all know how these gaps in corporate governance led to the several irregularities during the closure and sale of seven defunct banks that were identified by COSASE. As it is, these illegalities could end up costing the tax payer several billions of money in law suits.
COSASE also recommended that all the implicated officials in the now infamous bank closures be held liable and punished accordingly.
It would therefore be important and prudent for MPs to consider implementing these recommendations such that any recapitalisation of the Central Bank is free from any risks that caused the need to recapitalise in the first place.
Having an independent board of directors for example will largely avoid the mistakes of the past that by and large are responsible for the losses that the central bank has suffered for long.
Bank of Uganda should not be allowed to regulate herself
It is now common knowledge that Central Bank officials have hidden behind the veil of “central bank independence” to escape scrutiny of parliament and other government and civil society accountability organs, which is what got the Central Bank into the problems they are in today.
That is why many experts have pushed for the unbundling of BoU’s so-called independence which in the present state was too wide and open to abuse.
While appearing on NTV’s Fourth Estate talkshow, both Dr Muhumuza as well as Dr. Patrick Wakida, a leading researcher and economist, called for a review and proper redefinition of BoU’s independence.
Muhumuza said that whereas the independence of the Central Bank is supposed to be limited to only monetary policy, there had been a blanket interpretation and application to include commercial bank supervision and this “too much independence” had created “complacency”, “ambiguity” and “room for being compromised.”
“The supervision (of banks) aspect of the Central Banks can and should be subject to regular audits… the independence of the central bank; is more to do with monetary policy, which is more perfect. The supervision of banks needs to be subjected to an independent audit process,” he said, adding: “There has been this debate whether bank (commercial bank) supervision should be under the central bank or a separate entity; so that the central bank focuses on its core mandate of monetary policy and not bank supervisions. There are actually jurisdictions in the world where the two are separate.”
Dr. Wakida, said that allowing uncontrolled independence at the Central Bank is largely to blame for the failures at the bank unravelled in the recent past.
“The central bank is the regulator of all banking institutions. Unfortunately the central bank is supposed to be independent (regulates itself),” he said.
If the central bank’s independence was well defined and regulated, many of the problems in the banking industry today, wouldn’t be the case.
Manage excessive costs at Central Bank
One of the reasons why the Central bank needs recapitalisation, according to Muhakanizi is because of high currency costs.
The issue of high currency costs is well documented by the Auditor General in his report on the financial statements of Bank of Uganda for the year ended 30th June 2017. He noted that BoU runs a bloated currency management budget compared to Kenya which has a bigger economy but runs a smaller currency management cost.
The Auditor General noted that for example in 2016, Kenya whose GDP was USD70.88 billion in 2016 spent an equivalent of UGX65.42 billion on currency costs, compared to Uganda whose GDP in 2016 was USD24 billion but spent UGX93.9 billion on currency costs.
“The Bank risks not being able to sustain its operations with the need for continuous injection of capital from government. With the different competing priorities as outlined in the national budget, the Bank could continually face challenges in justifying its expenditure,” noted the Auditor General.
Uganda in 2016 had 8 branches and 7 currency centres compared to Kenya with six (6).
This is an opportune time for MPs to task the management of BoU on a prudent and sustainable cost management as well.