The cash flow squeeze and BOU’s need to push for liquidity

The economy is moving into an iceberg. If Bank of Uganda, does not step in quickly, we may end up the Titanic way. BOU

The economy is moving into an iceberg. If Bank of Uganda, does not step in quickly, we may end up the Titanic way.

BOU must issue regulations with respect to the following:

  • Issue corporate bonds. Financial institutions should sale bonds to by Bank of Uganda so that banks have liquidity. For example, Australia has reduced interest rates by more than 25 basis points in less than a month.
  • Encourage financial institutions to lend more to individuals to spur spending, consumption and economic activity
  • The government must set prices for basic commodities to avoid exploitation amid the crisis. Prices for basics like hand sanitizers, face masks, essential foods like beans and posho, etc. must be fixed as inflation will distort market fundamentals.

Financial Institutions should issue debt securities like bonds at favourable interest rates to cover their short-term liquidity during this economic shock. During these times, many people are withdrawing money which is likely to lead to liquidity squeezes and the possibility of falling below the minimum cash reserve ratios.

The problem shall be worsened by the increasing defaults on loans since businesses and individuals are not trading and cannot afford to spend all money.

The best way is for Bank of Uganda to boost the liquidity of these institutions by purchasing the corporate bonds and encourage banks to be willing to lend and give current loans with a grace period considering the liquidity of the country is poor.

This liquidity will bail out companies that are experiencing short term shocks that could end up becoming long term issues. Companies need ready cash to function and can only do that if it’s accessible. What happened in the crisis of 2008 when there was inadequate liquidity in both American and European markets, led to a several top organisation’s closing businesses from AIG to Lehman’s Brothers as the US government and other institutions failed to bail many of these out. While others were struggling as a result of strong impairment positions (Over US$90 Billion Impairment of AIG’s assets), most struggled as ready cash was not accessible (Lehman’s Brothers) considering their investment in securitized assets that were mostly long term financed.

Now is the time to act.

People are worried. Prices are rising so fast.

Copyright Mustapha B Mugisa, 2020. All rights reserved.

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