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


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.