BoU blames Shs484b deficit on 2008 global financial crisis

central bank

Bank of Uganda (BoU) has defended the Shs484.9b request for recapitalisation, saying it suffered the deficit as a result of the global financial crunch of 2007/2008.
The global financial watershed began in 2007 with a crisis in the subprime mortgage market in the United States, and later developed into a full-blown international banking crisis.
Governments around the world were forced to step up efforts to ease the strain on their economies.

BoU officials have not explained the government intervention that might have eroded its assets and created the deficits in the process.
Mr Kelvin Kizito Kiyingi, the acting BoU director of communications, said the request for recapitalisation is lawful as per the BoU Act 2000.
“The Bank of Uganda (BoU) Act 2000 provides for recapitalisation by government when capital is eroded. Since the global financial crisis started in 2007/2008, BoU’s capital has been eroded to the tune of Shs448.9b as at June 30, 2018. Recapitalisation will allow BoU revert to the minimum authorised capital as prescribed by the BoU Act 2000,” Mr Kiyingi stated in an e-mail at the weekend.

The Bank also denied reports that the withdrawal of Shs478b injected in Crane Bank Limited was to blame for the deficit. Part of the money BoU injected in the now defunct commercial bank, however, remains unaccounted for. BoU officials have since submitted the documents to the Auditor General’s office for verification.
Mr Lawrence Ssemakula, the Accountant General, presented the BoU request for recapitalisation last week while appearing before the Parliamentary Committee on Finance. He said BoU officials had approached the government, requesting for urgent capitalisation of the bank.

Mr Ssemakula also told the committee chaired by Rubanda East MP Henry Musasizi (NRM) that the central bank had indicated to the ministry that it had suffered deficits since June 2013 and that the money was needed to avert an impending crisis.
“So as per the BoU Act, we have no option but to allocate the money in our budget since their operations are in deficits,” he said. Mr Ssemakula added that those deficits have been cited in the Auditor General’s reports.

According to the ministerial statement for the 2018/2019 financial year, the Shs484.2b capitalisation fund for BoU is expected to increase the budgetary allocation towards payment of domestic debt from the current Shs2.3 trillion to Shs3.2 trillion in the next financial year.
It is not clear how the ministry of Finance came up with Shs484.2b in the request to Parliament yet the official information from BoU quotes Shs448.9b. BoU officials last week requested for time to explain the request.

Some committee members said that the BoU Governor and his team will be summoned to the committee to explain the deficit and how it is linked to the 2008 global financial crisis.
Mr Kiyingi said that the recapitalisation will be in form of government securities not cash.
Mr Kiyingi said the money is needed to increase BoU assets and to boost the monetary policy.

“First the securities are assets and not cash. This means the assets of the Central Bank increase. As capital is equivalent to the difference between assets and liabilities, the Central Bank’s capital must increase by an amount equal to the value of the securities issued to it,” he said.
Mr Kiyingi explained that the Central Bank realised the deficit after a drastic drop in the foreign exchange reserves as a result of the global financial crisis.

Looking back
Request. The BoU request for capitalisation first came to Parliament in May last year. Secretary to the Treasury Keith Muhakanizi wrote to the Clerk of Parliament, explaining that BoU had registered a deficit of Shs17b and operating losses of Shs457b on account of “monetary policy” and “currency costs”.
Rejected. However, the Budget committee rejected the request because it had come at the tail end of the budgeting process.

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