The objectives of financial sector reform in Uganda were interest liberalisation, reducing directed credit, improving prudential regulation, privatisating financial intermediaries, reducing reserve requirements, liberalisation of securities markets and pro-competition measures. Interest rate liberalisation focused on positive interest rates, with rates linked to the weighted average of an auction-based treasury bill, followed by full liberalisation in 1994. To increase competition, entry barriers were lowered in 1991 but this was followed by a moratorium on new banks that was lifted only in 2005. Reserve requirements for commercial banks were raised in 2000 following collapses in the 1990s and in 2004. Directed credit and credit ceilings were gradually removed but re-introduced using European Union funding in the late 1990s to support selected sectors, emphasising export production. Other reforms included privatisation with government divesting its stake in commercial banks in the 1990s and early 2000s. In 1991, penalties were introduced for non-compliant banks and supervision was aligned with Basel 1. Legal and regulatory reforms to enhance the Bank of Uganda's authority started in 1993. Legislation governing microfinance institutions was introduced in 2003 followed by the Financial Institutions Act in 2004 with new regulations. In 1996 the Capital Markets Authority was established followed by the licensing of the Uganda Securities Exchange. Treasury bonds were introduced in 2004. Liberalising the exchange rate began in 1986 with a dual rate replacing the fixed rate, followed by a parallel foreign exchange market in 1992 marking the transition to a market-based system. This was followed by an inter-bank foreign exchange market, liberalisation of the current account and then capital account in 1997. Financial development can be assessed using the ratios of M2 money supply to Gross Domestic Product (GDP), M3 to GDP and domestic credit to GDP. From 1983 - 2008, M2 and M3 to GDP showed an initial sharp upwards trend followed by a decline and then a steady increase. Domestic credit to the private sector has not matched growth in the M2 and M3 shares of GDP. For instance from 1983-2008 M2 and M3 grew by 13% and 15% respectively while private sector credit grew by 11%. Deposit and lending rates rose from 9% and 15% in 1983 to 32% and 40% in 1989, with the spread widening to 15% in 1987. They then dipped, rose again and fell to about 8% and 20% in 1995, remaining at about those levels until the present. The inflation rate reflected these movements rising from about 25% in 1984 to a peak of 190% in 1998, driven by excess money supply, and then declining to single digit levels from 1994.

  • Project SADRN
  • Year 2011
Published in Policy Briefs

Closing Plenary 

  • Year 2010
  • Organisation World Bank
  • Publication Author(s) Sergio Schmukler
  • Countries and Regions South Africa

Closing Plenary Session

  • Year 2010
  • Organisation Tandem Global Partners
  • Publication Author(s) Paulo Viera da Cunha
  • Countries and Regions South Africa

Session 8B the Global Financial Crisis - Micro Impacts

  • Year 2010
  • Organisation International Labour Office
  • Publication Author(s) Sher Verick
  • Countries and Regions South Africa

Session 8b: The Global Financial Crisis - Micro Impacts

  • Year 2010
  • Organisation University of Pretoria
  • Publication Author(s) Margaret Chitiga et al
  • Countries and Regions South Africa

Session 7B: Regional Issues

  • Year 2010
  • Organisation Rhodes University
  • Publication Author(s) Abel E Ezeoha
  • Countries and Regions Southern African Development Community (SADC)

Session 6B: Taxation and Trade Quotas

  • Year 2010
  • Organisation University of KwaZulu-Natal
  • Publication Author(s) Imraan Valodia
  • Countries and Regions South Africa

Session 2B: Inflation Dynamics

  • Year 2010
  • Organisation University of Copenhagen; Human Sciences Research Council; Human Sciences Research Council
  • Publication Author(s) Seedwell Hove; Albert Tounamama; Fulbert Tchanatchana
  • Countries and Regions South Africa

Session 1B: The Financial Crisis: Global and Regional Impacts

  • Year 2010
  • Organisation KwaZulu-Natal Provincial Treasury
  • Publication Author(s) Clive Coetzee
  • Countries and Regions South Africa

Session 1A: Financial Development and Economic Growth

  • Year 2010
  • Organisation Member of Parliament
  • Publication Author(s) Ben Turok
  • Countries and Regions South Africa

Session 1A: Financial Development and Economic Growth

  • Year 2010
  • Organisation University of Pretoria
  • Publication Author(s) Manoel Bittencourt
  • Countries and Regions Mercosur (Common Market of the South), South Africa

Session 1A: Financial Development and Economic Growth

  • Year 2010
  • Organisation University of the Witswatersrand; University of London; University of the Witwatersrand
  • Publication Author(s) Samantha Ashman; Ben Fine; Susan Newman
  • Countries and Regions South Africa

Session 1A: Financial Development and Economic Growth

  • Year 2010
  • Organisation Vaal University of Technology; Purdue University Calumet
  • Publication Author(s) Job Dubihlela; Pat Obi
  • Countries and Regions South Africa

This paper employs the Bernanke-Gertler-Gilchrist "financial accelerator" model to study current economic conditions in South Africa. Given the turbulent financial market conditions we investigate the optimal monetary policy response as well as the potential role fiscal policy might play.

