The article titled “Central Bank tops government loss-making bodies” published in the Daily Monitor of July 30, contained glaring falsehoods about the Bank of Uganda’s financial management and its capacity to execute its mandate.
The article alleged that Bank of Uganda (BoU) is facing bankruptcy caused by poor financial management. The article also made the alarming allegation that the bank doesn’t have adequate reserves to maintain exchange rate stability in the event of shocks to the economy.
In effect, the article surmised that the bank’s capacity to execute its constitutional mandate is weak. Given the gravity of the allegations, the outright falsehoods contained therein and the unnecessary alarm this may cause to the public, the BoU wishes to clarify as follows.
At the outset, it should be understood that the Bank of Uganda’s primary function is to formulate and implement monetary and supervisory policies aimed at achieving and maintaining price stability and ensuring a sound financial system.
In addition to being banker to the government and to the commercial banks, the Bank of Uganda issues currency notes and coins, ensures safe and efficient payment systems and acts as lender of last resort to Commercial Banks. The Bank also issues treasury bills and bonds on behalf of the government and manages the country’s foreign exchange reserves.
The delivery of all the above mentioned services and supporting services like communication and procurement come with costs and yet they are provided to our customers without any charge. According to the latest customer satisfaction survey results conducted by the BoU, 88 per cent or more than eight out of every 10 respondents were satisfied with all the services offered to them by the Bank of Uganda.
It is common knowledge that since the global financial crisis in 2008, the bank’s earnings on investment of foreign reserves assets in the international financial markets have fallen substantially owing to a decline in interest rates on these assets from about 5.24 per cent in 2005-2007 to 0.7 per cent in 2010-2012. The abnormally low interest rates have adversely affected the bank’s income, given that its major income source continues to be interest earned on foreign reserves and foreign exchange trading.
The combination of declining income and increasing expenditures to run the bank’s normal operations has culminated into operating deficit positions since 2010. In spite of the reduced earnings, expenditure necessary to meet its core mandate can neither be postponed nor significantly scaled back. Deferring any expenditure related to the aforementioned mandate would have meant macroeconomic instability for Uganda and or failure by the bank to deliver on its mandate. It should be noted that the foreign exchange reserves are a form of national precautionary saving and BoU minimises risks rather than maximise returns.
In spite of the challenging financial situation above, and contrary to your reporter’s claims, BoU’s foreign exchange reserves are very healthy, currently amounting to a historical high of $3 billion, which is sufficient to cover about 4.5 months of future imports of goods and services.
Not only is this level of reserves way above the normal international threshold of three months of import cover, it provides adequate resources to enable BoU to intervene in the foreign exchange market. Therefore, the view that BoU lacks the means to address market instability is wrong and has no basis.
It is also worth noting that the BoU Act provides for recapitalisation by the government in the event of impaired capital. The Act also provides for sharing of net profits or losses between the bank and the government. In fact, the author of your article is completely unaware of the fact that following BoU’s operating deficit position, the government recapitalised the bank in June by issuing bonds worth Shs410 billion.
While BoU’s performance is not judged by its profit or loss position, it is committed to deliver on its mandate using the most efficient means possible. Indeed, the bank is undertaking measures to improve on its income stream in line with the evolving global financial market dynamics, and seeking higher efficiency in its operations.
The Bank of Uganda assures the public that it is prudently managed, and has adequate resources, including foreign reserves to maintain price stability and a sound financial system.
The Bank of Uganda believes in the values of transparency and accountability and is very supportive of efforts by the media to bring to light the conduct and performance of public entities. We, however, continue to urge the media always to do their research and be truthful, objective and unbiased in reporting matters of national interest to the public.
Dr Tibamwenda is the director of communications, Bank of Uganda.