remarks by prof. emmanuel tumusiime - mutebile governor, bank of uganda at the high level stakeholders ’ engagement on building a 21st century ugandan economy kampala serena hotel tuesday, september 3, 2019 the bank of uganda ( bou ) has not only successfully achieved its inflation objective of low and stable inflation, but has done so while supporting economic activity. in the last two financial years ( fy ), uganda ’ s economy has grown on average by 6. 1 per cent from a growth of 3. 9 per cent in fy2016 / 17. investor surveys suggest that business conditions and sentiments are strong. credit to the private sector has improved ; helped by accommodative monetary policy stance. the economy is expected to maintain this growth momentum and is projected to grow by between 6. 0 and 6. 3 per cent in fy 2019 / 20, and between 6. 5 and 7. 0 per cent in the medium term. the growth prospects are supported by private sector credit growth ; public investment in infrastructure ; higher agricultural output due to favourable weather and positive government interventions in agriculture ; pick - up in activity in the mineral sector ; improved regional security ( with peace in south sudan and drc ), which are expected to boost uganda ’ s exports. there are downside risks to growth, including : a ) lower external demand due to a depressed global economy. b ) political and policy uncertainty, which are very elevated in several major economies with global growth continuing to be biased downwards. already, the probability for a global recession is very high. page 2 of 5 c ) climate change which will increase uncertainty of weather patterns and constrain the agricultural sector. domestic inflation remains subdued, with the annual headline and core inflation averaging 2. 7 per cent and 3. 7 per cent, respectively, in the quarter to august 2019. the inflation outlook is favourable, with inflation projected to stabilize around the 5. 0 per cent target in the medium term. given the current inflation outlook, bou has kept the policy rate on hold since october 2018. low inflation protects the purchasing power of ugandans, especially for the poor households. bou has successfully ensured financial sector stability, including through resolving commercial banks that posed systemic risks by being very highly interconnected, both by the number and size of transactions with the other commencial banks. currently, commercial banks are wellcapitalized, liquid, and profitable. improvements in asset quality have contributed to an easing of lending standards

requirement which relates a regulatory definition of capital to risk weighted assets. at the global level, concerns have focussed on loopholes in the capital adequacy requirements : banks in western countries were able to “ game the system ” to reduce the amount of capital that they were required to hold, thereby driving up their leverage. we have not faced similar problems in uganda and i don ’ t think that radical changes in capital adequacy requirements are needed yet. we already impose a higher capital adequacy requirement – 12 percent of risk weighted assets – than the minimum of 8 percent stipulated in the basel accord and most banks in uganda currently operate with much more capital than the statutory minimum. we do, however, need to make two revisions to the capital adequacy requirements to cover risks which were not previously considered pertinent but which have become more so. first, we will shortly introduce a capital charge for market risk, which is necessary for full compliance with the basel i accord. secondly, we will eventually introduce a capital charge for operational risk, based on one of the methodologies in the basel ii accord. we require more a radical change to the minimum paid capital requirement for banks. the current statutory minimum of shs 4 billion, which was set six years ago, is far too low. it does not ensure that new entrants to the banking industry have sufficient capital to support their operations before they reach a scale where they can begin to generate profits. it has also fallen way below the minimum statutory levels imposed by our neighbours in east africa and elsewhere in africa. although the banking system as a whole in uganda is currently well capitalised, the evolution of the banking system over the long term is likely to intensify the risks to which banks are exposed. hence i believe that the changes i have just described will help to ensure that banks are better able to withstand shocks to their balance sheets. i think that the higher minimum paid up capital requirement will also stimulate a degree of consolidation in the banking industry in uganda, with fewer but larger commercial banks. i will return to this issue when i discuss the implications of the east african common market. the scope of allowable banking activities the question of whether commercial banks should be allowed to engage in “ non bank ” activities, and if so, what specific activities should be permitted, poses acute dilemmas for regulatory policy. in developing countries, the objective of promoting a diversification of what are often very narrow financial markets with very few non