Stop borrowing from BoU, Mutebile tells government

What you need to know:

  • Wrong. The governor says any attempts to borrow from the Central Bank to fix Budget shortfalls, requires printing more money, which disrupts the country’s economic stability
  • Government has been accused of often “raiding” Bank of Uganda for money without Parliamentary approval.


The governor Bank of Uganda, has said government’s borrowing from the Central Bank is a big threat to economic stability.
Mr Emmanuel Tumusiime-Mutebile said any attempts to borrow from the Central Bank to fix Budget shortfalls, requires printing more money and this disrupts the country’s economic stability.
Mr Mutebile made the remarks while addressing a Cabinet retreat at Kyankwanzi last week. He listed six key principles which are essential for Uganda’s “economic instability” and reminded President Museveni and his ministers that in the President’s new term dubbed Kisanja Hakuna Mchezo (no-joking era), “macroeconomic stability is a prerequisite for all development objectives”.

Why government should not borrow
“A cardinal principle of sound of macroeconomic management is that the government should not finance its fiscal deficits by borrowing from the Central Bank, as this leads to high inflation,” Mr Mutebile said in his presentation to Cabinet. He added that path for debt must be consistent with the debt sustainability thresholds.

In his paper titled “Ensuring stability and sustainability in macroeconomic and Fiscal Framework”, which Saturday Monitor has accessed, Mr Mutebile also warned the President and ministers: “If trade deficits remain too large for too long, or if the nation’s foreign exchange reserves are run down to fund trade deficits, there will eventually be a balance of payments crisis.”
Sources at the retreat told Saturday Monitor that Mr Mutebile informed the President and his ministers that although member states in the East African Community are committed to building their foreign reserves to the equivalent of 4.5 months of imports of goods and services, Uganda’s foreign reserves are currently at 4.4 months. They said he explained that the main cause of macroeconomic instability is the imbalance between supply and demand conditions in the economy.

“The sharp depreciation of the exchange rate was a supply side shock to the economy. The Bank of Uganda responded by raising interest rates. The outcome was lower real economic growth and a relatively small rise in inflation above the target,” Mr Mutebile said, adding that a more serious cause of macroeconomic instability arises from persistent and excessive growth in aggregate demand, at rates exceeding growth of aggregate supply. When this happens, the governor explained, excessive demand translates into a combination of higher inflation and larger trade deficits.

Bank of Uganda has previously been criticised by previous Parliaments for providing what Mr Nandala Mafabi (Budadiri West MP) and former Public Accounts Committee chairman in the 8th Parliament, called the government’s “free entry and exit” whenever they need money to finance pressing needs.

Government has been accused of often “raiding” Bank of Uganda for money without Parliamentary approval.
The sources said the governor also informed the President that the Central Bank must be free to set its monetary policy to deliver low inflation, saying inflation between 1993 and 2015 averaged at 6.7 per cent, with economic growth at 6.8 per cent.

Bad habit

The governor explained that large domestic borrowing has partly resulted in high domestic interest rates, thereby crowding out the private sector in the credit market, something Mr Julius Kapwepwe Mishambi of Uganda Debt Network and other analysts say, inhibits economic growth and job creation.

Mr Kapwepwe explained that Uganda’s economy is already grappling with less than expected GDP growth, away from 8 per cent seven years ago to about 5 per cent currently, instead of the projected 7 per cent in 2014/15 and 4 per cent against the projected 6 per cent partly because of continued government’s domestic borrowing.

“Clots of credit have become much higher in Uganda, partly due to government competing with its citizens through borrowing on the domestic market to finance Budget shortfalls,” Mr Kapwepwe said, adding that the economy is overdue for reforms and printing money will make matters worse. “We should learn from Zimbabwe and Uganda in 1980s the adverse effects of printing money in degenerating the economy.”


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