MAKERERE UNIVERSITY BUSINESS SCHOOL

MONETORY POLICY AND PORTFOLIO ANALYSIS ASSIGNMENT

NAME: KIIZA MARINA

PROGRAMME: BACHELOR OF COMMERCE

REGISTRATION NUMBER: 15/U/16049/PS

SIGNATURE:…………………………………
Introduction
Government of Uganda under the Bank of Uganda Act 1966 established Bank of Uganda in 1966
and in this same year, Uganda's first currency was issued. Central Bank of Republic of Uganda
with the sole right to issue notes and coins in the country; owned by Government of Uganda but
is not a Government department. The current Governor is Professor Emmanuel Tumusiime
Mutebile whose regime is from 2001 to date.

Mission of the Bank of Uganda

To foster price stability and a sound financial system

Vision of the Bank of Uganda

To be a center of excellence in upholding macroeconomic stability

a. Objectives of the Bank of Uganda

The Bank of Uganda Annual Report 2011/2012 lays down the strategic plan 2012-2017 that
entails corporate strategic objectives which are continuous improvement activities that must be
performed under each of the four strategic themes of operational excellence, customer focus,
strategic partnerships and leadership to achieve the desired strategic results. The following are
the strategic objectives of Bank of Uganda explained:

To enhance price stability; this implies that the general price of goods and services are stable
and competitive. This reduces fluctuation in prices which reduces inflation and the bank has been
able to maintain it at least 5%.

To enhance financial system stability; this entails the sustenance of a safe, sound and efficient
financial system. It involves ensuring that the economy has well-functioning financial
institutions, payment systems and financial markets. This is done for instance, for financial
institutions, constant supervision of each and every transaction done by these commercial banks
to ensure compilation of bank laws and regulations for the good of customers and the bank itself.

To increase customer satisfaction; this refers to the value that customers derive from Bank of
Uganda services in terms of price stability (which reduces on the likelihood of inflation
happening and their objective to maintain it at 5%, and not deteriorate the economy), financial
system stability to (which ensures effective loaning process to customers of commercial banks
which funds can be provided for by the Central Bank where need be) and timely advisory
services in form amount of capital the Bank should have as its minimum for efficient banking
operations.

To improve staff motivation; this objective means having staff that are engaged, enthusiastic
and committed to achieving the Bank of Uganda mission and vision. It includes job enrichment,
providing competitive rewards and benefits, a conducive working environment (safe and healthy)
and participatory approach to work.
To enhance organizational culture; these are a set of values, beliefs and practices that bind the
bank together and influence behavior. A few of the values are; Accountability, the Bank being
answerable to its customers and stakeholders and maintaining a prudent approach in
safeguarding the monetary and financial stability of the country. Transparency, honest
communication with candid disclosure. Excellence, delivery of quality services efficiently and
timely.

To enhance financial performance; this covers all aspects of financial management of the Bank
including ways to improve income sources and the budgeting process, optimizing utilization of
resources and avoiding wastage.

To enhance monetary sector and financial sector policy formulation and implementation;
this includes the processes that are undertaken to develop, analyze and determine monetary
policy framework, currency operations and support services.

To strengthen strategic partnerships; actively engaging with national regional and

international strategic partners to leverage the benefits of interdependence and participatory
decision making. Relations with the International Monetary Fund and World Bank enables
accountability of funds to the country in form of loans or grants which may be used for
infrastructural developments for example schools, roads and hospitals hence boosting economic
growth.

b. Functions of Bank of Uganda

Section 4 of the Bank of Uganda Act (Cap 51) Laws of Uganda 2000

The functions of the Bank shall be to formulate and implement monetary policy directed to
economic objectives of achieving and maintaining economic stability. In this regard, the Bank
shall perform the following;

Maintain monetary stability in financial market and maintain an economic environment

conducive for growth. Financial markets deal in trading of securities, that is, buying or selling
treasury bills or bonds from the market for purposes of increasing or reducing the amount of
money in circulation.

Issue currency notes and coins. The Bank issues the national currency, Uganda shilling, in
sufficient quantities to enable the public carry out financial transactions.

Be the banker to government. The Bank manages Government ministries and Departments'
accounts and as such, receives all Government revenues and effects payment, external or internal
on behalf of Government. For example, Ministry of Finance, Planning and Economic
Development has an account called the Treasury Services Account for making payments to
different districts and municipalities of the country appropriately for development purposes.
Advise the Government on monetory policy. This policy is put in place to regulate the amount
of money in supply, therefore, the Bank advises on whether print more money or not, so as to
reduce on the likely causes of inflation which means persistent increase in prices of goods and
services; bad for Uganda's economy. Where producers assume that a lot of money in the
economy means the customers can afford expensive commodities.

