Bank of Uganda earns most of its income from investing the bulk of Uganda’s foreign exchange reserves in bonds, a practice referred to as investment in fixed income assets.

While profits and losses aren’t typically thought of as a consideration for central banks, the financial deficit that BoU incurred in the bond market has resulted in paper losses on various holdings.

Central banks, experts say, use sale of bonds as a tool to increase bank reserves and lower interest rates. When they buy bonds, money flows from them to individual banks in the economy. Conversely, they reduce supply on money through selling bonds.

According to BoU’s annual report for 2022 which was released earlier this month—whereas some returns had been made on investments in the financial year that ended in June 2021; there was negative return on investments made in the financial year that ended on June 30 this year.

The negative returns come at a time when BoU’s expenditure, sometimes referred to as an operating deficit shot through the roof, eclipsing income by Shs233 billion in the period ended June 30, 2022.

“Return on foreign assets experienced a slump, from 0.62 percent as at end June 2021, to -0.89 percent at close of June 2022,” the report reads in part.

Covid impact

The report blamed the situation on volatility in the markets caused by a variety of factors, including the Russia-Ukraine war, continued lockdown restrictions in parts of China and the emergence of other Covid19 variants.

The toxic cocktail, the report says, precipitated major shifts in the monetary policies of major central banks to emphasise tightening instead of easing monetary policies. It also prompted central banks to bring in aggressive interest rates aimed at containing inflation.

“Policy rates were raised across the globe, causing sovereign bond yield curves to flatten with shorter dated yields rising higher than longer dated yields,” the report further noted.

According to sources within the institution, BoU had invested in bonds with longer maturity dates. This left it disadvantaged by a policy that suddenly favoured those that had invested in bonds with shorter maturity periods.

According to the Daily Monitor, earlier in the week, Mr Adam Mugume—the director for research at the Bank—in an email to them, indicated that the new interest rates and the major policy changes culminated into a slump in the price of the bonds. This, he added, explains the losses.

“If the BoU were to sell the bonds before maturity, it would make a big loss. In other words, revaluing the bonds now at high interest rates and low prices imply low value of the reserves invested in fixed income assets” Mr Mugume explained.

The report also partially blamed the failure to cash in on the increase in interest rates on the foreign markets in government’s spending patterns.

“Furthermore, the Bank’s ability to take advantage of rising interest rates was curtailed by increased government foreign expenditure and intervention in the domestic markets to stem foreign exchange volatility. On the side of expenses, high domestic demand for currency contributed to an increase in currency costs.”

Shrink in reserves

According to sources at BoU, the situation was not helped by the fact that Uganda’s foreign exchange reserves had shrunk quite significantly during the period of volatility.

The annual report indicates that foreign exchange reserves reduced from the level of $4.2b or Shs16 trillion (equivalent to 5.48 months of import cover) at the close of June 2021 to $4.1b or Shs15.6 trillion (equivalent to 4.17months of import cover) as at the close of June this year.

That reduction in the amounts of the country’s foreign exchange reserves is deemed to have been a major factor in the losses posted.

“In FY 2021/22, BoU had foreign currency reserves of about $4.6 billion. The global interest rates in the year were around zero, meaning minimal income earned on reserves. Global interest rates started rising this financial year when reserves had declined,” Mr Mugume explained to the Daily Monitor.

Breach of EAC policy

The reduction in the foreign exchange reserves breaches the forex reserve policy that requires member states of the East African Community to maintain reserves equivalent to 4.5 months of import cover.

Uganda is performing worse than neighbours Kenya, Tanzania in terms of amounts of dollars, but not necessarily in terms of import cover.  Kenya recently reported that its reserves had fallen to $7.321 billion (equivalent to 4.13 months of import cover); Tanzania’s amounted to $5.1b (equivalent to four months of import cover) as at the end of June 2022.

Rise in cost of operations

The cost of operating the bank, which has over the years been on the rise, reached unprecedented figures. Whereas it was not possible to immediately establish what the bank earned in the year ending June 30, 2022, the report indicates that the bank’s expenditure overshot income by a staggering Shs233 billion—implying a Shs191 billion rise compared to how much it spent in the year ended June 30, 2021.

The report indicates that the bank’s expenditure in the period that ended June 30, 2021 overshot income by Shs42 billion.

Mr Mugume explained that the bank usually spends on, among other things, meeting the cost of printing and issuing secure currency, supervising financial institutions and conducting monetary policy.

The bank attributed the increment in the operation deficit to the hostile global and domestic economic environment including inflation.

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The shilling has maintained trading within a narrow range between Shs 3800 and Shs 3820 throughout the week. Healthy month-end inflows from NGOs and other sectors and flows from commodity exporters covered the pockets of demand seen from the usual sectors keeping the unit more or less range-bound. As we close October, we should continue to see the usual month-end flows and unless demand picks up significantly, the unit is likely to remain range-bound between the 3780 -3840 trading range in the near term.

Catherine Kijjagulwe, Head of Trading at Absa Bank Uganda said Money Markets were fairly liquid during the week with overnight yields trading between 10% – 11.50%. Bank of Uganda held a Treasury Bill auction and yields in the 91-day, 182-day and 364-day tenors cleared at averages of 11.498%, 13.689% and 15.503%. Bank of Uganda will hold a 2-year and 10-year Treasury Bond auction on Wednesday 2nd November 2022.

