By Patrick Kagenda
A 73% decline in the value of off-shore investments has forced Bank of Uganda to rethink its policies.
BoU Deputy Director of Research, Charles A. Abuka, told a workshop organized for forex bureau operators that the bank was reviewing its fiscal policy programs to fit in with the new reality.
He blamed Uganda`s economic slump on the exit of off-shore investors who quit the market when the global financial meltdown hit the rich economies.
The proportion of off-shore investors in Ugandan securities has declined dramatically since the credit crisis began. In June 2008, off-shore investors held 25.67% of total government securities. However, by February 2009, they held just 9.85%. Holdings have decreased from the equivalent of US$ 452.22 million in June 2008 to US$ 121.23 million in February 2009, a 73.2% decline in value.
Mr Simon Rutega, the Chief Executive Officer of the Uganda Securities Exchange (USE) told The Independent that foreign capital flight resulting from the global financial crisis and apathy from unfulfilled investor expectations from share offers last year contributed to the decline.
The USE All Share Index has declined over the period September 2008 to February 2009 compared to similar periods in the previous two financial years. The All Share Index, which is a composite measure of price changes of shares traded, dropped dramatically early this year. In March alone, it sunk 30% to 560.51 points before surging again to 713 in April.
Economic growth that had been at over 8% for the past 5 years is faltering and could fall bellow 4% this year.
According to Bank of Uganda officials, the off-shore investment squeeze partly explains why the dollar has appreciated sharply against the Uganda shilling.
The value of the dollar shot up by 30% from Shs 1,700 to the dollar in mid-2008 to a new 12-month high of Shs 2,200 to the dollar this month on the local forex market.
The other reason for the dollar’s appreciation is its scarcity on the Ugandan market as both remittances from Ugandans working abroad and Ugandan exports to other countries have taken a nose dive.
The World Bank has warned that the global economic crisis could hit Uganda, like most emerging markets, on three fronts: via reduced foreign capital inflows, a drop in remittances from Africans abroad, and a drop in commodity prices. The Bank said that capital inflows to Africa, which had exceeded US$530 million, and remittances, which were in excess of US$20 billion annually, were now all falling sharply.
In order to ameliorate the impact of the flight of off-shore capital, the Central Bank’s Abuka said it would review its fiscal program to accommodate lower outturns of revenue.
“We will reprioritising the needs of the economy to facilitate operation within a reviewed budget and optimising value for money in public spending to ensure efficacy in resource utilization,” he said.
He said the Central Bank would facilitate regional trade more, revise inflation projections, balance of payments, and forex market sterilization in a manner consistent with the latest developments. The bank is to invest foreign exchange reserves in secure portfolios such as those issued by multilateral institutions and G7 Central Banks.
The Central Bank official also said that given the potential knock-on effects from the slow down in real activity, efforts would focus on monitoring closely the balance sheets of financial institutions.
“There are potential risks for the Ugandan economy by virtue of its participation in the globalised economy,” he said. However, the impact on the economy would be somewhat reduced by low public debt, international reserves cover, and a sound, well regulated banking sector, he added.
He said the Central Bank’s monetary policy will continue to support disinflation and there are signs that consumer prices are stabilizing.
“The decline in prices of our trading partners is likely to help lower our inflation rates going forward,” he said.