The Bank of Uganda (BoU) has in the past closed commercial banks on the grounds that they are ‘significantly undercapitalized’.
However, according to the Bank of Uganda Annual Report 2017/2018 released on September 28, 2018, Uganda’s Central Bank was undercapitalized to a tune of Shs468.86bn as of June30, 2018.
The details of the Bank’s capital status were disclosed in the Auditor General’s report that was included in BoU’s report that highlighted that as per the Bank of Uganda Act section 14(3), the issued and paid-up capital of the Bank shall be a minimum of Shs20bn.
“As at June 30, 2018, the core capital of the Bank (BoU) was below the minimum required capital by UGX 468,864 million (2017: UGX 37,313 million) as disclosed in Note 43 to the financial statements,” the report reads in part.
The report explained that the operating losses of the Bank during the year ended June 30th 2018 were mainly attributable to the interest expenses paid out to financial institutions on deposit auctions and vertical repos issued by the Bank in the management of the momentary policy as per the Bank’s mandate, and currency costs of Shs155bn (79% of the interest income).
Bank of Uganda’s officials told the auditors that the costs implementations of monetary policy that have caused the Bank’s core capital erosion are currently fully borne by the Bank.
“I considered this issue to be a key audit matter since inadequate capital poses a business risk to the Bank and its operations,” Auditor General John Muwanga warned.
Recapitalization rejected
It should be noted that plans by Government to recapitalize Bank of Uganda to a tune of Shs500bn in the run up to the passing of 2018/19 budget fell flat, after MPs threw out Ministry of Finance’s addendum to corrigenda to the draft budget estimates for treasury operations FY 2018/2019.
Rejecting David Bahati’s proposal, Speaker of Parliament, Rebecca Kadaga said it was too late to consider the proposal, saying it would be an abuse of Parliament.
“Now you want to cause Parliament to continue holding meetings and calling agencies again. No, we shall not accept. The budget process is time bound, we are already late and I don’t think it is fair for you to cause Parliament delay and all you do is that Parliament hasn’t finished the budget. If you are late, you are late. You are out of time. You aren’t being fair to this house,” Kadaga said.
Finance, BoU Speak Out
It is therefore most likely that BoU has not yet been recapitalized because no supplementary has been brought to Par brought.
When contacted on whether there has been any arrangement between Finance Ministry and BoU, Ministry of Finance Spokesman, Jim Mugunga, referred this Business site to Bank of Uganda, noting that if BoU ‘prayed’ for something, it is best placed to comment on whether their prayers have been ‘answered’.
This website made efforts to get a comment from BoU. When contacted, Charity Mugumya, the Director of Communications refused to say something on the recapitalization, noting that she was on leave. She said she hadn’t read the released Annual Report. She referred us to her deputy Angela Kasirye Katete, who we were unable to reach out to by the time this story was posted.
In an exclusive interview with Business Focus, Dr. Fred Muhumuza, an economist and lecturer at Makerere University’s College of Business and Management Sciences, said it is more likely that “government will be injecting more capital in BoU every year.”
This is because the Bank’s capital is eroded whenever it pays interest rates on Treasury Bills, which he says were previously directly paid by the Finance Ministry.
He noted that Treasury Bills mature and are rolled over. This, he says, erodes BoU’s capital and is reflected on its financials. A rollover is when a debt or loan arrangement is allowed to continue for a longer period than previously agreed.
None the less, BoU Governor, Prof. Emmanuel Tumusiime-Mutebile (in featured photo) says the “banking system remained in a sound financial condition and was well capitalized with all the banks meeting the minimum capital adequacy requirements” for the period under review.
