Governor, Bank of Uganda THE GLOBAL FINANCIAL CRISIS AND ACCESS TO FINANCE Implications for African economies Prof. E. Tumusiime-Mutebile Governor, Bank of Uganda AfDB Ministerial Round table Dakar, Senegal May 12, 2009

Presentation Outline A. Introduction B. Appropriateness of International response so far C. Dangers posed to access to private and public financing D. Policy measures for consideration E. Concluding Remarks

A:Introduction Global Crisis is “Once in a century tsunami”, born of the collapse deep inside the US housing sector and cascading outwards leading to Financial markets instability and more recently , a recession Global Crisis threatens key drivers of sustained economic growth- technology, capital and labor Crisis risks compromising Africa’s macroeconomic gains via the triple deficit problem of high fiscal deficit, high current account deficit and high private sector saving-investment gap

A:Introduction (con’t) Global growth prospects decline significantly; -3.3% in 2009 for developed countries and -2% for emerging and developing economies Africa growth rates are expected to slowdown to 2.8% in 2009 Export and import growth projected to decline by 7% and 4.7%, respectively (adverse terms of trade and declining volumes)

A:Introduction (con’t) In the developed high income countries, recession has set on and the volatility in the markets remains at a record high In some of the low income countries revenues from remittances & tourism have fallen drastically

B. Appropriateness of International response so far Total value of IMF (Exogenous Financing facility), World Bank’s Rapid Access Facility, AfDB $ 2.5 bn (emergency liquidity and trade finance facility) & bilateral donor community new facilities need to be increased to offset current and future BOP problems

B. Appropriateness of International response so far Economic diversification is critical in improving Africa's resilience to external shocks #reduce dependence on primary commodities

C: Risks to access to Financing Refinancing risk: # Risk averseness of markets may lead to tightness and conservativeness in lending and # Depreciation of currencies may all increase foreign currency loan obligations for Africa’s private sector Deeper Financial sector reforms are key in increasing efficiency in savings mobilization and investment allocation Requires Capacity and productivity focused policies

C: Risks to access to Financing Credit Risk, regulation and financial stability: # reduction in investment financing and economic slowdown may saddle Banks’ balance sheets with non-performing assets # Access to international credit facilities by Africa’s exporters could become difficult Need to strengthen regulatory capacity through establishment of financial stability units and capacity

C: Risks to access to Financing Regulatory risk and financial stability #timely detection of changes and vulnerabilities # comprehensive stability assessment highlighting various risks to macroeconomic stability (Establishment of Financial Stability Department in Bank of Uganda)

C: Risks to access to Financing Public finances # Global recession may impact negatively on demand for exports, reduced current transfers posing concerns for current account deficits and attendant financing # Vulnerability to swings in external financing is unavoidable for most African countries given the current levels of Current account deficits (5% or more of GDP) # Need to fast track regional integration, consolidation of export- oriented policies and infrastructure investment to increase domestic productivity and reduce domestic resource cost ratios

We need to continue to remove obstacles to regional trade – Waiting Trucks at a border

Risk to donor flows (priority shifts in budgeting of advanced economies) though no immediate cuts expected

Case for “light-touch” policy response Crisis may lead to over reaction in response “ favoring short-term political gains” over long run benefits of macroeconomic stability and growth # Need to minimize policy reversals

Policy measures to consider Main challenges of African economies relate to acute shortage of financing for long-term public investment programs, private investment and export trade Credit crunch: Need for MDBs to provide lines of credits to domestic financial institutions to increase capacity to deal with increased demand for domestic credit Capital flows: MDBs and G20 should scale up ODA to Africa to offset immediate and future BOP shortfalls and dealing with infrastructure financing

Policy measures to consider Domestic Savings mobilization # emphasis should be on promoting efficiency and deepening of domestic financial sectors to increase savings to aid ODA Stabilization funds: need for MDGs to put in place stabilization funds to finance counter-cyclical measures ( as a response to persistent swings in commodity prices and Terms of trade for most African economies)

Additional measures Focus on macroeconomic stability Scaling up of infrastructure investment in Africa (Absorption issues as well as efficiency and effectiveness in implementation of public programs are important) Monetary policy: Pursue objective of preservation of foreign exchange reserves and partly allow BOP shocks to be absorbed via flexible exchange rate adjustments

Additional measures Financial stability focus: Need to strengthen and broaden stability assessments beyond traditional banking sector. # Should include cross-boarder cooperation to ensure sound international financial rules and systems to minimize financial contagion

Conclusion Impact so far on financing for development is not too big to warrant a major policy shift for most of African economies and certainly not in the case of Uganda. Diversification of exports and maintenance of flexible exchange rate regimes are appropriate policies for countries heavily dependant on few primary commodities Adjustment to crisis will require Prudent and flexible macroeconomic management plus smarter financial market regulation, including risk-based supervision

Global Crisis will require innovations

Africa too will have to find home grown solutions

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