After government revealed last week that Bank of Uganda has been making losses of up to about Shs2 trillion since the 2008/2009 Financial Year, the central bank has blamed government’s failure to pay charges on treasury bills and bonds and apportioned part of the blame to the global financial crisis that started in 2007.
Treasury Bills are the short-term money market instruments issued by the central bank on behalf of government to curb temporary liquidity shortfalls. They do not yield any interest, but issued at a discount, at its redemption price and repaid at par when it matures.
Late last week, the State Minister for Finance (Planning), Mr David Bahati, told Parliament that the last time the central bank posted profits in the Consolidated Fund Account was in 2007/2008. Mr Bahati was answering a question raised last year by MP Kenneth Lubogo (Bulamogi, NRM).
Mr Lubogo had asked why Bank of Uganda was always coming to Parliament seeking recapitalisation. He asked the Ministry of Finance to explain how much losses the Central Bank had suffered to warrant continual requests for recapitalisation, but his question had never been answered.
“It (BoU) last transferred to the Consolidated Fund in 2007/2008 an amount equivalent to Shs40 billion. Since then, it has not transferred anything to the consolidated account because it has been making losses,” Mr Bahati told Parliament, but offered no further details.
The Shs40b was out of the Shs111.17b the central bank made in profit between 2004/2005 and 2007/2008 financial years. In 2004/2005, the profit was Shs3.17b, in 2005/2006, it was Shs10b, followed by Shs5b and Shs93b in 2006/2007 and 2007/2008 respectively.
Thereafter, the central bank has continually made losses annually from 2008/2009 to 2018/2019, according to a brief statement Mr Bahati made to Parliament last week.
The bank has been in the eye of the storm over a number of irregularities including illegal closure of seven Commercial Banks. Over the years, BoU posted losses and has been running to Parliament for recapitalisation.
Ms Charity Mugumya, the BoU director for communications, said on Friday that there was no way the central bank could recover these losses without recapitalisation from government.
Bank of Uganda is charged with controlling inflation and ensuring a sound financial sector in the country.
“It is important to note that BoU’s earnings are mainly from the interest income on Foreign Reserve assets. These make more tha 90 per cent of our income. BoU, like other central banks around the world, invests in risk free assets like USA Treasury Securities.
“However, the global financial crisis that started in 2007/2008 and associated economic recession led to a decline in global interest rates on these assets from about 5.24 per cent in 2005 to 2007 to just 0.5 per cent in 2010 to 12. The abnormally low interest rates adversely affected BoU’s income,” Ms Mugumya further stated.
She insisted that despite the persistent losses, the Bank has been executing its core mandate under Article 161 and 162 of the Constitution and the BoU Act 2000.
The central bank is charged with formulation and implementation of monetary policy, supervision and regulation of financial institutions, currency management and ensuring safe and efficient payment systems.
In execution of this mandate, BoU also issues Government Securities (Treasury Bills and Bonds) on behalf of Government and the proceeds from the sales are used for government projects.
“As such, the delivery of these services which are public goods come with costs, yet they are provided without any charge. For example, the costs relating to the core mandate accounted for 72.3 per cent of the total expenditure in 2018/2019 while general and administration costs accounted for only 27.7 per cent of total expenditure,” Ms Mugumya explained.
While asking supplementary questions on the floor of Parliament on Wednesday, the MP for West Budama North, Mr Richard Othieno, wondered how BoU, which handles securities can make losses.
“BoU trades in securities, the minister is talking of making losses, can the minister brief the country the circumstances under which the bank made the losses yet it trades in securities?” Mr Othieno asked.
In response, Mr Bahati said government has no immediate solutions to sort out the losses.
“It is true, it (BoU) trades in securities. These are the facts on the ground (but) we cannot do anything about it because a loss is a loss,” Mr Bahati said.
The Speaker of Parliament, Ms Rebecca Kadaga could not open up debate although MPs were already raising hands. Under Parliament’s Rules of Procedure, a Question for Oral Answer does not attract debate save for supplementary questions by a member who posed such a question at a previous sitting.
However, Speaking to Daily Monitor on Friday, Budadiri West MP Nandala Mafabi said no amount of explanation justifies BoU losses, which he said cannot go unpunished. “The central bank cannot explain anything because what is happening there is theft. Remember the Bank sometime back just paid Shs210b to (Hassan) Basajjabalaba. The Bank needs thorough investigations because the problems there are not management issues but theft,” Mr Mafabi said.
Mr Julius Mukunda, the executive director of Civil Society Budget Advocacy Group, said the losses in BoU were inevitable because the management has been making bad decisions. “If you close banks just haphazardly, you will make losses. If your supervisory department is not as strong as it is supposed to do, you are likely to make losses,” he said.
Mr Mukunda said government must find money to recapitalise BoU at once. He said failure to finance the agricultural sector to the internationally recommended percentage of the National Budget has cost BoU a lot because the bank must spend to control inflation caused by food prices.
Ms Mugumya said BoU has consistently delivered on maintaining low inflation rates and providing a “sound financial system”.
She said in order to stop the losses, the Bank has sought solutions through request for recapitalisation from government under Section 14 (4) of the Bank of Uganda Act, engaging government to provide for payment of Banking Services rendered to it as a measure of cost recovery to the Bank, and, continuous rationalisation of operational costs through adoption of technology.