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Bank of Uganda governors and the capital markets industry

Looking at the Bank of Uganda at 50 years, it is instructive to examine how three governors have influenced and left their mark on the development of and the current state of the financial services sector.

At the outset, let us accept that the current interest rate signal (CBR@14) means that we are telling the whole world that in our country, one must invest short. When the dominant commercial banks add their margin of 10 points or more, retail lending rates begin to dwarf the thin profit margins (about 12%) of law abiding tax-paying companies.

It also means that secondary market activity will continue to remain elusive as upper double digit interest rates are signals of high risk to both domestic and foreign investors. We shall continue to get low quality FDI – the ones that come, come looking for high and quick returns and do not stay long in the country.

High quality FDI only goes to countries whose CBR is in the mid-single digits and the spread between lending rates and the CBR is narrow – allowing for secondary market activities. For this reason, there is a strange ‘exchange’ with no product portfolio and recently licensed by the CMA purporting to deal in derivatives – when the current interest rate regime cannot support secondary market activities.

Others are talking about real estate investment trusts [REITS] – a secondary mortgage market product which cannot also be supported by the current retail mortgage market price signal of well over 20 points

In other words, secondary market products which require financial sector depth have and will find it difficult to swim the shallow pond which describes Uganda’s financial services sector and capital markets industry.

I have only selected three governors whom I have personally interacted with over the years in an effort to first of all initiate the market for Bonds Equities and Related Instruments (BERI) – which led to the also now moribund BERI Forum.

Governor Charles Nyonyintono Kikonyogo [1990-2000]. This quiet man can safely be credited with the foresight of lending direct and indirect support to then Capital Markets Development Committee (CMDC) – a low level initiative intended to realise a securities market in Uganda – even as the restrictive stabilisation measures under the structural adjustment programs of the World Bank PRSP initiatives frowned upon such activities

Credibility was further given to this CMDC by former governor Leo Kibirango accepting to be its chairman. I was his market adviser. This was the formation where Governor Emeritus became the first chairman of the Capital Markets Authority – and I became the first chairman of the Uganda Securities Exchange Ltd. Both the CMDC and the USE obtained support from USAid and then GTZ – with the approval of the central bank.

Indeed, I got my first chief executive officer from GTZ – Mr Bernt Benning – who was then seconded to the Uganda Commercial Bank. The central bank also later continued to subsidise the pay of my second CEO, Simon Rutega, whom they had brought from the USA under a returning Ugandans program.

Governor Emeritus Leo Kibirango [1981-1986]. When the argument was lost that the USE should be established first before the CMA so that the latter would have something to regulate, Governor Kibirango stepped up and Hon Israel Mayengo was lobbied to expedite the CMA statute – which he did.

Governor Kibirango subsequently became CMA chairman and proceeded to assist me get the USE off the ground – so that he could have something to regulate.

Governor Kibirango is a founder of the Uganda Securities Exchange Ltd by reason of his work at the CMDC and what he did in expeditiously getting the USE off the ground as chairman of the CMA. But without Hon Israel Mayengo, who is somewhat an expert in securities, we might not have succeeded in getting the CMA statute and there would have been no USE

Governor Emmanuel Tumusiime Mutebile [2000 to date]. Governor Mutebile has a large footprint in the capital markets industry. By issuing the first long bond series – two, five and 10 year notes – the governor has made the capital markets industry dream of a market of instruments of tenor possible, moving serious transactions away from cash.

While the market is looking for a new benchmark note for pricing to replace the awkward 180-day benchmark, it is Governor Mutebile’s action on notes of tenor which will make the mooted Uganda 30-year note a reality – shifting infrastructure financing away from expensive treasury cash to instruments of tenor.

Satisfied with the effect of the long bond series on the yield curve and downward pressure on the interest rate regime, the governor subsequently authorised the first Financial Markets Development Plan (FMDP) which he chaired until it started moving in a certain direction.

Carried to its logical conclusion, the governor’s FMDP would by now have yielded a National Bond Program – helping to deepen the financial services sector with badly needed instruments of tenor. The performance of FMDP was not sterling – members converted the limited funding available to trips and the FMDP is moribund to date, as is the mooted National Bond Program.

Nonetheless, in the face of restrictive stabilisation measures which actually required the government of Uganda finances to be managed on cash basis, governors have attempted in various ways to influence the development of the capital markets industry in order to reduce the influence of cash.

The author is an investment banker and son of former Bank of Uganda governor Onegi-Obel.

These notes are extracted from his forthcoming book: ‘The Governors – Their Monetary Policy Footprint and their Times’.

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