will the Market ever trust Mutebile Again?

Will the market ever trust Mutebile again?

In any case he seems to have run out of ideas that can manage an economy that is out of the reform phase

Conventional monetary economics teaches us that financial markets are by configuration very volatile. Empirical evidence shows that exchange rates are more volatile than the underlying economic variables. Yet exchange rate volatility is dangerous because it makes it difficult to plan economic activities, and also destroys confidence in the currency of a country.

Although market fundamentals can explain changes in long run exchange rates, it is the market expectations that explain changes in short run exchange rates. It is factors such as speculative opinion about future exchange rates, rumours of political instability or uncertainty, loss of confidence in profitability of economic enterprises, real interest rate differentials, and market psychology that dictate currency movements in the short run.  

Over the past twelve months, our shilling has undergone a speculative attack because of the sudden change in exchange rate expectations. Since the February general elections last year, market expectations, fed by political and economic unrest and uncertainty, have worsened speculation leading to more volatility in our financial markets.

This forced Bank of Uganda (BOU) to deplete reserves making the country more vulnerable to speculation and exchange rate overshooting. The market expectations were further worsened by Governor, Emmanuel Tumusiime-Mutebile's media utterances when he told the Financial Times of the UK that government had raided the Treasury, took off with about two months of the country's reserves to purchase fighter jets. Although Mutebile later denied having let out government secrets to the media, only novices could accept his denials.

The shilling is sinking
In his characteristic style, Mutebile told the Financial Times whatever he told them as a way of letting the blame for the deteriorating economy off his sleeves, to the attention of his "friends" at the IMF and the World Bank. Little did he know that speculators were out to take advantage of such reckless utterances and drive our shilling to a record low!

The shilling sank so low, to the gladness of the political animals that this country has bred in crowds and soon the rumour mill was running in gear number five thus, "Mutebile has resigned as BOU Governor." The social network prophets of doom took the opportunity of the resignation of the Afghanistan's Central Bank Governor at the time to get their message home. The pit in which the shilling was falling could only become deeper.

In these very pages, I wrote asking, "Who of the two -- Government and Bank of Uganda -- should we blame for our worsening economic situation?" The BOU's continued claim that it had done enough to keep inflation under check, implied that it was government's fiscal policy that was letting the economy down.

Nevertheless inflation and exchange rate depreciation recently peaked and started to lessen. Then the Basajjabalaba saga came up and once again, our central bank Governor was in the press for the wrong reasons. 

No longer the super Governor
Parliament has been consistent in demanding for his resignation for his role in the Basajjabalaba saga. Mutebile, typical of him, faced the cameras and roared, "Only God can take me out of this chair." He went ahead to asked the market players to ignore "the ramblings in Parliament" because "I am here to stay." Indeed after a heated debate in Parliament, the votes were cast and Mutebile was saved by a visibly divided legislature.

Well, cabinet may have succeeded in defending the Governor but will the market ever trust him again? We all know that the position of Governor is critical as far as the health of the macroeconomy of any country is concerned.

Mutebile has been a very successful Governor in the last decade mainly because everyone, literary everyone - from the executive to parliament to the general public and the development partners - had confidence in him. He has been a super Governor. Can he still enjoy this confidence? 

The other night when I was watching news on a local television I heard a number of our Members of Parliament, the few patriots championing the battle against corruption, asking "When Mutebile says he is going nowhere because if he goes the economy would be affected; was this economy invented by Mutebile?"

Mutebile's sleek record
My answer to them is a big YES. It is Mutebile who in 1987, together with a few of his colleagues at the then Ministry of Planning and some expatriates, authored the famous Economic Recovery Programme (ERP) that marked the beginning of the emergence of the Ugandan Economy we are witnessing today. At the time the Mutebiles authored this program, inflation had reached 358.4%, poverty was at 56.7% and the GDP growth of 1.1% was largely driven by the subsistence sector.

Mr. President, I trust you remember how in 1986 your Marxist economic policies had worsened the already bad economic spell Uganda had faced at the hands of Amin and Obote II.  It is Mutebile who restored both fiscal and monetary discipline; agitated for liberalisation of consumer and producer prices to eliminate distortions such as price controls, black markets, high tariffs, smuggling, excessive printing of money to finance fiscal deficits and fixed exchange rate regime.

It is Mutebile who in 1990 wrote the "Way Forward 1", a macroeconomic strategy he authored while working as Permanent Secretary of the then Ministry for Planning and Economic Development.

This policy paper forever changed the face of the economy of Uganda. In his typical arrogant tone, Mutebile asked you Mr. President and your cabinet to choose between failing the economy under the weight of fiscal indiscipline or work for full and sustainable recovery by stopping NRM's thriftlessness.

It is Mutebile who proposed five key reforms that provided a pebble upon which this economy has been built in the last two or so decades. These are:     

(1)    Merger of Ministry of Finance (MoF) with Ministry of Planning and Economic Development (MoPED) in 1992 to ensure fiscal discipline,

(2)    Granting of independence to the Bank of Uganda through three legislations -- the 1993 BoU Statute, the 1993 Financial Institutions Statute, and the 1995 Constitution,

(3)    Setting up of Uganda Revenue Authority (URA) in 1991 to improve revenue administration,

(4)    Setting up of Uganda Investment Authority (UIA) to administer the Investment Code, and

(5)    Abolition of taxes on export goods

Mr President, without question you agreed to implement these reforms and appointed Mutebile the PS of the newly created Ministry of Finance, Planning and Economic Development to execute the task, until he became the Governor. We all know what these reforms have done for this country. That is how critical Mutebile's contribution to the resurgence of our economy has been.

His economics inapt in post-reform
However, as I wrote in these pages back in 2010 when you, Mr President, renewed Mutebile's contract to give him a third term, the embattled Governor has outlived his usefulness.
He seems to have lost ground to the changing times. Certainly he was at his prime in the 1990s and early 2000s. He seems to have run out of ideas to manage an economy that is out of the reform phase.

We need new blood at BOU and Finance. Luckily, in Louis Kasekende, Mutebile's deputy, we seem to possess a guy better suited to guide the post-reform economy into take-off. He was a star performer at the World Bank where between 2002 and 2004 served as Executive Director before having a three-year distinguished service at African Development Bank as Chief Economist.

I am told that actually there is an ideological cold war at BOU between Mutebile and his deputy. The latter, with support from a good number of other top brains at the Bank, believe that the former is still frozen in the past; agitating for policies and economic ideologies which are not in agreement with today's economic realities.

So could this be the time we prepare for his exit? But as we do so we need to be careful on the timing, tactics, and methodology we employ to uproot this monetary fundamentalist out of this critical seat. That is why I supported government when you protected him against the reckless method of operation by Parliament. That is not how they sack a central bank Governor. You may sack a Syda Bumba or a Kabakumba Matsiko using the method parliament used but not the chief guardian of the economy.

Nevertheless, the bottom line remains that we must prepare the post-Mutebile Uganda because sooner or later he has to leave that position. He has lost the confidence he exuded in the last couple of decades. Our financial markets are now vulnerable to speculative volatility owing to the likely continued onslaught on the man with divine right to print and keep our money!