‘Museveni dollar’ comes into play in currency reform, exchange programme

A Bank of Uganda official displays the 1987 series banknotes in Kampala in 2012. They ceased being legal tender after March 2013. The notes that were affected were Shs1,000, Shs5,000, Shs10,000, Shs20,000 and Shs50,000 plus the Chogm bank note of Shs10,000. PHOTO/FILE

What you need to know:

  • At the time the reforms were announced the official exchange rate was Shs1,400 to the dollar, but it was within the region of Shs14,000 to the dollar on the black market, also known as Kibanda, where the dealers were also known as Kibanda boys.

This week, 37 years ago, (May 18, 1987), the National Resistance Movement (NRM) government introduced a new currency under what was termed as the currency reform and exchange programme.

The exercise, in which the populace was required to exchange currency notes from the Obote II era with new notes, saw the value of the shilling chopped by 30 percent. Two zeros were also cut off the value exchange.

Writing in the article, ‘Devaluation Cure: A Bitter Pill for Sick Money in Black Africa’, which was published in the Los Angeles Times of June 19, 1987, Mr Scott Kraft pointed out that the new currency had higher values, but lower numbers.

“One new shilling was issued for every 100 old shillings: Shs1,000 became Shs10; Shs5,000 became Shs50, and so on. 

President Museveni said the public will no longer “have to carry huge bundles of currency for simple transactions”.

The biggest currency note was Shs100. The exercise also saw Shs1, Shs2 and Shs5 coins introduced along with 50 cent coins.

Scott further wrote that government had at the same time set the exchange rate at Shs60 to $1, a 75 percent devaluation, and ordered the changes to take place over a few weeks of May and June 1987.

At the time the reforms were announced the official exchange rate was Shs1,400 to the dollar, but it was within the region of Shs14,000 to the dollar on the black market, also known as Kibanda, where the dealers were also known as Kibanda boys.

The shilling had throughout the Milton Obote II era been the object of repeated devaluation. 

On June 1, 1981, less than one year after he took office for a second time, Obote, working on the recommendation of the International Monetary Fund (IMF) and the World Bank, let “the shilling float”.

Floating is a monetary policy where government does not fix the exchange rate. The system is not backed up by gold or assets. That means that the foreign exchange rates tend to fluctuate due to supply and demand with global demand and level of foreign exchange reserves often playing a very big role.

It, however, did not work for Obote. Rapid rise in the cost of imports and domestic inflation forced him to abandon it.

That was followed by the introduction of different windows and rates at which forex could be bought. That returned the power to determine the exchange rate into the hands of government.

However, shortages of foreign exchange remained prevalent and the economy was a shambles by the time the National Resistance Movement (NRM) took power, hence the need to find solutions to place it back on the path of recovery.

According to the paper, ‘Uganda and Post-Conflict Recovery: 1987’, part of a three-part series authored by Frank Warnock and Patrick Conway of the University of North Carolina at Chapel Hill, which focused on the subject of Ugandan economic growth, the currency reform came against a backdrop of failure of the initial economic strategy that had been announced with a view of setting the country back on the path of recovery.

The centrepiece of the new economic strategy announced in August 1986 by then Finance minister, Mr Ponsiano Mulema, was a huge revaluation of the Ugandan shilling, the paper notes.

Since May 1986, the paper says, there had been two legal exchange rates: official transactions were carried out at a rate of Shs1,400 to the US dollar, all other transactions at a legal market rate of about Shs5,000 to the US dollar, but Mr Mulema abolished the different rates and harmonised them into one rate – Shs1,400 to the dollar. The effect was disastrous.

“Every exporter has since vowed to keep his money abroad; every would-be importer rushed to get licenses to import at the new, artificially favourable rate. The Kibanda rate immediately shot up to Shs8,000 per US dollar,” the paper read.

It is not clear whether it was as a consequence of the failure of the strategy, but Mr Mulema, a professor of economics, was in October 1986 shown the exit and replaced with Dr Crispus Kiyonga.

Dr Kiyonga’s appointment was followed by the formation of a Presidential Economic Council which was charged with coordinating all aspects of national planning and investment. 

The council was comprised of, among others, the Governor of the Bank of Uganda and the ministers of Finance, Cooperatives and Marketing and of Commerce.

Mr Museveni charged the council with drawing up a strategy of ensuring that economic activity returned to pre-independence levels.

IMF and Museveni print?
Their immediate task was to find a way of increasing economic activity without compromising macroeconomic stability.

It is not clear whether the currency reform was one of their ideas, but Mr Scott seems to suggest that it had a lot to do with both the IMF and Mr Museveni.

“Museveni, Uganda’s President since 1986 and himself a university-trained economist, devised a radical plan with the help of the IMF to rescue Uganda’s economy,” he wrote.

The new shilling notes, printed in brown, green and blue notes, was soon christened the “Museveni dollar” even when he had departed from a practice by other long-serving presidents of Uganda, Idi Amin and Milton Obote, and others of other African presidents such as Mobutu Sese Seko of DR Congo, Daniel arap Moi of Kenya, Julius Nyerere of Tanzania etc. who had their images printed on the currency notes of their respective countries.

Like the case is with most changes, there was some confusion and a few distortions when the currency reform was first carried out, but some watchers saw a silver lining.

“In the ensuing confusion, some merchants have been price-gouging, and the prices of imported goods such as soap and fuel have tripled overnight. But the plan has quickly turned some dividends for Uganda’s economy, Western economic analysts here say. For one thing, Ugandans are saving the new shilling, which, the analysts say, is implicit recognition that it has value,” Scott wrote.

Uganda has since moved on from the reforms of 1987. The journey has entailed the introduction and withdrawal over the years, of currency notes.

In 1999, for example, a green Shs20,000 denomination note was brought into circulation, only to be replaced with a tomato red one in the course of 2010.

Again at the end of 2000 the Shs5, Shs10, Shs20, Shs50, Shs100, Shs200 and Shs500 bank notes were phased out leaving only the Shs1,000, Shs5,000 as the legal currency notes. Those were supplemented with coins, of Shs50, Shs100, Shs200 and Shs500.

New notes of denominations of Shs50,000, Shs20,000, Shs10,000, Shs5,000, Shs2,000 and Shs1,000 were in the same year introduced into circulation.