Emmanuel Tumusiime-Mutebile: Foreign reserve management
Welcome remarks by Mr Emmanuel Tumusiime-Mutebile, Governor of the Bank of Uganda,
at the third BIS Meeting on Reserve Management in Africa co-hosted by the Bank of
Uganda, Kampala, 18 March 2010.
* * *
The BIS Meeting Chairman - Mr Louis de Montpellier (Deputy Head of Banking
Department, BIS)
Distinguished Resource Persons and Participants from Central Banks in Africa
Ladies and Gentlemen
I would like to begin by extending to you all a very warm welcome to this meeting: the third
BIS Meeting on Reserve Management in Africa. I would also like to welcome our foreign
guests to Uganda, especially those who are visiting this country for the first time. I hope that
this meeting will prove very productive and that your visit to Uganda will be a memorable
one. I would also like to thank the Bank for International Settlements for granting Uganda the
honour of hosting this meeting.
The Bank of Uganda is very pleased to co-host this meeting with the BIS because it comes
at a critical time for central banks in Africa, which are still grappling with the myriad
consequences of the global economic crisis.
Foreign reserves management is a core function of central banks all over the world. It is
particularly important for developing countries. Many developing countries have suffered
balance of payments crises, often as a result of large terms of trade shocks or "sudden
stops" in the capital account. Many African countries suffered BOP crises in the 1980s while
the 1990s saw BOP crises in emerging market economies; in Latin America, East Asia and
the former Soviet Union.
The costs of BOP crises, in terms of lost output, bankrupt firms and foregone budget
revenue, are usually very high. The lesson we have learned from past episodes of external
shocks is that it makes sense to put in place a strategy to protect our economies from the
risk of a BOP crisis. One arm of such a strategy comprises sound macroeconomic policies;
including sustainable fiscal, monetary and exchange rate policies.
The other arm is to maintain a substantial buffer of international reserves, which can be used
to support the BOP in the event of an adverse external shock. This motivated many
developing and emerging market economies to build up their international reserves to record
levels in the 2000s. Uganda was part of this trend. Our gross international reserves have
increased almost fourfold in the last 10 years: from $760 million at the end of 1999 to nearly
$2.8 billion today. The countries of Sub-Saharan Africa increased their reserves on average
from 3.8 months of imports of goods and services at the start of the 2000s to 5.5 months in
2009.
The decision by central banks to accumulate reserves has proved farsighted. Many African
economies, including Uganda, are weathering the current global crisis with much less
damage to their economies than was the case with previous major external shocks, such as
the oil crises of the 1970s. One of the reasons for the greater resilience of African economies
to external shocks is that they now have much larger buffers of international reserves to
support their balance of payments, although the improvement in their macroeconomic
management undoubtedly made a more important contribution.
With countries across the continent holding higher levels of international reserves, the
management of these reserves to maximize the benefits which can be derived from them
becomes ever more important. Traditionally, central bank reserve management has focused
on three objectives, commonly referred to as the "classic trilogy of objectives".
In order of importance, this trilogy of objectives is:

Safety of capital - through the prudent management of risks;

Liquidity - the availability of reserves at short notice and at minimal cost to meet
unforeseen requirements and;

Reasonable consistent rates of financial return - this objective is normally
subordinated to the safety and liquidity objectives.
In pursuit of this trilogy of objectives, most central banks adopt a conservative approach to
the management of their foreign reserves. Like Silas Marner, central banks hoard their gold
zealously. I think it is fair to say that this approach, with the attendant governance and risk
management frameworks that guide its implementation, has also been vindicated by events
arising from the global financial crisis in that central banks have not suffered significant
losses of capital despite the dramatic falls in value of many different classes of financial
assets on world markets. Nor was the liquidity of central bank reserves impaired even though
liquidity dried up in many sections of the financial markets around the world.
The global financial crisis has, however, created new challenges for the management of
reserves by central banks, in several important respects. First, interest rates on fixed income
securities and in money markets in the industrialised economies have fallen to near record
low levels as a result of the extraordinary measures taken by central banks in these countries
to inject liquidity in order to bolster financial markets and aggregate demand. A three month
United States Treasury Bill currently yields only 0.13 percent and a three year US Treasury
bond yields only 1.5 percent.
How long interest rates will remain this low is very difficult to forecast, but I'm sure that you
will have noted the statement by the United States Federal Reserve on Tuesday of this week
that economic conditions "are likely to warrant exceptionally low levels of the federal funds
rate for an extended period."
Because of the prevailing low interest rates on the traditional safe assets which dominate the
portfolios of central banks, their reserve managers are facing increasing pressure to find
ways of enhancing income, not least because the income generated by reserves is the main
source of operating revenue for many central banks. As such central banks are starting to
examine whether they need to diversify their reserve asset portfolios to embrace types of
financial assets which can offer higher yields without impairing the liquidity and safety of their
portfolios.
A second consequence of the global financial crisis for reserve management is that it has
radically changed our view of risks in financial markets. We now know that transactions with
financial institutions and markets which, prior to the crisis, were perceived as being virtually
risk free can actually carry very significant counterparty and credit risk, as well as liquidity
risk.
One other development which has implications for reserve management bears noting. The
long term dominance of the US dollar in global financial markets may wane, raising the issue
of whether reserve managers should seek to establish a more balanced currency
composition of their asset portfolios, and if so, what criteria should guide this.
To meet the challenges posed by low interest rates and the changing nature of risk, central
banks must strengthen the technical capacities of their staff for reserve management. In
particular they need to deepen their understanding of the risk/return tradeoff in their asset
portfolios and they must develop more sophisticated risk management tools.
This third BIS Meeting on Reserve Management is very timely. It presents a unique
opportunity for reserve managers to examine the challenges they face and identify solutions.
The agenda for the meeting will cover the issues I have highlighted in my remarks as well as
other important issues for reserve management, such as cooperation among central banks in
reserve management. I am confident that you will be able to take back to your respective
central banks a wealth of new ideas to strengthen your reserve management.
Finally, let me implore you to spare a small part of your precious time to enjoy the beauty of
this country, the delicious food and the warmth and hospitability of its people. I have heard
that some of you took a trip to the source of the River Nile in Jinja yesterday and others are
set to visit Murchison Falls National Park on Saturday. I will be happy to join you later this
evening at the dinner which the Bank of Uganda will host.
Ladies and Gentlemen, I wish you a very successful meeting. Thank you for your kind
attention.