As typical in the literature, we find that monetary policy should not deviate from a standard Taylor policy rule that principally targets inflation. The optimality of the Taylor, however, depends on the hypothesized degree of integration between the financial sector and the real economy. Finally, we find that fiscal policy plays a significant role in stabilizing the economy.

About the authors:

Nicola Viegi is associate professor in Economics at the University of Cape Town. A graduate from the Scottish Doctoral Programme in Economics, he has held positions at the University of Strathclyde in Glasgow, at the University of KwaZulu-Natal and he is currently Visiting Scholar at De Nederlashe Bank. His main areas of research are economic policy theory, macroeconomic modeling and regional macroeconomic integration. Current research includes inflation targeting under uncertainty, monetary policy and assets prices, macroeconomic integration in Southern Africa.

Michael Parusel is an Economics Master student at the University of Cape Town. After graduating with a Bachelor of Business Administration from the Berlin School of Economics he worked in the Semiconductor industry for two years. In 2007 he completed his Honours degree in Economics at the University of Cape Town. His main areas of research are monetary policy and asset prices and sustainability questions around the South African current account.

  • Year 2009
  • Organisation TIPS
  • Publication Author(s) Michael Parusel; Nicola Viegi
  • Countries and Regions South Africa

This study reviews the reforms undertaken in the financial sector with respect to regulation and access widening polices. The developments at the macro and micro level of the banking system are also assessed. Empirical analysis of the effects of financial liberalisation on growth by augmenting an aggregate production function with different measures of financial liberalisation. To account for the sources of the effects of financial liberalisation on growth, additional empirical analysis was conducted using panel data analysis of bank level data. Bank level data assists in investigating the effect of financial liberalisation on intermediation spreads, non-performing loans and non-financial costs. The empirical findings do not indicate a positive effect of financial liberalisation on growth. However, they suggest that there was improved efficiency among banks. The critical issue for Uganda appears to be that the efficiency improvements may not have been translated into increased credit to the private sector. There are possible policy choices to ensure that financial liberalisation exerts positive knock on effects to output and subsequently poverty reduction. Some of the proposed policies include the reduction of credit risk to banks through information availability via the credit reference bureau, promotion of further competition in the sector through increased bank entry and more robust loan recovery procedures in cases of default.

  • Year 2009
  • Organisation Services Sector Development Thematic Working Group; TIPS, BIDPA and UoM
  • Publication Author(s) Charles Augustine Abuka and Kenneth Alpha Egesa

The purpose of this paper is to investigate whether a relationship between export volumes and exchange rate volatility exists as suggested in the ASGISA document. It goes about this by first investigating the theoretical channels that predict the relationship between export volumes and exchange rate volatility. The theoretical prediction though, is ambiguous depending on the justification, model and factors taken into account in reaching the result. Furthermore, the paper provides evidence that the empirical results are ambiguous as well, as some countries tend to exhibit a negative relationship and others a positive relationship. Thus the paper goes on to estimate two measures of exchange rate volatility (a moving average standard deviation and the conditional volatility extracted from GARCH modelling) using the real effective exchange rate. These measures provide varied results in testing for stationarity. A cointegrated model for export volume using the Johansen estimation technique is then estimated with the volatility variables included in either the short or long run model, depending on the sensibility of the results produced.

NOTE: This I am currently revamping this paper, it was my mini-dissertation done toward the completion of my Masters in Economics at UCT. I am still estimating the cointegrated model, and so am not sure if any of my volatility variables will be able to enter in the long run model (in the previous paper this was not possible). I have not summarised the results yet for this reason. The model will be estimated with data ranging from the first quarter of 1961 to the first quarter of 2007 (the reason for the revamp is that this paper previously only considered data up until the first quarter of 2005). The model will also be estimated for the period starting 1972 (after the collapse of Bretton Woods) until the present, or a structural break at this period will be investigated (to see if the behaviour changed as a result of the introduction of the floating exchange rate in spite of the variability of the Real effective exchange rate before this time). The policy implication will be suggested at the end. Originally there was a negative effect of exchange rate volatility on the GROWTH of export volumes (so a significant negative short run effect), but not on the level of export volumes.

