##opardising fiscal sustainability, the control of inflation or external stability. thirdly, part of the adjustment to the much less favourable international economic environment will be facilitated by exchange rate depreciation. the exchange rate of the uganda shilling against the dollar has depreciated in nominal terms by almost 35 percent since september 2008. although this makes imports more expensive, it will help our economy by improving the competitiveness of our exports and inducing consumers to switch demand from imports to non tradeable domestically produced goods. it thereby enables the economy to adjust to maintain external balance without having to undergo a painful recession to reduce import demand. in some countries, where the private sector has borrowed heavily in foreign currency denominated loans, exchange rate depreciation has been damaging because of its negative impact on private sector balance sheets, but this is not a major cause for concern in uganda. exchange rate flexibility is an important tool to help the economy adjust to an external shock. however, the bank of uganda will ensure that exchange rate adjustment is smooth and avoids disruptive volatility which would be harmful to users of foreign exchange in our economy. fourthly, the ugandan banking sector has proved to be resilient in spite of the global financial crises. it is well capitalized with no indication of direct exposure to distressed financial institutions or toxic financial assets in other parts of the world. the banking sector has grown and diversified, with 21 commercial banks now offering a wide - range of financial products. the non - bank financial institutions and microfinance companies have also continued to expand their products and operations to the countryside. conclusions the current global financial crisis is largely attributable to the mismanagement of financial institutions in developed economies, weak financial regulation, and to macroeconomic policies in the industrialised economies which contributed to large global macroeconomic imbalances. the direct contagion affects of the global financial crisis on the ugandan financial sector are not significant, because of the limited exposure of banks in our economy to problem assets and distressed financial institutions in the developed world. nevertheless, the secondary effects, of the global economic recession pose a threat to uganda ’ s economy through reduced demand for export products, lower remittances and tourism earnings and a reduction of foreign capital inflows. as a result, real economic growth will slow to some extent but will remain strong. uganda will continue to maintain prudent and flexible macroeconomic policies management in order to adjust to the global crisis. finally, both

be generated while the risks were often regarded, wrongly, as negligible. this transformation of the financial sector was facilitated by the “ light touch ” regulation practiced especially in the usa and uk. light touch regulation was partly motivated by a belief in the efficiency of financial markets that now looks naive, partly by the desire of governments to attract globally mobile financial services to their own territories and partly by regulatory capture. however, rapid expansion of balance sheets and the assumption of risks that were not properly understood created financial fragility in many financial institutions, including those which had been bastions of the financial establishment. furthermore, the complexity of the modern financial system and opacity of many new financial instruments created enormous uncertainty among investors as to where risks were actually held. allied to the increasing importance of transactions in securities markets, for example to source funds for bank lending and the growth of a shadow banking sector, this served to increase the vulnerability of the financial system to systemic risk. it was the systemic risk to the financial system that forced governments in several countries to risk huge sums of public money to bail out distressed financial institutions, even though the problems faced by these institutions were largely of their own making. impact of the global crisis on africa in contrast to some of parts of the world, most countries in africa, including uganda, have not suffered direct contagion from the financial crisis in the developed economies. although there are substantial capital flows between africa and the rest of the world, banks in africa have virtually no exposure to the developed worlds ’ toxic assets. nor do african banks depend on wholesale securities markets for funding, unlike many banks in the developed world. as a consequence, neither the asset quality nor the liquidity of most african banks has been directly impaired by contagion from the financial crisis in the developed economies. furthermore, most african economies have not funded large current account deficits with short term external private borrowing. hence they are not at risk of a capital account crisis, in contrast to some of the transition economies in eastern europe. for these reasons most african economies have not suffered systemic failures in their financial systems as a result of contagion from the global crisis not have they been forced to adjust to sudden stops in their capital accounts through draconian expenditure reduction. nevertheless, the impact of the global crisis is being felt in africa, although it is somewhat more muted than in some other parts of the world. the sharp slowdown in global growth affects africa, including uganda, through its impact on demand for