closing remarks by prof. emmanuel tumusiime - mutebile, governor, bank of uganda launch of the eighth edition of the world bank ’ s uganda economic update : “ step by step – let ’ s solve the finance puzzle to accelerate growth and shared prosperity ” kampala, serena hotel february 7, 2017 ms. christina malmberg calvo, world bank country manager for uganda, members of the diplomatic corps, distinguished panelists, staff of the world bank in uganda, distinguished guests, ladies and gentlemen. i would like to begin by commending the world bank for publishing the eighth edition in the series of uganda economic updates, which over the last few years, have provided a valuable source of economic analysis for everyone with an interest in the ugandan economy. i would also like to thank the presenters, discussants and other contributors for all of the important insights they have given us this morning. given the main theme of this latest economic update, i would like to take this opportunity to offer my own perspective on the development of the financial sector in uganda, its role in the economy, and the challenges which it faces. page 2 of 8 to begin, i think that it is important to recognise the progress which the financial sector, and especially the banking sector, has made over the last decade. between the 2005 / 06 and 2015 / 16 fiscal years, commercial bank credit to the private sector expanded by more than threefold in real terms, at an average real rate of 12 percent per annum. although bank deposits also grew strongly over this period, by two and a half times in real terms, there was a marked rise in bank intermediation, with the ratio of bank loans to bank deposits rising from 53 percent to 70 percent. secondly, there has been a notable strengthening of competition in banking markets. the herfindahl hirschman index of market concentration in the banking market fell from 1, 508 in june 2006 to 909 in june 2016, denoting a substantial reduction in market concentration and an implicit rise in competition. the fact that competitive pressures have intensified in the banking market over the last 10 years is also reflected in a secular fall in the industry ’ s after tax returns on equity, from 32 percent in 2005 / 06 to 14 percent in 2015 / 16. page 3 of 8 it is no longer tenable to argue that banks in uganda make excessive profits. thirdly, although there have been occasional incidents of bank distress and failure over the last 10 years, prompt regulatory

to finance purchases of household durables and other consumer goods and services probably will become more expensive and less available as well. banks are likely to be especially cautious about making new loans and financing commitments while substantial uncertainty about the quality of loans and the extent of demands from previous commitments persists. so it would not be surprising to see lessgenerous credit for a wide variety of loans to business and households. and, the rates for some loans are tied directly to elevated libor or other rates in term funding markets. more generally, credit will probably not be as easily available and as inexpensive for many borrowers as it was a few months ago, even after market functioning improves. in several segments of the financial markets, compensation for taking on risk had for some time seemed too low to be sustainable. in addition, more credit is likely to flow through banks, and leverage in the nonbank sectors of the financial markets will be lower. the higher levels of capital relative to assets should form the basis for a more stable system, but the spread of lending rates over the cost of funds will need to rise so that capital can earn a competitive rate of return. the deterioration in actual and expected financial market conditions between the august and september fomc meetings changed our view of appropriate monetary policy. whatever policy path previously seemed appropriate to support sustainable growth and price stability looked too high once credit conditions tightened substantially. our policy easing was aimed at helping to offset the effects of those tighter credit conditions and thereby to encourage moderate economic growth over time. it was not intended to, nor should it, short circuit a more realistic pricing of risk and the gains and losses that the repricing will entail for market participants. many people had expected the federal reserve to follow a gradual path of rate reductions in response to financial market developments – say, 25 basis points in september and another 25 basis points in october. such a path would be in keeping with how we have often approached our policy choices, as it has the advantage of allowing us to calibrate our policy as we see how the economic situation is evolving and responding to earlier policy moves. however, given the circumstances at the time of the september fomc meeting, there were strong arguments in favor of the larger action of a 50 basis point decrease in the federal funds rate. for one thing, it seemed that a decrease of that size could well be necessary to promote moderate growth. we had been holding the federal funds rate at 5 - 1 / 4 percent, well above