##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

which amounts to less than 1 percentage point of gdp. but the only way that uganda's economy can benefit from the planned increase in investment is if spending agencies efficiently absorb the allocated funds and use them effectively. the key sectors of agriculture, transport and energy are now being urged to step up their absorption capacity if fiscal policy is to have the intended effect of cushioning the expected decline in domestic demand on account of lower private capital inflows. with respect to monetary policy, the bank of uganda will continue to pursue the objective of preserving foreign reserves and maintaining macroeconomic stability. this is important because the outlook for capital inflows of all forms ( fdi, portfolio, remittances ) is declining. specifically, the balance of payments ( bop ) shocks are partly being allowed to be absorbed via exchange rate adjustments, strengthening and broadening financial stability including cross border cooperation to ensure sound international financial rules and systems to minimize financial contagion. other issues lastly, there is need to take a step back and discuss how policies in uganda may differ from the approach adopted in some of the advanced economies. why can't uganda rely on borrowing much as the u. s. is currently doing? we should note that by maintaining the current spending profile in the face of a decline in revenues, the government of uganda is going to end - up with a higher fiscal deficit path over the medium - term. so uganda, too, will be relying on borrowing, albeit at a much smaller degree than the united states of america. second, unlike the u. s. a, uganda is financially constrained. to wit, the global financial crisis has led to lower borrowing rates for the u. s. government, notwithstanding the mounting fiscal imbalances. in contrast, interest rates on government securities in uganda have drifted upwards. this is partly because some investors sold local ugandan government securities to instead hold u. s. treasuries. why shouldn't the bank of uganda flood the ugandan financial market with liquidity much as the federal reserve has done? first and foremost, the inflation rate which remains in the double digits in uganda is a major concern, while in the u. s. the risk is of deflation. second, supplying more shillings will likely entail increases in inflation rate and reserve losses ( unless the exchange rate is of no concern ). and as discussed above, preserving foreign reserves to the extent possible should be one of the anchors of monetary policy in this highly uncertain environment.