##flows and even some outflows by portfolio investors. ( it is estimated that foreign portfolio investors held around us $ 400 million in gou treasury bills and bonds as of september 2008 and about us $ 193mn as at end december 2008. ) o interest rates on government treasury bills and bonds have consequently also increased, with some knock - on effects on bank lending rates. • stock market. the uganda securities exchange ( use ) all share index in the period july - october 2008 lost 39 percent. the month of october 2008 alone recorded the biggest loss of 28 percent. the fall in the share prices on the cross - listed stocks, which account for 61 percent of total shares explains the fall in the use all share index. the high percentage of foreign investors exiting, accounted for most of the decline in the use index as investors exited to the so - called safe heaven. the dip in the index, however, appears to have been primarily driven by panic and uncertainty among foreign investors rather than the change in macroeconomic fundamentals of the listed companies. indeed the fall was temporary and the index recovered mainly because the institutions listed on the use remain fundamentally strong. • donor flows. aid from donors has remained fairly stable though in december 2008, it fell short of amounts observed for the same month in 2006 and 2007. however, we are yet to establish whether this is due to delayed disbursements and not a cut in donor flows. • taxes. while the tax collections appear to perform well in nominal terms, adjusting for the impact of inflation shows that revenue appears to have declined somewhat starting from july 2008 to january 2009. the preliminary indications of a decline in real tax revenues, if sustained, could have implications for uganda's fiscal consolidation strategy. • inflation, which has for a long time been stabilized at low single digit rates, has since mid 2008 crept to double - digit levels. this has been due to exogenous factors associated with high imported inflation from uganda's major trade partners ( e. g. kenya, south africa, india and china ), high demand for ugandan goods from neighboring countries, as well as low supply response in the domestic economy. in addition, the high costs of fuel and food on the world market exerted upward pressures on uganda's inflation. the recently observed slow - down in prices of these items on account of slowing global economy, however, could if sustained contribute to reducing the inflation and the cost of doing business in uganda. the challenge however lies in

represents an economic strength in the face of external shocks, but not because it could potentially shield the country against external financial volatility. in fact, asset price fluctuations, independently of their origin and extent, convey useful information to investors and market participants. for the exchange rate, flexibility helps prevent the build - up of unsustainable balance - of - payments disequilibria which in the past were common causes of currency and banking crises. in any case, hedge products are available for those who are less willing to bear risk. the fundamental contribution of a sound banking system, especially in times of crisis, is that it does not magnify financial instability. also, rather than acting as a drag on the economy, through continued intermediation and within limits, it can buttress the pace of economic expansion. in the case of mexico, this support has been further reinforced by the continued health of public finances and low inflation. the negative effects of weak financial systems interacting with unsustainable public debt and escalating inflation can hardly be exaggerated. 2 these three elements were behind the mexican crisis of 1995. also, the negative feedback loop between the fiscal problems of some emu member countries and the risk exposures of significant financial institutions are prominent causes of the current maladies in that region, which are threatening to further affect the rest of the world. for total commercial bank lending to the private non - financial sector, the past - due loan ratio fell from 4. 4 percent at the peak of the crisis to 3. 2 percent in september 2011. the capitalization ratio was 16. 2 percent of which 87 percent was tier - 1 capital in august 2011, the average coefficient of liquidity coverage has been above 100 percent in the course of 2011, and the reserve coverage ratio of non - performing loans was 181. 2 percent in august 2011. this point has been extensively documented by reinhart, c. m. and k. s. rogoff ( 2009 ), this time is different : eight centuries of financial folly, princeton university press. bis central bankers ’ speeches challenges for the financial system beyond its key role of contributing to economic stability, mexico ’ s banking system faces challenges in order to more deeply contribute to long - term economic growth. perhaps the most crucial task for the system is to increase its scale and scope, as standard indicators of penetration, such as bank loans to gdp, are low compared to those of other economies. it is well documented that financing and economic