Finally, I may (time permitting) include a third estimation of a volatility variable that has been suggested in some of the international literature (a linear moment model/instrumental variable type approach) and the effects of this volatility measure on export volumes.

  • Year 2008
  • Organisation South African Reserve Bank
  • Publication Author(s) Siobhan Redford
  • Countries and Regions South Africa

In this paper we analyze the relationships between exchange rates, inflation and competitiveness. We show that over the 1994-2006 sample period real exchange rate depreciations did not improve the trade balance and therefore had no positive effect on growth. One reason is that SA exports are priced to market (PTM instead of PCP). We also comment on the policy advice of the International Panel of Experts on Growth (The 'Harvard Team') on South Africa's Accelerated and Shared Growth Initiative (ASGISA) with respect to the present architecture of SA's inflation targeting regime. Rodrik (2006) argues that since the health and vitality of the formal manufacturing sector has to be at the core of any strategy of shared growth, the South African Reserve Bank (SARB) should switch to a modified inflation targeting framework which allows considerations of competitiveness to affect its decisionmaking. We argue against this. Instead we show that if the monetary authorities would be interested in targeting competitiveness via the real exchange rate, a good way to do this is by narrowing the present inflation targeting band from the present 3- 6 percent, to say 1-3 percent.

  • Year 2008
  • Organisation University of Pretoria and Tilburg University
  • Publication Author(s) E. Schaling
  • Countries and Regions South Africa

Formal inflation targeting has been adopted as the monetary policy framework in South Africa since February 2000. Prior to that (since about 1990), the South African Reserve Bank has pursued implicit inflation targeting with no officially announced inflation target. Official inflation targeting frameworks are based on the premise that inflation targeting will deliver improved inflation performance and reduced inflation persistence, as well as contain inflationary expectations. Nevertheless, the international experience seems to suggest that countries that implement official inflation targeting (such as New Zealand, Australia and Canada) are not markedly more successful at maintaining price stability than the countries that do not explicitly target inflation (such as United States, Japan and the European Monetary Union). With regard to South Africa, the record is also ambiguous. During the 1990s, when South Africa had a system of implicit inflation targeting, the South African Reserve Bank was successful in reducing the inflation rate to single-digit figures. However, since the implementation of inflation targeting the CPIX exceeded its 6% upper bound in 31 of the 74 months between February 2002 (the first month that inflation had to be within its target range given a 24 month policy lag) and December 2007. This poses the question whether or not a regime of official inflation targeting is more effective in achieving better inflation performance than a regime with an unofficial (implicit) inflation target, such as the one in South Africa for the period 1990-2000. To answer this question, this paper employs a Vector Error Correction Model (VECM) and a state space model with intervention variables to capture the different monetary policy regimes.

  • Year 2008
  • Organisation University of the Free State
  • Publication Author(s) M. Marinkov;P. Burger
  • Countries and Regions South Africa

To better understand why some currencies are more volatile than others, this paper considers the cross-country determinants of exchange rate volatility for a set of middle-income countries. Overall, the paper finds that higher levels of reserves reduce volatility, and it is estimated that an appropriate level of reserves is approximately 4 1 2 months of imports. Volatility is increased by increased uncertainty and loose fiscal policy. In addition, a volatile terms of trade spills over into a volatile currency. From a policy perspective, whilst it is clear that prudent macroeconomic policy is the best course of action to reduce exchange rate volatility, the influence of external volatility on the exchange rate (over which the authorities have no control) should not be underestimated.

  • Year 2008
  • Organisation University of Cape Town and Deloitte Consulting
  • Publication Author(s) Chandana Kularatne; Roy Haveman
  • Countries and Regions South Africa

The key objective of this paper is to construct a commodity export price series for South Africa (incorporating a wider range of commodities than those considered in the empirical literature on South Africa to date) and to determine its influence on real exchange rate movements in South Africa. Existing models of the determinants of the real exchange rate of the rand employed in the literature will facilitate the analysis. The paper will investigate the long-run relationship between the real exchange rate and commodity prices in South Africa. More specifically, the paper will attempt to determine whether commodity prices are an important source of persistent changes in the real exchange rate of South Africa.

  • Year 2008
  • Organisation South African Reserve Bank
  • Publication Author(s) L. Rangasamy;J. Jakoet
  • Countries and Regions South Africa
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