Parliament should free BoU from government arm-twisting

Although in the Bank of Uganda (BoU) Act 1993 edition, BoU is a corporate entity, the political influence that the bank suffered during Idi Amin Dada has been sighted under the present government like; printing paper money without a financial plan to support government spending spree programmes, and arm-twisting BoU to sanction risky credits to government backed firms which as individual companies hold no bank accounts against which they can access loans. In real terms, BoU is not a commercial bank to do the business of lending money to individuals or business entities. Such acts impinge Article 162 (2) which cushions BoU from the direction or control of any person or authority. In the end, such monetary episodes continue to fuel inflation, poverty and political problems.

Remember, when the Movement government eliminated state regulations over foreign exchange in 1987, it took the Uganda shilling up to May 2004 to put a record of gain against the dollar trading at Shs1890/1906 as compared to Shs1906/1912 shillings for one dollar. But on July 14, 2004 according to Pan African Press (www.panapress.com), the dollar started to overtake the shilling following a dramatic double buying intervention by BoU claiming it intended to keep stability in the money market that had suffered mainly demand shock a week before. This action by the Governor was like; too early to press the ‘panic button’ as such behaviour by the shilling could be a simple indicator of repeated waves of growth and decline in business activity. (See Business Cycle). Since then, the dollar to date keeps pushing against the shilling.
In 2010 despite BoU awareness of the past danger resulting from printing currency without a financial plan, in a dramatic way it replaced all the banknotes for two incredible reasons that; all the banknotes were dilapidated and their security features were outdated and easy to be counterfeited. Refer to Governor BoU Tumusiime Mutebile statement in New Vision dated January 20, 2012 titled: “Uganda is winning the battle of inflation”.

However, the Governor’s reasons were not convincing because not all the banknotes were printed on the same day. Besides, BoU daily replaces dilapidated notes from circulation on sight.
The Governor’s conviction of winning inflation was unattainable, as after replacing all the existing banknotes in 2010, he swept under carpet BoU Act Section 23(3) directing any retired banknote to cease as legal tender within 15 days. Instea,d the Governor extended circulation of the retired banknotes at the same value with the new ones for three years under a deceptive currency lingo of “Family Currency.” This he did without a government decree. Besides, the Minister of Finance never took action on the Governor as provided by BoU Act Section 48. This sparked off government careless spending and the resultant inflation.

In the end, BoU’s reckless monetary measure gave a lot of time to those who were in possession of the volatile old banknotes to go ahead with their speculative businesses of hording essential commodities, dollars, petrol or heavily investing in property. This fuelled inflation. I pointed out this monetary blunder to BoU to no response. Refer to all press media published on February 3, 2012 titled: “BoU policies controversial”)
“On realising the irreversible ruin brought about by his controversial monetary policies probably forced on him by the government, the Governor BoU spilled the beans.”
The BoU Governor Tumusiime Mutebile in his November 2014 speech at the Bankers’ Association dinner, according headline of Daily Monitor of December 1, 2014, spilled the beans thus; “I won’t print money for the 2016 elections. Not this time, as a measure to tame the inflationary shocks as such money can be used to facilitate political campaigns and to fuel inflation like in 2011.”

In another incident, the Governor according to Daily Monitor of Wednesday July 8, 2015 in his address to the Uganda Manufacturing Association meeting in Kampala, made more shocking revelations characteristic of a person under pressure such as: “The shilling was being buffeted” by forces beyond my control. Defending the shilling is “unsustainable.” I will conserve my hard earned foreign currency against the “indefensible”. By the end of 2005, the shilling had lost value against the dollar by 27 per cent. BoU resorted to hiking her CBR by 4.5 per cent to bolster the same fragile shilling the Governor suffocated against the dollar in May 2004.

But such waves of financial panic wouldn’t arise if the Governor BoU used a conventional way to increase money supply rather than giving in to the sweeping measure of just printing money. Instead, the Governor should have used money in checking and saving accounts (Reserve System). This money is more than in currency and should be used in alternate ways either by; lowering the bank discount rate, buying government bonds in case government wanted money from the central bank or allowing banks to hold a smaller percentage of their deposits to support more loans. Such measures could generate stable money as if government had cut taxes. The opposite is as if government increased taxes.
Below are some the homegrown strict long-term measures, Parliament of Uganda can opt to save BoU from political interference and abnormal monetary conditions; the main causes of inflation.
It should be noted that restraining political influence in the central banks does not imply independence from government control. No! The government retains its political mandate of passing and enforcing laws that restrict economic activities considered; corrupt, subversive, unfair or socially unacceptable.

Parliament should investigate BoU’s controversial policies and questionable transactions before opting on one of the home grown long term measures I have sampled. Any of the measure is as effective as the rest to curtail the increasing political influence over BoU to do her work professionally.
My specific prayer to each Member of Parliament is through this anonymous saying; “If not you then who? If not now, then when?”
Remember, the stable value of the Uganda shilling is the new foundation for our revival and survival.

Other experiences

In United States the Panic of 1907 occurred following acute inflation when the government printed Continental dollars to pay for the Revolutionary War. So many were printed that they became worthless and this resulted in the 1913 establishment of the Federal Reserve Bank under commercial banks.
In South Africa, following the direct results of the abnormal monetary and financial conditions brought in by Word War 1, the South Africa parliament in 1920 passed the Currency and Bank Act which established the South Africa Reserve Bank (SARB) in 1921 as a private bank.

In Brazil, when Juscelino Kubitschek became the president in 1955, he printed currency to fulfill his over ambitious campaign slogan of “fifty years in five.” Kubitschek’s reckless monetary plan propelled Brazil into a legacy of inflation and public debt. In July 2016, Brazil’s Congress embarked on formulating a constitutional amendment to rid Brazil Central Bank the perception of government influence over Brazil Central Bank.
In Europe, central banks are owned and operated by the governments, but in their Maastricht Treaty of 1992, all agreed not to borrow money from their central banks.

The author is the president National Tax Payers Protection Organisation (NTAPO). Email: [email protected]