FACTORS THAT LIMIT THE SUCCESSFUL IMPLEMENTATION OF MONETARY POLICY IN LDCS/ UGANDA

15 FACTORS THAT LIMIT THE SUCCESSFUL IMPLEMENTATION OF MONETARY POLICY IN LDCS/ UGANDA

  • Excessive liquidity among the commercial banks. Many commercial banks enjoy a lot of liquidity and rarely borrow from the central bank hence making the use of the bank rate as a tool of monetary policy ineffective.




15 FACTORS THAT LIMIT THE SUCCESSFUL IMPLEMENTATION OF MONETARY POLICY IN LDCS/ UGANDA
  • Domination of foreign commercial banks which are not under direct control of the central bank. Many of these banks receive money from their parent organizations overseas. This makes it hard for the central bank to regulate their activities.
  • High liquidity preference among the public. This leads to limited use of commercial banks. The central bank cannot have effective control over money that is outside the banking system.
  • Ignorance of the public about the facilities offered by commercial banks. For example many people are ignorant about open market operations hence do not buy government securities whenever they are declared. This limits the effectiveness of open market operation as a tool of monetary policy.
  • Unfavourable external influence such as IMF conditionarities that are at times not in line with the monetary policy objectives.
  • Underdeveloped money and capital markets. In Uganda and other LDCs, money and capital markets are underdeveloped. This limits the effectiveness of open market operations as the buying and selling of government securities is made difficult.
  • Rampant corruption and bribery by commercial banks in the implementation of some tools (such as selective credit control) limits the effectiveness of monetary policy.




  • Government interference in the activities of the central bank for example ordering it to print more money to finance budgeted deficits. This affects the effectiveness of monetary policy.
  • Poor distribution of commercial banks/ urban concentration of commercial banks. Most of the commercial banks are concentrated in towns limiting the effectiveness of the monetary policy in rural areas.
  • Persistent inflation in the country. Persistent inflation leads to continuous loss of value in the country‚Äôs currency hence people fear to deposit their money in banks because after a long time, it would have lost value. They prefer to invest it in physical assets and this limits deposits which makes monetary tools inefficient.
  • Limited effective use of commercial banks due to low incomes, limited collateral security, high level of illiteracy, few creditworthy borrowers among others.




  • Conflicting government objectives. The government and the central bank at times have conflicting objectives. This is because if the government wants to achieve its objectives, it increases its expenditure yet the central bank pursues a restrictive monetary policy so as to achieve objectives like price stability making the implementation of monetary policy difficult.

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