Saving the Uganda shillings

US$10 for a bag on Amazon,” this was read with a simultaneous grin as a Ugandan importer shopped online on eBay 10 years ago. In Ugandan shillings, that was just about Ugx. 17,400, high but reasonable. However today, many importers are worried by the escalating dollar price. That same US$10.00 costs about Ugx. 34,000 in 2018 minus shipping costs. That’s twice as much as it was in 2007. The shilling has lost ground by double the price since 2007.

Many analysts have blamed Uganda’s dire state on the unstable political atmosphere surrounding the country especially towards elections. These speculators have a solid point in that inflation rises by more than 100 percent towards and during every election. This greatly pushes the dollar price to levels any middle and low income Ugandan finds difficult to maintain. But the real problem is under looked.

These and many other factors have continuously been raised by economists, policy analysts and many other consultants in various media; television, magazines, newspapers, radio, to mention but a few. You cannot fail to have listened to this at least once or twice in your life as a Ugandan or tourist. The biggest issue unearthed by Summit Business is a narrow minded central bank approach.

We’ve heard many people praising the Central Bank over the years as it has always tried to battle the dire economic state. Nevertheless, the shilling continues to weaken in spite of its initiatives. They continue to use monetary policy instruments to try and combat Uganda’s catastrophic economic situation. None of these however have been efficient dating back to the financial crisis of 2008. Most recently, the reduction of the central bank rate to 9.5 percent that

momentarily reduced the lending rates but couldn’t keep them below the planned ceiling. As we speak, the rates are back to levels above 20 percent showing weakness in BoU’s policy implementation.

Not only has BoU struggled with balancing the economy with politics, other regional central banks too are facing the same. So let’s not dwell on learning from these failed institutions if shilling is to regain its glory.

Take the Swiss National Bank (SNB). It has swept many a policy analyst away with their policies, from demutualization of the institution to owning equity that could shake the economy of the globe. While the Uganda shilling has weakened by a phenomenal 86 percent since the financial crisis in 2008, the Swiss Franc has gained by more than 14 percent in the same period.

Of course Uganda shouldn’t be looking at influencing the global economy in the short run, but BoU could follow the example of National Social Security Fund. It has invested significantly in equity at the Uganda Securities Exchange.

On December 7th 2017 during the 27th edition of the Annual CEM Investment Benchmarking survey, commissioned by the International Social Security Association (ISSA), NSSF outperformed other pension funds of similar magnitude across the globe on key investment performance indicators. This was to determine the competitiveness of pension and social security funds on a global scale based on international standards on a peer-to-peer basis. Return on Investment, Net Value added and Investment cost were the key areas assessed. Net Total Return was 11.8 percent, above the median return of 7.6 percent meaning their return on investment was over and above by 4.2 percentage points. Moreover, investment cost was 7.0bps (0.07percent), way below the global

median 49.4bps(0.49percent), meaning that NSSF created more value for its members at a much lower cost. Yet, the fund paid a lumpsum 11.23percent interest rate on members’ savings for the financial year 2016/2017, following exceptional financial performance that saw earnings grow by a massive 35 percent to Ugx. 912 billion in 2017 from the Ugx. 674 billion in 2016. This is concurrent with the growth of LCI’s share index that has gained by 5 percent year on year.

While other banks have concentrated on printing money and purchasing assets to stimulate economic growth, SNB has also added investment in private equity to that list. With just about US$836 billion of assets on its balance sheet compared to its rival central bank powers like the Federal Reserve (US$ 4.5 trillion), this is still striking in comparison with the economy in which it conducts its policy. While the Federal Reserve works out only about 23 percent of the GDP, SNB pools over 127 percent of the Swiss GDP, implying that it has invested a quarter more than the entire Swiss economy produces in a single year. But how has SNB achieved this milestone? Can BoU implement the same strategy or its farfetched?

How SNB confronted the financial crisis

The Power of Equity

The Swiss National Bank greatly impacted its currency by investing about 94 percent of its balance sheet outside of the Switzerland in a bid to devalue the Swiss Franc in 2015. More than 20 percent of this venture is in equities with three quarters in the US stock market. The bank has invested a massive US$ 88 billion (Ugx.316.8 trillion) in US equities, 0.3 percent of the US stock market. BoU too has overseas investments but in just normal central-bank instruments specifically the state-backed securities almost every central bank has ventured in. Our sources in USE reported that they could hardly find Bank of Uganda listed among the top shareholders in any of the 16 listed companies. All that was close to Bank of Uganda was a few individuals who decided to invest for their personal needs. The only public agency spearheading investment in the stock market is the National Social Security Fund. No wonder the agency is contributing the biggest chunk in Uganda’s retirement benefits’ reports (refer to What Ails URBRA? on

Clearly, NSSF is a big actor in Uganda’s stock market and has reaped great benefits from it. Summit Business Research Unit is baffled by the fact that a Social Security Scheme is influencing the capital markets more than the central bank itself. For instance, NSSF being the top shareholder in both Umeme and UCL could easily influence the stock price and demand for these shares. BoU could use the same advantage to bolster its asset base. SNB is the largest individual fund on the US stock market, bigger than any hedge fund. It holds more than US$1 billion (Ugx. 3.6 trillion) worth of companies including famous brands like Apple, Microsoft, Facebook, Amazon and Alphabet (owns Google). Apples stake alone is worth about US$3 billion and puts the bank in position to finance every person in Switzerland with over US$350 (Ugx. 1.26 million) per person, the average salary of a Ugandan working in a top office.

