What Will Political Oversight Do to Uganda’s Central Bank?

Published 1 year ago -

By Eshban Kwesiga

Three years ago; May 2015, officials from Uganda’s Central Bank appeared before a Parliamentary hearing to ask MPs for a USD 50 million recapitalization. Any time an entity requires recapitalization it implies that the entity is undercapitalized – a fancy word to mean it is going broke.

At the hearing, Parliament sought an explanation on how the Central Bank had arrived at the USD 50 million. Instead, the Parliament got a laborious explanation veiled in complex Wall Street language from monetary tools to financial instruments, by the time the Central Bank representative was done, not a single MP had a question or comment. It is a time-tested trick seasoned technocrats use to keep politicians from meddling in their business.

For a long time, Uganda’s central bank has presided over a fast growing and successful banking industry partly because it has been insulated from political oversight. We shall get back to this later.

Back in 1933, America had a law called the Glass–Steagall Act. It prohibited investment banks from ever merging with commercial banks – the difference being that investment banks gamble with your money and commercial banks don’t. This law would be torn down during the Clinton administration allowing commercial and investment banks to become one entity.

Seven years after Clinton had left the White House, the American banking industry started to fail. The problem; investment banks were using commercial banks’ money for risky investments. In the 2008 financial crisis, a number of banks were on the verge of closing shop thanks to undercapitalization, until the American Central Bank usually also known as the US Federal Reserve bailed them out.

But as it bailed out one, two, three banks, public opinion, amplified by the media and politicians, began to gather pace against more bailouts, insisting that banks take the fall for their backfired investments. Following this pressure, the Federal Reserve declined to bail out the next bank that was most likely to go under –a 158-year-old bank called Lehman Brothers holding assets of over USD 600 billion and (going by World Bank data) was also valued at thrice the combined GDP of Uganda, Kenya, Tanzania, Rwanda, and Ethiopia. The bank collapsed, and its impact on the American Economy was such a disaster; it prompted the Federal Reserve to bail out every bank that applied for a bailout after that.

Fast forward to 2018; what does the Central Bank of Uganda have to with the collapse of America’s financial crisis? From America to India, political interference in the business of Central Bank has never ended well.

Even though Uganda’s Central Bank has been haunted by political interference from the executive, and a law (The Public Finance Management Act) was passed in 2015 to allow for government to borrow directly from the bank without as much as a head nod to Parliament for approval, there is danger in allowing too much political oversight over highly technical and sensitive institutions such as the Central Bank.

Take Uganda’s oil industry for example. For almost 20 years, oil exploration in Uganda went on unhindered, in large part because it was insulated from politics. It’s only recently that politicians have taken a keen interest in Uganda’s oil, the highlight of which was the 2011 showdown in Parliament with a host of ministers accused of pocketing kickbacks to prefer particular companies to develop Uganda’s oil sector, creating another layer of checks and balances, that is abused for political theater.  While the storm passed, the damage was made – developments in Uganda’s oil sector have since been sluggish, riddled with innumerable stalemates between the political class led by the President, Ministry of Energy technocrats and the oil companies.

Country economy reports are not always about how the economy works, they are sometimes about how mass psychology works. What quickly comes to the mind of an IMF analyst that sits to draft a report on Uganda might influence what that report will look like. If she thinks about reduced public confidence in the central bank; this cognitive bias may be carried forward into a published IMF report because analysts are not always immune to being influenced by negative press coverage the bank receives.

Some of the fastest growing economies in the world today understand the importance of managing perceptions. A number of them have been accused of ‘cooking’ the books on their economic performance. The reason is; they understand that many foreign direct investment decisions are influenced by how investors feel about the country being considered for investment. The global legion of economic analysts, investors – both local and foreign, is also susceptible to group-think. They conform to generally accepted sentiments that lead to decision-making outcomes with far greater consequences.

This article is in no way a case against political oversight or blanket insulation. It is only a caution that we exercise good judgment as we probe further into the Central Bank. No matter the resultant findings of the COSASE committee, the accompanying publicity, and media scrutiny has the potential to erode public confidence in the bank, irreparably dent its image, hurt investment, and open a Pandora’s box with long-term consequences for the country’s economy.



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