Uganda - Banking and Currency

More about the Economy of Uganda.

Banking

Government-owned institutions dominated most banking in Uganda. In 1966 the Bank of Uganda, which controlled currency issue and managed foreign exchange reserves, became the Central Bank. The Uganda Commercial Bank, which had fifty branches throughout the country, dominated commercial banking and was wholly owned by the government. The Uganda Development Bank was a state-owned development finance institution, which channeled loans from international sources into Ugandan enterprises and administered most of the development loans made to Uganda. The East African Development Bank, established in 1967 and jointly owned by Uganda, Kenya, and Tanzania, was also concerned with development finance. It survived the breakup of the East African Community and received a new charter in 1980. Other commercial banks included local operations of Grindlays Bank, Bank of Baroda, Standard Bank, and the Uganda Cooperative Bank.

During the 1970s and early 1980s, the number of commercial bank branches and services contracted significantly. Whereas Uganda had 290 commercial bank branches in 1970, by 1987 there were only 84, of which 58 branches were operated by governmentowned banks. This number began to increase slowly the following year, and in 1989 the gradual increase in banking activity signaled growing confidence in Uganda's economic recovery.

Banking and currency

Uganda's years of political turmoil left the country with substantial loan repayments, a weak currency, and soaring inflation. During the 1970s and early 1980s, numerous foreign loans were for nonproductive uses, especially military purchases. Even after the Museveni regime seized power, debts climbed while the productive capacity of the country deteriorated. To resolve these problems, the government tapped both external creditors and domestic sources, crowding out private-sector borrowers. The Museveni government then attempted to reduce the percentage of government borrowing from domestic sources and to reschedule payments of foreign loans. The government also implemented successive devaluations of the shilling in order to stabilize the economy.

Currency and Inflation

Between 1981 and 1988, the government repeatedly devalued the Ugandan shilling in order to stabilize the economy. Before 1981 the value of the shilling was linked to the IMF's special drawing right ( SDR). In mid-1980 the official exchange rate was USh9.7 per SDR or USh7.3 per United States dollar. When the Obote government floated the shilling in mid-1981, it dropped to only 4 percent of its previous value before settling at a rate of USh78 per US$1. In August 1982, the government introduced a twotier exchange rate. It lasted until June 1984, when the government merged the two rates at USh299 per US$1. A continuing foreign exchange shortage caused a decline in the value of the shilling to USh600 per US$1 by June 1985 and USh1,450 in 1986. In May 1987, the government introduced a new shilling, worth 100 old shillings, along with an effective 76 percent devaluation. Ugandans complained that inflation quickly eroded the new currency's value. As a result, the revised rate of USh60 per US$1 was soon out of line with the black market rate of USh350 per US$1. Following the May 1987 devaluation, the money supply continued to grow at an annual rate of 500 percent until the end of the year. In July 1988, the government again devalued the shilling by 60 percent, setting it at USh150 per US$1; but at the same time, the parallel rate had already risen to USh450 per US$1. President Museveni regretted this trend, saying "If we can produce more, the situation will improve, but for the time being we are just putting out fires." The government announced further devaluations in December 1988 to USh165 per US$1; in March 1989, to USh200 per US$1; and in October 1989, to USh340 per US$1. By late 1990, the official exchange rate was USh510 per US$1; the black market rate was USh700 per US$1.

All of the government's efforts to bring the economy under control succeeded in reducing the country's staggering inflation from over 300 percent in 1986 to about 72 percent in 1988. Then the government contributed to rising inflation by increasing the money supply to purchase coffee and other farm produce and to cover increased security costs in early 1989, a year in which inflation was estimated at more than 100 percent. Low rainfall levels in the south contributed to higher prices for bananas, corn, and other foodstuffs. Shortages of consumer goods and bottlenecks in transportation, distribution, marketing, and production also contributed to rising prices. Moreover, the depreciation of the United States dollar increased the cost of Uganda's imports from Japan and Europe. The government tried to curb inflation by increasing disbursements of import-support funds and tightening controls on credit. These measures helped lower the rate of inflation to 30 percent by mid-1990, but by late 1990, inflation had once again resumed its upward spiral.

Domestic Credit

By 1981 the rate of growth of domestic credit was 100 percent per year, primarily as a result of government borrowing from domestic sources. The 1981 budget attempted to reestablish financial control by reducing government borrowing and by floating the shilling in relation to world currencies. This measure led to a sharp decline in the growth rate of domestic credit and to a temporary decline in the central government's share of domestic credit from 73 percent to 44 percent in 1986. The following year, however, domestic credit recorded growth of over 100 percent, primarily reflecting credit extended to private-sector owners for crop financing. During 1987 crop financing for private owners again increased, while the government's share of domestic credit fell even further, from 45.3 percent to 30.7 percent. Crop finance accounted for 86 percent of all financing for agriculture, crowding out commercial credit to other areas within agriculture. Commercial lending for trade and commerce also increased during 1987, rising from 15.6 percent to 23.7 percent of total lending in 1986. Commercial lending to manufacturing, building and construction, and transportation rose marginally, while lending to other sectors declined.

The Uganda Commercial Bank introduced a new program, the "rural farmers scheme," to help small farmers through troubled economic times. This program aimed to boost agricultural output by lending small sums directly to farmers, mostly women, on the basis of character references but without requiring loans to be secured. Most of these loans were in the form of inputs such as hoes, wheelbarrows, or machetes, with small amounts of cash provided for labor. The farmers repaid the loans over eighteen months, with interest calculated at 32 percent--marginally lower than commercial rates. Under this program, the bank had loaned USh400 million to approximately 7,000 farmers by 1988. The scheme attracted more than US$20 million in foreign aid, including US$18 million from the African Development Bank.

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