Forex Re-Regulation!

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It is kind of absurd that the Governor who called Mr. Museveni a Marxist has resorted to socialist principles for the institution he heads, the Bank of Uganda – Central Bank, is from 1 July 2011to begin publishing a monthly “Central Bank Rate” which shall be used as a base for lending to commercial banks. This was announced by the Deputy Governor – Louis Kasekende on 23 June 2011.

I was thus surprised to check the leading daily newspapers the following day and note that this story was missing. Did they not attend the function at which the Deputy Governor made this pronouncement or were they just indifferent to the matter on a whole?Well, because of that and also due to lack of any sort of notice on the Bank of Uganda website I cannot deduce deeper the purpose this is supposed to do to help with the stabilisation of the freefalling shilling but my guess is the Central Bank hopes the commercial banks will use it as their base in foreign currency transactions and this shall somewhat curb the short term fluctuations of the shilling.

The dollar hit the 2,500shs mark against the dollar last week (2,600shs 28/June/2011) and this was after a flurry of activity in the forex market sparked off by the Governor’s interview with the Financial Times two weeks back. The central bank managed to salvage the shilling by selling an undisclosed amount of dollars in the market my guess is over 30million dollars since this is how much is claimed to have been bought out of the market after the Ugandan newspapers re-run the story.

It is these short term fluctuations coupled with our lack of dollar reserves since they were used in jet purchasing that I think Governor has come up with this ludicrous plan of setting a Base Exchange rate for the market each month.

If Uganda is to attain its ambition of becoming a middle income country then it will have to reign in on the depreciation of its shilling. With Uganda being a net importer and the Balance of Payments as announced by the Minister at her reading of the Budget Speech shows that we spent 1.8times more on imports than we earned on exports. The depreciation of the shilling when also looked at from 1990 to 2010 shows a very marked depreciation with it having been Shs.440 in July 1990 and by July 2010 it was Shs. 2303.93 or depreciation by 413% over the period or an average of 21% per year. This depreciation clearly works into the prices of the products we are importing and together with the imported inflation adds onto the already burdensome price inflation we are currently facing.

Therefore with all this in the back of our minds and the future we desire of being a sub-Saharan nation with middle-income status by 2016, the monetary tool best put forward by the world acclaimed economists at the Central Bank is not enough to curtail the freefall of the shilling.

Many nations have some sort of foreign currency regulation which in a way tries to restrict the movement of foreign currency in the economy and they include Brazil, Russia, India, China, South Africa, Malaysia, Argentina, Cuba, Egypt, Morocco, Namibia and Nigeria. I particularly looked at the regulations in Brazil and South Africa. These two have been said to be the most “emergent” of the emerging economies and are part of the five nation acronym of BRICS.

Republic of South Africa

The country has an Exchange Control authority that is charged with the responsibility of carrying out various foreign exchange controls in South Africa. The country has some interesting controls in place including limitations on amounts of foreign currency that can be taken out of the economy if not part of normal trade operations.

The Republic has restrictions on investments made out of the country, for instance. This is because these investments would require foreign exchange to be purchased from the South African market. Corporate institutions for instance are restricted from investing more than R1 billion for rest of the world and R 2billion for African countries except Lesotho, Namibia and Swaziland which have no limit for their membership of the Common Monetary Area. Institutional investors (including Collective Investment Schemes, Mutual Funds) are restricted to 20% of their investment portfolio and 15% for institutions like long-term insurance funds and retirement funds.

For trade purchases (imports) the Exchange Control limits advance payments up to 33.33% (a third) of the factory cost prior to shipment.

Other controls in place include limits to individuals of amounts that can be remitted out of the country to R750,000 for individuals, R1.5million for a family as a unit and R1million of personal effects.

It is these and more controls in place that maintains the countries exchange against the dollar other major world currencies to a reasonable amount that has enabled the country’s manufacturing industry to flourish.

Brazil

Brazil has had a long history of foreign exchange controls most of which were Decrees by its many military leaders and these have been retained or modified to suit its current economic situation. A series of events led to the first foreign exchange control Decree in 1931 and these were the NYSE crash of 1929 that led to drop of commodity prices including Brazilian coffee, the 1930 Brazilian revolution of Getulio Vargas and the 1931 devaluation of the Pound Sterling following its abandonment of the Gold Standard. The Decree was made to limit the free exchange of currencies in Brazil and introduced a monopoly in the Bank of Brazil in order to control the inequitable distribution of foreign exchange. This led to a flurry of other Decrees and laws which by 2003 a variant of these was still in effect.

Brazil after going through all these rules and regulations finally settled for an ICT system Siscomex and Sisbacen to record all exports and imports in order to acquire licenses of export and import. It requires an exporter to record various information including the type, quantity, classification and description of goods as well as terms of payment. Shipment has to be done within 60days else the export license is cancelled automatically. Payment is followed up with receipt of foreign currency in the bank by quoting the export license reference no. Proceeds without a reference identifier are automatically flagged and export licenses which aren’t cleared in the 180 days from the point of shipping then it is considered a loan with interest due.

The imports also have to be recorded in the Siscomex system with it generating an import license. Advance payments of imports are allowed up to 180days beyond which if goods have not been received in the country the import has to repatriate the foreign currency. The government controls on imports are to curtail import of unwanted commodities like guns, drugs etc as well as avoiding tax evasion by over invoicing and foreign exchange evasion by over invoicing (repatriation of forex in guise of imports).

These two countries have put in place controls over their foreign currency exchange markets to essentially insulate the effect of foreign currency demands on the depreciation of their currencies ultimately affecting the inflation in their own countries and earnings received from exports.

The government through the Central Bank needs also to put in place several measures that can efficiently monitor the actual numbers of imports and exports resulting in foreign currency outflow and inflow for much better decision making. The controls put in place by the BRICS though frowned upon by the IMF and most international investors in those countries have actually been one of the greatest factors that have enabled them to become BRICS.

Uganda as such needs to implement some sort of control over this market in order to get back control of the currencies in circulation in the country most especially the foreign currency.  It is my view that it should be made illegal for residents, bodies incorporated in Uganda and individuals, to charge in foreign currency for transactions made with other individuals and corporate bodies resident in Uganda. All transactions should be charged using the national legal tender, Uganda shilling except for transactions of export. It is after all illegal to deny receipt of payment in Uganda shillings if transacting business in the territories of Uganda. It should thus then be the risk of the supplier within the territories of Uganda to bare if at all they would like to maintain foreign currency.

Other control measures that the country needs to put in place include the monitoring of imports which in my view and from extensive audits of some companies has revealed that most of these companies are actually simply repatriating income through making payments for goods that may never actually enter the economy or by paying more for goods to sister related companies abroad.

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