why it was imperative for the bou to tighten monetary policy in 2011, by raising interest rates. interest rates are the main tool of a modern monetary policy in a market economy. the rationale for raising interest rates last year was threefold. first, higher interest rates discourage borrowing by the private sector and, therefore, could be expected to bring about a slowdown in credit growth, which had been growing very rapidly in 2011 as i have already mentioned. secondly, higher interest rates could encourage households to increase their savings and, therefore, reduce consumption. both of these channels work by dampening the growth of private sector expenditures, thereby easing inflationary pressures as demand for goods and services weakens. it is a basic principle of economics that the price of goods and services is positively related to their demand. thirdly, higher interest rates can provide support for the exchange rate, by attracting foreign portfolio investment. a stronger exchange rate takes some of the heat out of the inflation of the prices of imported goods and services. the bou ’ s policy interest rate – the central bank rate ( cbr ) – was raised from 13 percent in july 2011 when it was first introduced as the main policy tool of monetary policy, to 23 percent in november. it has been kept at 23 percent in the subsequent two months. the bou does not fix commercial bank interest rates ; that would be counterproductive in a market economy because it would distort business decisions and lead to borrowers being denied access to credit, because banks could not properly cover their costs of lending. the commercial banks must be free to set interest rates which reflect market forces and the specific characteristics of individual customers ; for example the credit risk of borrowers. the cbr acts as a benchmark to guide commercial bank interest rates upwards or downwards. hence when we raised the cbr we expected that commercial banks would raise their lending rates, as the marginal cost of funds was increased. this has happened. most of the banks have raised their prime lending rates and average bank lending rates have risen since the middle of 2011, as can be seen in figure 5. the interest rates paid on large term deposits have also been raised, reflecting the competition among banks for these deposits, although disappointingly most small depositors have not seen much benefit in terms of higher deposit rates. bis central bankers ’ speeches in the last two to three months we have seen clear signs that our policies to fight inflation are starting to work. bank credit growth has slowed markedly since september

emmanuel tumusiime - mutebile : urban land management as a potential financing mechanism for urban development discussion by mr emmanuel tumusiime - mutebile, governor of the bank of uganda, of prof. paul collier ’ s presentation on urban land management as a potential financing mechanism for urban development, 24 may 2016. * * * the essence of paul collier ’ s argument is that the binding constraint to development in africa is a lack of connectivity in african cities. the lack of connectivity arises from a combination of the low population to land densities and poor transport services which characterise african cities, including kampala. it impedes the functioning of labour and product markets and thereby prevents firms from achieving optimal economies of scale and formal sector status, which in turn depresses labour productivity. consequently the key to development in africa is massive investment in african cities, by three sets of actors ; households investing in residential property, private sector businesses investing in commercial property, including multi - story residential buildings, and the public sector investing in urban infrastructure. most of this investment will entail structures of various types. to mobilise this investment major reforms are needed to create well functioning land markets, long term urban planning and mechanisms to raise finance for the huge volumes of investment that would be needed. paul collier estimates that the average african city will need approximately $ 50 billion of investment in structures – buildings and infrastructure – if its population is to enjoy middle income country standards of living. although there are many useful insights in paul collier ’ s thesis, there are also a number of important aspects which can be questioned. let me elucidate these. african development and structural transformation has undoubtedly been held back by the paucity of private investment in labour intensive industries, such as manufacturing, as a result of which the vast majority of the labour force in the urban areas, including kampala, has to earn its living in very low productivity informal household enterprises. only about 3 percent of the labour force in uganda is employed by a formal sector business. but it is debatable whether the binding constraint to private investment is really the poor connectivity of african cities, rather than other potential constraints such as the poor institutional environment for business, low quality of the workforce or a lack of competitiveness unrelated to urban connectivity, for example because of overvalued real exchange rates. i would like to see empirical evidence to support the contention that the poor urban connectivity, rather than other factors, is the binding constraint to private investment.