By Joseph Kasibante

The Bank of Uganda (BoU) Governor, Emmanuel Tumusiime Mutebile, recently criticised those blaming the bank for introducing new currency suspected to be the advent of the ongoing inflation.

He retorted that BoU Act 1993 gives them the mandate to issue the notes and coins and to determine how this should be done. Mutebile further assured Ugandans that high interest rates are the panacea to subdue inflation.

He defended BoU issuance of new notes. But despite all the debasing reasons he gave against the old currency notes, he still defended BoU action of circulating the same dangerous notes as tender to run as family currency alongside the new ones.

The reasons Mutebile gave are a classic own goal against BoU team. It is true BoU Act Section 20(1) gives it the right to issue notes and coins but not on their choice how to do it as the Governor asserted.

The appropriate BoU Act Section 23 (3) which Mutebile should have used for the reasons he forwarded to retire the old currency states: “On giving not less than 15 days’ notice in the Gazette, the bank may call in any of its bank notes and coins on payment of the face value; and any notes or coins with respect to which notice may have been given under this subsection shall, on the expiration of the notice, cease to be legal tender.

According to acceptable monetary policy, family currency notes both the FIAT and credit forms of money are generally made acceptable through a government decree that all creditors must take the money in settlement of debts; the money is then referred to as legal tender.

If the supply of paper money is not excessive in relation to the needs of trade and industry and people feel confident that this situation will continue, the currency is likely to be generally acceptable and relatively stable in value.

If, however, such currency is issued in excessively large volume in order to finance government needs, confidence is destroyed and it rapidly loses value.

BoU’s decision to increase its credit rate just acted as a signal to the effect that anytime it could raise bank reserve requirement.  This incited banks to push the burden to their customers.

·         The Government should swiftly intervene to correct BoU anomalies. BoU Act Section 48 gives the minister the powers of direction over BOU inadequate policy. The minister may, after consultation with the governor and subject to this Act, give directions of a general nature in writing, relating to the financial and economic policy of the bank.

·          If, after consultation with the governor, the minister is of the opinion that the policies being pursued by the bank are not adequate for, or conducive to, the achievement of the functions of the bank, the minister may, with the approval of Cabinet, by directive in writing, determine the specific policy to be adopted by the bank; and the bank shall give effect to that policy while the directive remains in force.

Although the market system in Uganda relies on private ownership and decentralized decision-making by households and privately owned businesses, the government still retains its economic function.

The Government has a political mandate to pass and enforce laws that protect the property rights of individuals and businesses.

It is, therefore, the duty of a democratic government to restrict economic activities that are considered unfair or socially unacceptable

The impact of inflation on individuals depends on many variables. People with relatively fixed incomes, particularly those in low-income groups, suffer during accelerating inflation, while those with flexible bargaining power may keep pace with or even benefit from inflation.

Other optimal monetary systems the minister can propose to the cabinet is the central bank reserve system which can effectively control money supply and credit in one of the three ways: A central bank can increase the supply of money and the availability of credit by lowering the percentage of deposits that banks must hold as reserves at the central reserve system, by lowering the discount rate, or by purchasing Government bonds through open market operations.

Other effective episodes are changing the government spending and lowering taxes to stimulate saving, investment, higher employment and economic growth.

The writer is the president of the national tax payers protection organization