Advises Ministry of Finance, Planning and Economic Development on managing external

reserves. The Bank monitors the official foreign exchange reserves of the country using the
Integrated Financial Management System, which helps keep track of the amount of the external
reserves available. These reserves are used to meet Government's foreign exchange payments for
debt repayments and Government purchases as well as indirect management of the exchange
rate.

Lender of last resort. Acts as a lender of last resort to Commercial banks and other financial
institutions who may not be able to source funds for their daily operations.

Be a clearing house for cheques and other financial instruments for financial institutions. In
case of loan payment by financial institutions to the Central Bank of Uganda who may choose to
use cheques to clear the debt.

Managing Uganda's external debt. The Bank maintains in conjunction with the Ministry of
Finance, Planning and Economic Development, an up-to-date database of the country's total
external indebtedness. This includes public and private loans, and suppliers' credit.

Exchange rate management. The Ugandan shilling freely floats on the foreign exchange
market. The Central Bank has no view on exchange rate. However, the Central Bank maintains
an active interest in the movement of the exchange rates and may intervene with the sale or
purchase of foreign exchange to smoothen out erratic movements to resort market stability.
Similar intervention through sale or purchase of treasury bills, is undertaken if liquidity levels
threaten a spill over into the foreign markets.

Be the banker to financial institutions. For instance, for commercial banks that need loans, the
Central Bank acts as their banker in the event that information pertaining to the loan balance is
recorded and paid back at the prevailing Central Bank Rate which is currently at about 9.5%.

The Pros and Cons of the Central Bank Independence

The Central Bank of Uganda under the Constitution of Uganda 1995 Article 62 gives the Central
Bank the mandate to operate as an independent bank free from pressure from Government or any
political forces that may influence its decision making. In other words, the Bank can make its
own decisions without any political forces.

The Pros
These are the benefits of the Central Bank Independence which are explained as follows;

Governments tend to make poor decisions about monetary policy. In particular, they tend to be
influenced by short term political considerations which makes it beneficial for the Central Bank
to have the power to make its own decisions without external political forces of Government.

Government pressure on the Central Bank to help out in financing the large budget deficit. With
the Central Bank Independence, the Central Bank has the mandate to advise on whether
financing a deficit is good for the economy or not and not accept any move that may deter the
country from attaining economic growth and stability because more money in circulation means
likelihood of inflation occurring. Therefore, this independence is important and beneficial to the
Bank.

Central Bank Independence helps the Bank focus on long-run business objectives such as
promoting a stable price level which is one of the strategic objectives of the Central Bank and
this helps promote economic stability in the country.

Central Bank Independence helps avoid political business cycle, in which just before an election,
there is temptation for Government to employ expansionary policies leading to a boom economic
cycle. Therefore, it is better to take monetary policy out of the Government's hands because the
boom is not as a result of economic activity but a lot of money in circulation.

This independence helps the Central Bank acquire independent revenue from its Treasury
without necessarily getting help from the political sector and is therefore able to pay staff's
wages.

There is macroeconomic performance and also the banking sector given its core values it has to
abide by. These mission, vision and core values stated above help the Central Bank focus on
achieving its future targets and goals.

The Cons
These are the hindrances of the Central Bank Independence which are explained as follows;

Central Bank Independence requires delegation of power to an independent institution which

involves accountability of activities done which is quite expensive hence more funds are at times
directed to a lot of Annual Reports which ought to be written.

Central Bank Independence involves having the monetary policy affect almost everyone in the
economy but controlled by the Central Bank who is not responsible to any since it is
independent.

Economic stability requires that monetary policy must be coordinated with fiscal policy. Fiscal
policy is the management of Government spending and taxation. Only by placing monetary
policy under the control of the politicians who also control fiscal policy; these two policies
cannot be prevented from working at cross-purposes, which does not make the Central Bank
fully independent from Government.

Independent Central Bank has not always been successful in using its freedom because
Government may come in to get help in financing certain aspects of the economy which the
Central Bank may reconsider, for instance, printing of more money especially during President
Idi Amin's regime who ordered the Bank to print more money to finance the buying of military
equipment which may not be economically profitable to the Uganda's economy.

An independent Central Bank can pursue policies that are politically unpopular, and yet in the
public interest. For instance, the Central Bank may not see it fit to continue borrowing from the
International Monetary Fund because of the likelihood of the country not being able to pay back
because Uganda as an economy still has some carrying out subsistence farming which does not
generate income to the economy.

In conclusion, the Bank of Uganda plays a vital role in enabling macroeconomic stability and
growth in Uganda.