This is what we call leveraging your leverage. With just a simple tweak in SNB’s strategy, this can greatly move the U.S stock markets and affect the dollar in its favour as it has done before.

Bank of Uganda should therefore opt for investment in public limited companies on the bourse. Meaning that it won’t only acquire capital from selling state-owned securities but also equity. Equity is very profitable especially in these inactive bourses of Uganda. Although this might not be represented in the cash flow accounts of BoU, the share prices are highly volatile and can reap great profit in the long run, given that Uganda’s shares take long to be traded. A small tweak can reap huge benefit. Individual shareholders ship in more than a billion shillings annually in their portfolio. What could BoU earn with its financial power had it invested in stock?

It would literally have bigger influence in the Capital markets to work in its favour. The Local company index has been gaining year on year. Having recorded 371.15 base points on February 6th 2017, it has gained by more than five percent year on year to 391.39 as reported in February 2018.This is evident that investing in each of the local companies would have boosted BoU’s inflows.

Demutualization a cure to bad inflation?

There is a handful of central banks that sell shares to the public. The Japanese, Belgian and South African central banks are part of this. Also, the Swiss National Bank is demutualized- meaning it can sell its stock to the public.

The SNB has private stakeholders to whom it reports its earnings like a regular company. These shareholders maintain their focus on the prosperity of the bank and the economy as a whole. Of course most of the stock is owned by Swiss Cantons (states), Cantonal banks and other public institutions. But we cannot ignore the power of private owners involved in its decision making unlike BoU that is absolutely and completely owned and governed by the government.

Comprehensive ownership by government evidenced by previous market drivers has shown power bias involved in some of the central bank’s decisions…. Like printing more money before and during elections, defying BoU’s principle purpose of stabilizing the economy. Most of its functions have been affected by political influence especially from the ruling party, most recently being the ‘Age Limit’ disbursement. There were also allegations of ruling party printing money in 2011 elections after inflation rose massively to 30.4 percent by October 2011 raised by opponents, but were quickly rebuffed by BoU.

State owned companies have for many years failed because of political influence in their decision making processes. Some companies like Uganda Telecom had exorbitant debts of over Ugx.300 billion mainly constituting MDA’s that had for long not paid their billsBut this has been countered in different ways. Take for instance before power distribution was privatized, Kampala and the rest of Uganda was characterized by massive power blackouts, falling poles and poor service. But the public responded to this leading to a concession with a private company. Umeme has outperformed Uganda Electricity Distribution Board in ensuring Ugandans gain quick access to electricity with an 868 percent increment in connections. This is one of the many privatization success stories of Uganda. New Vision limited, Uganda Clays, Nile Breweries, to mention but a few. This is just a tip of the iceberg. More than 80 institutions have undergone successful privatization. And this success could be amplified with our eyes set on a much more influential player.

Bank of Uganda is the single most influential macroeconomic driver in Uganda. In good hands, it can steer this country’s dire economy to satiety and reimburse the struggling shilling. Listing the central bank will not only give the bank opportunity to grow its reserves but also eliminate the political intrusion in its business. A true depiction of Laissez Faire. Private shareholders, having a big say in the bank’s future direction will make it hard for ruling powers to direct the bank by decree, something that has for long weakened the dwindling shilling. These shareholders are interested in the growth of their stake so will look to invest in different entities to boost the bank’s assets, profitability and reserves. This will give the power to the public to decide the market forces influencing the shilling.

SNB made more than US$ 20 billion in profits in 2016. This is a significant amount of inflow in the Swiss economy, a substantial stream of cash flow controlled by the central bank. This is the reason they have maintained stability. If BoU can make just five percent of that figure, our economy will more than exponentially achieve stability in a shorter period than is projected. Diversifying the bank’s investment portfolio in Uganda’s and regional capital markets could boost the central bank’s chances of achieving part of that extra turnover. This turnover could in-turn boost reserves in the central bank and enhance the balance of payments in the long run.

Currently, Uganda is undergoing financial crisis. People have little confidence in the shilling. More and more dollar accounts are being opened. The shilling has subsequently fallen year on year. This situation will continue to intensify as long as the central bank sticks to its rigid methods of financing its reserves and accounts.

Even though they say demand for Ugandan goods is increasing with devaluation of shilling in the global economy, the trade receipts are not enough to reimburse the balance of payments position of the country.

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