Kenneth Mumba Kalifungwa, the Absa Bank Uganda Managing Director.
Absa Bank Uganda Managing Director, Kenneth Mumba Kalifungwa has said that the financial markets “are vital to Africa’s growth providing an opportunity to tap into domestic capital but also be better positioned to access global capital.”
Kalifungwa was Tuesday morning speaking at the Absa Economic Outlook and 2022 Africa Financial Markets Index report release when he said that “Last year was an interesting year.” “The optimism with which it begun was dimmed by an even tougher economic environment as a result of inflationary pressures created by a combination of global shocks, supply chain disruptions caused by the pandemic and adverse weather conditions. The cost of fuel increased thus also increasing the cost of doing business and production and driving up commodity prices,” Kalifungwa said.
According to Kalifungwa, the Absa Africa Financial Markets Index released annually, facilitates meaningful debate about the maturity and accessibility of Africa’s financial markets, and records the openness and attractiveness of countries across the continent to foreign investment.
“The report continues to assess progress and potential across six key pillars: market depth, access to foreign exchange, market transparency, the capacity of local investors, macroeconomic opportunity, and the legality and enforceability of standard financial markets master agreements. Produced in collaboration with the Official Monetary and Financial Institutions Forum (OMFIF), the index is a credible source of information and insight on financial markets in Africa and macroeconomic indicators, providing vital data for the business community, policy makers, economists, regulators and the various players in the market. Africa’s financial markets present a great opportunity for growth and the discussions around indicators hampering this development and attraction of foreign and local investment are key. It therefore pleases me to see that the number of countries surveyed continues to expand. This year, Index ranks the maturity, openness, and accessibility of 26 financial markets in Africa, up from 17 countries when the report was first produced in 2017.”
According to the report, Uganda progressed to 4th position in 2022, up from 6th in 2021 and 10th in 2020. However, the report indicates that Uganda’s capacity of local investors remain wanting.
While delivering a keynote address, the Deputy Bank of Uganda Governor, Dr. Miachael Atingi-Ego said the 2022 AFMI “is especially encouraging for us because it provides immediate positive reinforcement for the initiatives taken by Uganda and its peers that improved significantly last year.”
Nevertheless, he added: “the index also depicts starkly the challenges holding us back. As we smile at the progress made in the previous year, we must grit our teeth, clench our fists, and pull up our socks to tackle the persisting challenges and unlock the potential of financial markets to spur national progress.”
Atingi-Ego says that the report “endorsed our joint efforts to promote environmental, social and governance (ESG) and sustainability standards in our organisations and across the financial system.”
He adds: “Relatively high interbank foreign exchange market liquidity, development of enabling regulations such as those facilitating close-out netting by the International Swaps and Derivatives Association (ISDA), promoting financial inclusion through the digitalization of services like the online opening of accounts on the Uganda Securities Exchange, embarking on work towards a central bank digital currency, and pursuing the inclusion of Ugandan fixed-rate local currency bonds on the FTSE Frontier Emerging Market Government Bond Index effective July 2023, among others, were positive for our national progress.”
Atingi-Ego says that all stakeholders must collectively consolidate the ground covered and undertake further improvements to the variety and liquidity of the country’s financial products, such as developing a framework for green and blue bonds, boosting secondary market liquidity by listing on the Bloomberg ABABI Index, deploying derivatives including SWAPS in the conduct of monetary operations, promoting collateralised interbank trading and developing alternative assets and financial products, e.g., municipal and diaspora bonds.
