mining industry. what policies are essential to bring about the economic transitions? macroeconomic policy the foundation of uganda ’ s economic growth over the past two decades has been the priority accorded to macroeconomic stability, and in particular the control of inflation. this will be equally important in the future, to support the transitions which i have discussed above, not least because the transition to an efficiency driven economy depends on attracting higher rates of private investment in modern industries. a stable macroeconomy is a prerequisite for private investment on a large scale. the two key components of sound macroeconomic management are a monetary policy which has as its primary policy objective the maintenance of low inflation, implemented by a central bank which has the operational independence to set interest rates to achieve this objective. the bou has modernised its monetary policy, introducing an inflation targeting lite monetary policy framework, which employs a policy interest rate – the central bank rate ( cbr ) – to influence demand in the economy. the new framework has already proved to be effective in bringing inflation down. inflation was driven up sharply last year by supply price shocks, but the bou ’ s strategy of raising the cbr has brought about rapid disinflation. the latest inflation data, released last week, show that core inflation has fallen to 4. 8 percent. the bou intends to hold core inflation as close as possible to its policy target of 5 percent over the medium term, using the policy interest rate to counter any shocks which threaten to drive inflation above the target in a persistent manner. fiscal policy will become even more important as a tool for maintaining macroeconomic stability once production of oil and minerals begins on a commercial scale. a large part of the rents accruing from natural resources take the form of government budget revenues and hence flow into the domestic economy through the government budget. how the government spends these revenues will have a crucial impact on macroeconomic stability and on the extent to which dutch disease affects the economy. a sound fiscal policy must be formulated in a forward looking medium to long term framework. it must ensure that revenues derived from natural resources are not spent in an unsustainable manner, leading to a short lived consumption and construction boom, followed by a bust once the resources run out. it must ensure that any expansion of domestic demand arising from the use of natural resource revenues is carefully matched to the available supply capacities, for example in the construction industry, to avoid driving up prices. fiscal policy must also ensure that public spending

emmanuel tumusiime - mutebile : the international financial crisis and its impact on uganda speech by mr emmanuel tumusiime - mutebile, governor of the bank of uganda, at the bank of uganda, kampala, 24 september 2008. * i. * * introduction the current global financial turmoil is rooted to the sub prime mortgage crisis. it is a recent economic problem that is characterized by contraction in liquidity in the global credit markets and banking system. an undervaluation of the real risk in the subprime market is cascading, rippling and ultimately severely affecting the world economy. the crisis began with the bursting of the united states ’ housing bubble and high default rates on " subprime " and adjustable rate mortgages ( arm ). loan incentives, such as easy initial terms, in conjunction with an acceleration in rising housing prices encouraged borrowers to assume difficult mortgages on the belief that these would be easy to refinance at more favorable terms. however, once housing prices started to drop moderately in 2006 – 2007 in many parts of the u. s., refinancing became more difficult. defaults and foreclosure activity increased dramatically, as easy initial terms expired. home prices failed to go up as originally anticipated, and arm interest rates reset higher. foreclosures accelerated in the united states in late 2006 and triggered a global financial crisis through 2007 and 2008. ii. effects of the crisis on uganda uganda ’ s macroeconomic conditions and the entire financial system are generally robust, healthy, and better able to weather the ongoing financial storm in the global economy. first, uganda ’ s financial institutions had not invested in derivatives that had exposure to these investment bankers. better supervisory oversight and risk management practices have strengthened bank balance sheets while bank asset quality, profitability, and capital adequacy have also improved remarkably over recent years. second, our real estate sector is also unlikely to be negatively affected since our relatively young real estate companies are not linked to the international organizations that have failed. our company valuations are therefore unlikely to be adversely affected. uganda ’ s economy resilience also stems from improved economic policies and institutional frameworks built over the last two decades. the banking and the entire financial system are stronger after years of restructuring. these have not only favored price stability and a firm base for sustained economic growth, but have also increased the country ’ s resilience to shocks generated by adjustments in international financial markets. for