Profit, people, planet set to govern bank business - BoU

What significant milestones has the Central Bank achieved over the past five years?

The bank has made significant milestones in pushing for regional economic integration initiatives particularly the EAC. We have been trying to harmonise the rules and guidelines because as a Central Bank, we are trying to move into a Monetary Union. But the most important one has been the inflation targeting framework. This has helped us especially when the financial sector was beginning to deepen.
We found out that the monetary targeting tool we were using prior to 2011 was beginning to let us down because there was a loss in stability in some macro-economic aggregates. Such things happen when the economy experiences shocks or there is financial sector deepening.

So, we had to switch to the use of interest rates to match what was happening in the financial sector which has been important in signaling performance.
Using interest rate signals has brought in financial discipline because under an inflation targeting regime, you need to exercise fiscal discipline otherwise you won’t succeed.

What emerging challenges will the Central Bank have to deal with in the next five to ten years?  

The biggest challenge is climate change because it is going to affect the levels of economic growth and our exports since we are still largely an agricultural country. But come to the side of monetary policy, if you look at the role of food crop prices in the CPI, it is very sensitive. Right now, we are dealing with external shocks and those that arose from the Covid-19 pandemic when countries locked down.
Following the re-opening, we saw aggregate demand pick up faster than supply could respond but the beauty was the price increase was still within the inflation objective of government. But early this year, the Russia -Ukraine war compounded that by distorting supply chains especially food and oil.
Also the continued lockdowns in China because of their zero Covid-19 policy have seen inflation rise again.

In Uganda, we have an extended drought which is driving food crop prices up. This can be seen in the last CPI for June which indicated food crop inflation was 14.5 percent year on year - far much higher than the average inflation derived from the CPI of around 6.8 percent.
The other challenges are these disruptive technologies from the Fourth Industrial Revolution that are changing the business landscape. But they come with cyber security challenges. This gives us sleepless nights.
The other big thing is how do we harness the big data from the impact of the Fourth Industrial revolution? Currently, there are so many fin-techs, e-payments among others. So is there a way we can use that data to our advantage? Yes. We have to start by collecting it.
This will help us analyse trends and formulate monetary and financial policies.
Currently, we are constrained because we have to rely on surveys and high frequency indicators supplied by third parties to make our estimates on growth and other things. But with big data, we shall have multiple sources and data specific to a sector. This will enrich our database, ease our forecast which will result in meaningful policies.

The other issue is how do we enhance our supervision and monitoring?
Currently, we are based on paper submissions of returns from commercial banks. So how best can we upgrade to see real time submission of data? In our new strategic plan, we are planning to talk to banks to allow us tap into their data directly.

Monetary policy transmissions are at times not as effective as desired, where do you think the bottlenecks still are?

We need to ask our selves: How does  the CBR operate? Government has objectives of growth and inflation and as a Central Bank, once we have those objectives, we ask ourselves how do we achieve those objectives of medium term inflation of 5 percent and a growth of 6-7 percent.
So we need to set a Central Bank rate that will deliver those objectives in a given time. From there, we monitor both the growth and inflation movements to see that we deliver on our mandate.
There is a strong relationship between the money market rate and the CBR because they tend to move in tandem. But there are bands in which the central bank allows them to move if any breaches those bands, then we have to act.
Then, the low lending rates which are due to a number of structural problems within the system which include the high cost of doing business, high utility prices to mention a few. There are also structural issues mainly arising from non performing loans. If these loans accumulate, then the banks have to look for away to recoup that money which translates into high rates.
The other challenge is government’s borrowing appetite which is huge. But commercial banks hinge their lending rates on a risk free instrument - treasury bills rates. So once government borrowing increases, it is very likely that interest rates on those securities will go up too. In East Africa, Uganda has got the highest interest rates on government securities because of this borrowing.

Economic management has been accused of being more textbook and not pragmatic. Is this a fair assessment? How can the Central Bank address economic realities?

In the new strategic plan we mention “in support of social economic transformation.” This means we have come to the realities of our society. Take an example of the current inflation which is supply-driven. At first, it was limited to a few commodities like oil and gas and there was no need to act. But then it was later compounded by global inflation which pushed prices of everything up then we had to act by tightening policy and limiting in aggregate demand. So we need to slow down aggregate demand to the extent that we have our eyes on to the medium target of 5 percent but also our hope is that Ministry of Finance implements the 2022/23 budget as read out in Parliament to trigger the supply side. This will close the imbalances and lower the inflation.
We are also pursuing the goal of Environmental Social Sustainability and Improved Governance (ESG). We are going to have a conversation with the supervised institutions on how they are implementing this ESG frame work. However, the challenge is that each institution is playing its own game basing on their parent companies mission. So we want to enforce uniformity on how these commercial banks deal with the three Ps - Profits, People and Planet.    

We saw a report from the banks saying that part of this currency depreciation is from offshore activity. How serious will this be if USA adjusts its rates?

We have been saying that further tightening of policy rates by Central Banks of advanced economies runs the risk of creating additional portfolio reversal because the interest rates differential between those countries and ours is narrowing. This informs the investment decisions of some investors here.