“In developing a rich spectrum of financial assets and products for investors of diverse needs, sophistication, and risk appetite, we must promote a low-carbon and climate-resilient financial system. Needless to say, Uganda’s economy, like the typical African country, is natural-resource-based, therefore, disproportionately imperilled by climate change. Yet, we lack capacity and suffer limited access to global climate finance. On our part, the Bank of Uganda has prioritised several strategic initiatives to promote ESG and the sustainability of the financial sector, including: Institutionalising an organisational ESG framework by applying for sustainability certification from the International Council of Sustainability Standards, the global community for sustainability standards and certification initiative. Establishing a Climate Change Risk Policy and incorporating climate change issues across our core functions, including developing economic modelling and analytical frameworks to underpin the interactions of climate change and monetary policy, integrating climate risk in the financial sector stress testing, and developing regulatory guidelines for climate risk management among supervised financial institutions; Adopting a paper-lite clean-desk culture; Sensitising and encouraging supervised financial institutions to adopt ESG sustainability principles to ensure that they do not pursue profits at the expense of livelihoods or contrary to the long-term interests of the Ugandan environment, economy, and society; Working with stakeholders to build data capacity to plug information gaps on climate issues, including through representation in the National Climate Committee; Pursuing membership in the Network of Central Banks and Supervisors for Greening the Financial System for peer lessons on enhancing the financial system’s role in managing climate risks and mobilising capital for green and low-carbon investments for environmentally sustainable development; Seeking to exploit the high potency of digitalisation for sustainable financial inclusion, the Bank of Uganda is also undertaking initiatives for interoperable, efficient, and sound development of the national payment system, including: Implementation of a national payment switch for inter-operable and cost-efficient electronic payments; Operationalisation of the regulatory sandbox for safe testing of innovations under regulatory oversight; Review of the legal and regulatory framework to strengthen consumer protection and empowerment through the NPS Consumer Protection Regulations; review of agency banking regulations to facilitate reaching those at the bottom of the economic pyramid, especially in remote areas; and potentially lowering the minimum capital requirements of small innovators in a graduated capital structure commensurate with risk profiles.”
He reiterated that the Bank of Uganda is promoting financial literacy through several initiatives with stakeholders across the country and user classes, including leading the review and development of the second National Financial Inclusion Strategy, which is underway.
Also, he added that “the Bank of Uganda is still researching and exploring the efficacy of central bank digital currencies, focusing on the potential policy objectives.”
The Permanent Secretary in the Ministry of Finance, Planning and Economic development, Ramathan Ggoobi said he is confident that the Africa Group Financial market Index will contribute tremendously to “our policy and investment decisions for both the public and private sectors as we strive to further unlock the pivotal role of SMEs in stimulating economic growth, creating decent jobs, helping millions of Ugandans to escape poverty, and improve their livelihoods especially at a time when prices are multiplying.”
“We are ready to mitigate on the impacts of these crises, anticipate them, and provide resilience, so that we can be able to first of all recover the economy but put it to a trajectory that can take us to another level.”
Uganda’s overall score in the Absa Africa Financial Markets Index increased by 6 points to 66 this year, moving the country up to fourth from sixth place in the rankings. This is mainly reflective of strong data reporting standards and new environmental, social and governance incentives.
Uganda’s score for Pillar 3: Market transparency, tax and regulatory environment registered the largest increase to 81, from 60 in 2021. This was largely due to an improvement in ESG initiatives and standards after the Bank of Uganda launched a strategic five-year plan from 2022-27 which focuses on the ‘sustainability of the financial system and climatic risk’. Within Pillar 3, Uganda continues to score among the highest for financial information transparency and corporate reporting standards.
Uganda’s highest score was 90 which came in Pillar 6: Legal standards and enforceability. This is partly due to the existence of legal provisions for the enforceability of collateral and netting-off. Uganda recently partnered with both the European Union and Frontclear BV to support interbank transactions and further use of standard master agreements, which would bolster its score in Pillar
Otherwise, in Pillar 2: Access to foreign exchange, Uganda’s score increased to 84 from 65 which was mainly due to an improvement in foreign exchange interbank liquidity. The score for FX reserves adequacy also rose. This indicator stayed relatively stable at four months of imports in Uganda in 2021, while it deteriorated more significantly in other AFMI economies.
Moreover, despite tumult in the global economy and slightly worsening inflation, Uganda’s solid growth prospects and relatively strong macroeconomic data standards means it ranks third in Pillar 5: Macroeconomic environment and transparency, behind only Egypt and Botswana.
Areas for improvement
Despite slight improvements to Uganda’s score in Pillar 1: Market depth, corporate bond turnover and total equity turnover remained low in 2022. Uganda continues to have a relatively low stock market capitalisation, which fell by 1.5 percentage points as a share of gross domestic product in the 12 months to June 2022. And despite the latest ESG incentives and standards, there is limited availability of ESG products (such as green bonds) on the domestic market.
A key area for improvement is in Pillar 4: Capacity of local investors, where Uganda scores 14. Pension fund assets per capita stood at $125, which is much lower than the average across all index countries of $826.