The Kenya shilling is still under pressure despite interventions by the Central Bank in the past few days and there is continued demand for dollars. The unit traded within the 121 -126 levels and the unit is anticipated to remain weak and trade within the same range in the short term.

The dollar was strong on Thursday on the back of better-than-anticipated economic data, US GDP printed at 2.40% slightly surpassing expectations.

The Euro which had been strong earlier during the week slipped below parity as the European Central Bank hiked its benchmark rate by 0.75% to 2.00%. The Euro touched lows of $0.9965 (Shs 3794) before ending the session at $0.9971 (Shs 3796).

The Pound also retreated from its highs on Thursday as news of the appointment of the new Prime Minister slowly faded. It touched highs of $1.1645 (Shs 4433) but later slipped to close at $1.1564 (Shs 4403).

Oil prices dipped marginally but are anticipated to remain high after a positive US GDP data print, continued demand and also the prospect of tightening supplies. Brent Crude traded at $95.95 (Shs 365,340) a barrel and West Texas Intermediate traded at $87.68 (Shs 333851) a barrel.

Gold traded at $1648 (Shs 6.2million) an ounce.

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The “Energy Access Workforce Uganda” report by Power for All, in collaboration with the global campaign to end energy poverty, and Uganda National Renewable Energy and Energy Efficiency Alliance-UNREEEA, has revealed that COVID-19 led to a drastic reduction in the sale of DRE technologies by nearly 20 percent leading to the loss of over 5,000 jobs. 

According to the report, the Pandemic shrunk jobs in Uganda’s Decentralized Renewable Energy sector by 15 percent and the slow growth is expected to persist.

“The Ugandan decentralized renewable energy-DRE sector has seen a 15 percent reduction in its employment workforce in the last two years due to COVID-19 and the measures put in place by the government. Furthermore, unless market conditions improve, employment creation is expected to remain stagnant with no additional jobs until 2025,” the report reads.

The study found out that Uganda’s DRE sector–which includes pico-solar appliances, solar home systems-SHS, and commercial and Industrial-C&I standalone systems–employed close to 30,000 workers in 2021, down from 35,000 in 2019, prior to the COVID-19 pandemic. 

It has also revealed that the economic downturn brought about by the pandemic, coupled with stringent government lockdowns, resulted in a drastic contraction of the SHS market. The sales volume of SHS products declined by 18 percent annually, which directly contributed to a loss in jobs in the DRE sector.

According to the report, the bulk of the jobs in the DRE sector was in the home solar systems sub-sector, accounting for 99 percent of the sector’s employment.  With the other 1 percent going to both the mini-grids and commercial and industrial (C&I) systems.

The country’s economic downturn due to the pandemic and the stringent government lockdowns, led to a drastic reduction in solar home systems (SHS) sales by nearly a fifth, from 400,000 products sold in 2019 to 263,500, in 2021. 

The loss of jobs was not unique to the DRE sector only. According to a survey by the Uganda Bureau of Statistics and the World Bank, Uganda’s employment rates dropped by almost 12 percent towards the end of 2021 compared to the pre-pandemic employment level in 2019.

In addition, the study found the participation of women in the DRE sector in Uganda was low at 28 percent, significantly lower than the country’s overall economy at 49 percent.  On a positive note, the sector is close to achieving pay parity between men and women employed in the sector. 

The report highlights areas of potential intervention to develop the sector, including building the capacity of the DRE workforce. The study identified 12 key areas in which further training is required by Ugandan DRE firms. These include soft skills, such as communication, interpersonal skills, and time management, and hard skills, including installation and commission, marketing, maintenance, and project management. Installation and maintenance skills, necessary to support growth in larger scale mini-grids and C&I, were also highlighted by DRE companies as important focal areas for training. 

Developing Uganda’s DRE sector will require concerted efforts from government agencies and the private sector. It will also need sound policies and adequate regulations to scale up the rollout of micro- and mini-grids. 

Benard Mbaine, the Vice Chairperson of Uganda National Renewable Energy Efficiency Alliance-UNREEEA, noted that DRE has always contributed to achieving Uganda’s targets faster, sustainably, and cost-effectively, therefore, the stagnation of employment in the sector is not good news for the country’s efforts to achieve its development agenda.

“The private sector has been at the forefront of advancing DRE technologies which have contributed up to 38 percent of the current national electricity access rate of 57 percent. Therefore, the government must work closely with the private sector in order to achieve 100 percent electrification by 2040,” says Benard Mbaine.

Mr. Mbaine further noted that Women are the most affected by lack of access to clean energy technologies since they spend most of their time at home and are exposed to indoor pollution from unclean cooking and lighting; therefore, women must be equally involved in DRE discussions and activities if we are to see the change that we want.

The Ugandan DRE sector employed close to 30,000 workers in 2021. Between 2019 and 2021, the sector exhibited a 15percent contraction in the workforce. If the current market situation prevails, employment creation within the Ugandan DRE sector is expected to remain static with no additional job creation in the sector until 2025.

Uganda is largely an informal economy with informal employment accounting for 90 percent of total employment in 2017. The level of informal employment in the Ugandan DRE sector may, in fact, be higher than 20 percent. Under-representation of smaller DRE firms, the source of the majority of informal employment, is likely due to challenges in locating formal addresses and reaching these firms.

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