Parliament okays Shs150b to recapitalise Central Bank
Bank of Uganda headquarters in Kampala. Uganda’s Central Bank Thursday brought forward its Monetary Policy Committee meeting by a month in a move expected to see it tighten interest rates. PHOTO BY ABUBAKER LUBOWA
What you need to know:
Problem. The recent Shilling depreciation would increase BoU’s inability to manage the country’s monetary policy.
Kampala. Members of Parliament on Tuesday evening approved the recapitalisation of Bank of Uganda by Shs150 billion following a recommendation by the Finance, planning and economic development committee.
The recommendation is, however, Shs50b less than the amount the Ministry of Finance Planning and Economic Development had requested for the committee to approve.
“The committee sought the justification for the Shs200b recapitalisation of Bank of Uganda but received no scientific explanation as to how the Shs200b has been arrived at,” the committee report reads.
The committee used its assessment of the current deficit at BoU to grant it Shs150b. By the end of March 2015, the committee observed that BoU was making income of Shs104b but had an expenditure of Shs248b, leaving a deficit of Shs144b.
In the 2015/16 Ministerial Policy Statement for ministry of Finance Planning and Economic Development, the ministry had requested BoU get Shs200b as a result of a fall in income from foreign financial investments that took a hit from the slowing global economy that can be traced as far back as 2008. Additionally, the recent Shilling depreciation would increase BoU’s inability to manage the country’s monetary policy.
The committee, however, rejected the currency depreciation reasoning, noting that the Shilling had stabilised and the government had other priorities.
“... fluctuations in Uganda’s currency have since stabilised and the request to capitalise Bank of Uganda comes at a time when the country is faced with numerous unfunded and underfunded priorities amidst a constrained resource envelope and the justification for this proposed recapitalisation was wanting,” the report further reads.
The Shilling remains weak against the dollar, with analysts and bankers saying it could close the year at Shs3,200. The committee recommended that the Shs50b balance initially meant for BoU should instead be taken on by Uganda Revenue Authority to address the funding gap at to enable enhance revenue collections. Additionally, newly created institutions, Financial Intelligence Authority and the Free Zones Authority have been fully funded in the Budget by Shs4b and Shs4.04b.
When BOU was last recapitalised
In June 2013, BoU was recapitalised to a tune of Shs410b to boost the issuance of Treasury bills and bonds. At the time, the IMF’s staff appraisal form recommended that BoU cut its operational costs. This came after BoU had incurred an operational loss of Shs600b in the financial year 2011/2012. The losses have since reduced, but BoU continues to incur deficits. Any deficit hampers the operations of BoU in managing the economy.
Definition
What is recapitalisation? It is when a company changes its capital structure. This may occur, for instance, as part of a debt restructuring, when a creditor exchanges an outstanding loan for a stake in the company (debt for equity swap).
When it happens. While the aim of a recapitalisation is normally to improve a company’s debt/equity ratio, it can also be used to fend off a hostile takeover - in which case the company makes itself unattractive by increasing the level of debt in its capital and using the funds to pay special dividends to shareholders.
