The Impact of Monetary Policy, Sterilised Forex Intervention, Demand and Supply Shocks on Credit in Uganda

This thesis presents four chapters on monetary and financial stability policies in Uganda. The objectives address a number of research questions that have emerged following financial sector reforms and a change in monetary policy framework in Uganda. The first chapter considers the impact of monetary policy tightening on the sectoral composition of banks’ loan books in Uganda. It also investigates for evidence of a balance sheet transmission channel and tests whether some sectors in the Ugandan economy are disproportionately affected by monetary policy. I document that a balance sheet channel is present, and the real estate and agricultural sectors of the economy are isproportionately affected by the policy. The results also indicate that bank capitalisation level is vital in the monetary policy transmission process as banks with larger capital are in position to have better loan portfolio re-balancing across the sectors. In the second chapter I investigate whether sector borrowing channel exists in Uganda. Results show that bank lending and sector borrowing channels are operational in Uganda in all currencies. As highlighted by Khwaja and Mian (2008), the existence of sector borrowing channel in Uganda improves the efficacy of monetary policy. Although we have observed that a sector borrowing channel is at work in Uganda, the role of the banks is important. We note regional and non-DSIBs banks’ borrowers can offset the impact of credit supply shocks in both local and foreign denominated currencies loans. However, local banks’ borrowers are unable to offset shocks in local and foreign denominated currencies borrowing. This may indicate that these sectors resort to borrowing from non-bank sources. In addition, all types of banks are more responsive to credit supply shocks, if loans are in foreign currencies this could affect the transmission of monetary policy. In the third chapter I study the impact of sterilised FX intervention on credit growth in Uganda, in a banking environment characterised by capital and leverage constraints. I find sterilised FX interventions dampen credit growth for a period of about six months and after which it recovers. Evidence of a crowding-out channel is observed however, a exchange rate transmission channel is insignificant. These results support a case for the use of FX interventions as financial stability instruments. However, this may need further investigation as a need to balance this tool with other macro-economic policies. In final chapter we examine using a network approach, the transmission of idiosyncratic credit supply shocks to aggregate volatility in a developing economy. In demonstrating the implications of our theoretical results in an empirical application to Uganda, the empirical results suggest that idiosyncratic shocks to credit supply account for more than a third of the volatility observed at the aggregate level. Results show that configuration of the network plays a marginal part in determining aggregate volatility, whereas the architecture of financial intermediation has a bigger effect. The Herfindahl index is no longer a sufficient statistic for explaining the banking sector's contribution to aggregate volatility.