‘Design economic policies to reduce external shocks’

Ugandan coffee on display at the 2015 Milan Expo. Uganda has been advised to design policies that will withstand external shocks. COURTESY PHOTO

What you need to know:

Fact. External factors affect developing countries start from developed economies

Kampala. Former governor of the Reserve Bank of India Duvvuri Subbarao has advised Uganda to design sound macroeconomic policies that minimise the effects of globalisation to developing economies in form of inflation, capital outflows and currency depreciation.
Delivering the 23 Joseph Mubiru memorial lecture in Kampala on Tuesday, Dr Subbarao said Bank of Uganda and Uganda government should always be prepared to manage forces that come with globalisation because external factors that affect developing countries such as Uganda start from the advanced economies.
“Global best practices are relevant but adapt to country situation. Think global, act local to safeguard your economy,” he said.
Dr Subbarao added: “Central banks in emerging and developing economies can’t shape globalisation but have to respond to it. They have to do so through external sector polices, monetary policies.”
In relation to the above, Dr Sabbarao said Uganda should have macroeconomic policies which ensure low inflation rate, stable exchange rate and resilient financial systems that respond effectively to forces of globalisation.
In the globalisation context, monetary policy should be effective to stem inflation from demand but Dr Subbarao said inflation in emerging markets economies is often due to supply shocks.
“Inflation hurts everywhere but hurts much more in poor countries. The most effective way of protecting the poor against inflation is to lift them out of poverty. The most effective way of lifting them out of poverty is to accelerate growth,” he said.

Defence in crisis
Central banks world over are charged with managing the economies, however, in the 2008 global economic crisis that started in the US through subprime mortgage, the institutions came under attack.
With central banks being blamed for any crisis that erupts in the global financial system, Dr Sabbarao said sound monetary policies by central banks should be the first line of defence.
He advised Bank of Uganda to listen to the poor people because the policies it designs are not for the markets but for the people.
“Keep your ear close to the ground to listen to the silent voices of the poor. It is important to understand what the poor people need,” he said.
On managing volatile capital flows and exchange rate which often affect growth, inflation, financial stability and corporate profitability pressures, Dr Sabbarao advised Bank of Uganda and Uganda government to develop effective policies that can deal with volatilities in capital inflows and outflows because there is a lot of money in the global economy.

Tit bits
Capitalisation. State minister of Finance (general duties) Fred Omach said government has provided Shs250b for capitalisation of Bank of Uganda as well as Uganda Development Bank and the East African Development Bank, all meant to support economic development.
BoU reaction. The Deputy governor Bank of Uganda, Dr Louis Kasekende said: “Bank of Uganda monetary policy will continue to be in support of price stability and economic growth,” he said.

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