Bank of Uganda headquarters in Kampala. The reforms suggested by the IMF
would boost the bank’s financial muscle and independence. PHOTO FILE |
NMG
Uganda’s central bank has been dominated by the Ministry of
Finance due to lack of financial muscle, according to the International
Monetary Fund.
The IMF said the dominance resulted in
the fiscal policy taking priority over monetary policy, which curtailed
the functions of Bank of Uganda (BoU).
The central bank
has operated under the shadow of the ministry due to its reliance on
the government for regular recapitalisation, which is not well defined.
The
regulator has also not been allowed to charge the government — its most
regular customer – fees for services rendered, limiting its
non-interest income sources.
“The repurchase agreement securities appear to be another example of the fiscal domination that the BoU faces.
“The
current “repo” securities represent a reluctance by the Ministry of
Finance, Planning and Economic Development to assume the costs of fully
resourcing the BoU to enable it to perform its functions,” reads a
report by the IMF.
Sweeping reforms
The IMF has called for sweeping reforms at the central bank, including its capital structure and product range.
It
added there should be a time frame within which the Bank of Uganda
should be recapitalised, if during conduct of its normal operations its
capital levels fall below the statutory Ush20 billion ($5.4 million).
Recapitalisation
of the bank is usually done in December but there is no structure on
how it should be done. Last year, the bank’s capital fell to negative
Ush17.3 billion ($4.7 million) putting it in need of at least Ush37
billion ($10.1 million) in order to be compliant.
The
IMF argues that the recapitalisation should not just be enough to meet
compliance levels but ought to give the bank room to execute its
mandate.
It also takes issue with Uganda’s central bank
paying the bulk of its profits, if any is made, to the government.
Profit sharing is split at 75 per cent to the government and 25 per cent
being retained.
If the Bank is holding more than
twice its capital in general reserves then it is required to pay the
full profit to the government.
Conflict of interest
Payment
of dividends by regulators to the government has been a source of
debate given the conflict of interest that it creates. It also takes
away resources that could make the regulator financially stronger and
more independent.
In Kenya, the central bank earns a
commission of 1.5 per cent from the government of amounts raised through
its agency role in the issuance of Treasury bills and bonds.
The
annual commission income is limited to Ksh3 billion ($30 million). The
central bank also earns commissions from other debt instruments issued
to meet funding requirements of state corporations.
The Central Bank of Kenya has also not sought recapitalisation in the past decade.
“The
level and timing of government injections into BoU seems to be more
about compensating the central bank for operating losses than a
co-ordinated effort to recapitalise the bank,” said IMF.
The bank has also been challenged to relook at its internal operations in efforts to manage liquidity in the market.
The
recommendations include de-stigmatising the use of borrowing from the
central bank, accepting use of longer term paper as security for the
discount window and changing the schedule for reserve maintenance period
to start on Thursday and not on Monday.
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