Friday March 21 2014

Harmonise money supply and expenditure, Kiwanuka says


The minister of Finance Planning and Economic Development, Ms Maria Kiwanuka, has called for the harmonisation of monetary and fiscal policies, saying the two complement each other in economic development.
Monetary policy is the process by which the monetary authority of a country controls the supply of money while fiscal policy is the use of government revenue to influence the economy.

Her call comes at a time when central banks are moving away from monetary-targeting policy frameworks which aim at the amount of money supply in the economy to control inflation to inflation target monetary policy frameworks, which look at inflation forecast, low interest rates and stable exchange rates.

Speaking in Kampala at the close of the International Monetary Fund -Bank of Uganda conference on transitioning to modern monetary policy frameworks in low income countries on Tuesday, Ms Kiwanuka said reforming monetary policy frameworks is important in light of the current economic and social challenges in the global economy such as slow recovery, unemployment and rising inequality.
“Innovative ways are required to use monetary policy not only for stabilization but also for realisation of sustainable inclusive growth. Economies are faced with small or declining revenues, rising deficits, limited infrastructure and effects of adverse weather that require a good blend of fiscal and monetary policy,” she said. Ms Kiwanuka argued that in view of the above, a well-designed monetary policy framework becomes a precondition for effective economic management.

She explained that factors responsible for well-designed monetary policy frameworks include controlling inflation, managing exchange rates and maintaining appropriate levels of interest rates.

On the fiscal side, Ms Kiwanuka said government has to ensure proper management of fiscal deficits, increasing revenues and ensuring that every shilling injected into the economy delivers its worth.

The governor Bank of Uganda, Mr Emmanuel Mutebile, said: “External factors can have a profound impact on domestic economy through a variety of channels. Enhancing our understanding of how a domestic economy operate and what this implies for formulation of monetary policy in inflation targeting frameworks should be an important component of the research agenda for the central banks on the continent and the IMF,” he said.