emmanuel tumusiime - mutebile : challenges for sound banking systems in east africa – a central banker ’ s perspective opening remarks by mr emmanuel tumusiime - mutebile, governor of the bank of uganda, at the 16th east african community ( eac ) monetary affairs committee meeting, kampala, 23 may 2013. * * * governors of eac central banks secretary general of the eac senior staff and technical officials ladies and gentlemen good morning it is with great pleasure that i welcome you to kampala for the 16th meeting of the east african community monetary affairs committee ( mac ). it is also an honour for me to host this meeting. the purpose of the meeting is to assess the status of implementation of previous mac decisions, and to consider any salient issues that may have emerged since our last meeting a year ago here in kampala. as is usual at the mac meeting, the format will involve the presentation of a report of the technical officials of our five central banks, followed by a discussion of the issues raised in the report. the technical report will be presented by the current chairman of the technical officials, dr adam mugume, of the bank of uganda. our technical staff has worked extremely hard over the last three days to produce a very comprehensive and analytically rigorous report. i would like to thank them all for the very good job that they have done. fellow governors, you have already received a brief on the issues in the technical report from your own technical officials this morning. without wishing to pre - empt the discussions, i would like to highlight briefly the following issues which i think merit particular attention today. first, financial stability is becoming an increasingly important area of responsibility for central banks in east africa as elsewhere in the world. for the eac, several trends in recent years have the potential to heighten vulnerability to financial instability. these trends include, inter alia, the rapid growth in the volume of short term portfolio capital flows, attracted often by favourable interest rate differentials. these capital flows are intermediated through our banking systems and could potentially expose banks to both liquidity and market risk. the volatility of these capital flows, which is often caused by events in the global financial markets, sometimes leads to highly disruptive movements in nominal exchange rates which policymakers cannot ignore. the importance of regional and international banks in our economies also poses risks unless we can put in place effective systems of consolidated supervision and mechanisms for resolving cross border banks in the event of

if poor urban connectivity is not the binding constraint to private investment and thus higher productivity, then the massive investments needed in the urban areas to improve connectivity will not, by themselves, unleash growth and development. instead they may turn out to be low productivity investments which could cause financial distress among both developers and those that have financed them. investable resources in africa are in scarce. resources which are allocated for investments to improve urban connectivity must unavoidably be at the expense of other types of investment, such as investment in rural development, human capital development or transport links to international markets. therefore, if priority is to be accorded to investment in urban areas to improve urban connectivity, we need to see strong evidence to demonstrate that the social returns to these investments exceed those of other competing demands on scarce resources. paul collier argues that there is under - investment by the private sector in urban structures – housing and commercial buildings – and that this is partly because the financing of structures is more demanding than other forms of investment because the former involves lumpy bis central bankers ’ speeches investments with long payback periods. however, i think that the contention that there is under - investment by the private sector in urban structures is tenuous. uganda does not lack investment in structures. over the last five years, an average of 18 percent of gdp has been invested in structures in uganda, with investment in structures comprising 70 percent of total gross fixed capital formation. in kampala, the bulk of private investment comprises residential and commercial buildings. these investments provide only a very limited number of jobs and yield low real rates of return. in many cases the income earned from property is far lower than the cost of capital. despite this, private investors favour property because of an expectation that its value will appreciate in real terms over time and, in some cases, because of the social prestige which owning property brings to the owner. most of the commercial investment in urban property that characterises kampala and other african cities involves investment in the non traded goods sectors of the economy ; housing, retail trade and business services. i would argue that the real dearth of investment in our economy is not in urban structures but in labour intensive traded goods sectors, such as manufacturing industry and agro - processing, which are the engines for structural change. paul collier argues that the huge public investments in urban infrastructure which he advocates can be entirely self funding with the appropriate taxation. he argues that public investment will generate gains in productivity which will raise the value of land held