Uganda’s central bank has been dominated by the Ministry of Finance due to lack of financial muscle, according to the International Monetary Fund.

The IMF said the dominance resulted in the fiscal policy taking priority over monetary policy, which curtailed the functions of Bank of Uganda (BoU).

The central bank has operated under the shadow of the ministry due to its reliance on the government for regular recapitalisation, which is not well defined.

The regulator has also not been allowed to charge the government — its most regular customer – fees for services rendered, limiting its non-interest income sources.

“The repurchase agreement securities appear to be another example of the fiscal domination that the BoU faces.

“The current “repo” securities represent a reluctance by the Ministry of Finance, Planning and Economic Development to assume the costs of fully resourcing the BoU to enable it to perform its functions,” reads a report by the IMF.

Sweeping reforms

The IMF has called for sweeping reforms at the central bank, including its capital structure and product range.

It added there should be a time frame within which the Bank of Uganda should be recapitalised, if during conduct of its normal operations its capital levels fall below the statutory Ush20 billion ($5.4 million).

Recapitalisation of the bank is usually done in December but there is no structure on how it should be done. Last year, the bank’s capital fell to negative Ush17.3 billion ($4.7 million) putting it in need of at least Ush37 billion ($10.1 million) in order to be compliant.

The IMF argues that the recapitalisation should not just be enough to meet compliance levels but ought to give the bank room to execute its mandate.

It also takes issue with Uganda’s central bank paying the bulk of its profits, if any is made, to the government. Profit sharing is split at 75 per cent to the government and 25 per cent being retained.

If the Bank is holding more than twice its capital in general reserves then it is required to pay the full profit to the government.

Conflict of interest

Payment of dividends by regulators to the government has been a source of debate given the conflict of interest that it creates. It also takes away resources that could make the regulator financially stronger and more independent.

In Kenya, the central bank earns a commission of 1.5 per cent from the government of amounts raised through its agency role in the issuance of Treasury bills and bonds.

The annual commission income is limited to Ksh3 billion ($30 million). The central bank also earns commissions from other debt instruments issued to meet funding requirements of state corporations.

The Central Bank of Kenya has also not sought recapitalisation in the past decade.

“The level and timing of government injections into BoU seems to be more about compensating the central bank for operating losses than a co-ordinated effort to recapitalise the bank,” said IMF.

The bank has also been challenged to relook at its internal operations in efforts to manage liquidity in the market.

The recommendations include de-stigmatising the use of borrowing from the central bank, accepting use of longer term paper as security for the discount window and changing the schedule for reserve maintenance period to start on Thursday and not on Monday.