Strategic Role of Budgeting in Health Context

Strategic Role of Budgeting in Health Context Purpose / rationale of budgeting in hospital The traditional purpose of budget have a diagnostic role in measuring and monitoring accounting and hospital performance. Budget also has an interactive role as learning and innovative model to drive strategic changes (Abernethy Brownell 1999). Hospital create budgets to monitor its actual performance compare to the estimated performance incorporates the revenue, health expenditures include operation cost, medications cost, administration cost, cash flows and other associated factors include funding adjustments and growth factors (Bragg 2014). Financial budget transform the activities of individual units into a number value within the health care system. From the value of previous activities, financial budgeting will enable management to forecast and put activities into a plan (Abernethy Brownell 1999). Government will allocated the money as funding to the hospitals, where hospitals will generate activities as a return on the funding begin given and train the capitals (Department of Health 2016). Administration and hospital employees will contribution to spend the funding and to achieve the goals and plans. Every unit within the hospital will require resource in order to operate and deliver services. The purpose of budgeting in the hospital is to ensure its performance and goals and objectives are achieved at the district and state levels. The strategic plan is the basis of the budgeting, the strategic role of budgeting in health care include driving strategic changes to make suitable with the budget set in order to generate high performance (Abernethy Brownell 1999). In Department of Health (2016) Budget 2016-17 stated that the strategic role for the budget is to ensure the health care is both accessible, affordable and the level of health care quality is also sustainable into the future. IHPA (2011) suggested that hospital funding and budgeting is based on the calculation of weighted population and on activity volume performed in an expression of National weighted activity unit (NWAU). Budgeting in the hospital context taken account the activity volume, the budget and funding received is pre-determined fee that reimbursed per activity based on the diagnosis related group (DRGs) (IHPA 2011). Commonalities between Activity Based Funding (ABF) principles and Strategic role of budgeting is the revenue and funding generate is link to patient activity. ABF principles help to create the strategic plan that reflects the hospitals development by volume of service (Eagar 2011). Activity based funding is a patient evidence based budgeting tool to understand the health care cost by episode of care or performance processes (AIHW 2014). It promotes price harmonisation and has the strategic role in supporting decision included costing and measurement potential health care delivery improvement initiatives (Eagar 2011). Where when the current resources allocation is not sufficient within the budgets, a strategic plan will need to be create and modify the budget and resources allocation to achieve the target and goals. Advantages of budgeting in ABF ABF provide efficiencies of the performance in hospital care and improve sustainability of hospital service provision (AIHW 2014).ABF promote best practice and have the advantage to put unmeasurable activities into number values, provide a more accurate picture of profitability and efficiency measure (Eagar 2011). ABF have the advantage to cover and measure value with a different characteristic and in a multi-product environment. The funding methodology create a clear picture include the complexity of the activity that attracts costs to support management in making decisions (Cohen et al. 2012). ABF in budgeting help to address services agreement objectives such as patient care base costing help reduce wait list, activities against peers will encourage competitions to enhance hospital quality and cost efficiency (Sutherland, Repin Crump 2012) Disadvantages of budgeting in ABF Cohen et al. (2012) suggested some disadvantage adopting ABF in budgeting include the high cost associated with the implementation of this budgeting structure. The requirement to ensure accurate budget forecast in ABF involve the large amount of comprehensive data and information to be reported. The disadvantage adopting ABF involve the data not readily available to the cost require to implement this method in data collection. Another disadvantage involves the use of DRGs in calculating the cost of activity may not be fully reliable (Mihailovic, Kocic Jakovljevic 2016). This suggested that adopting ABF in budgeting may incurred financial incentive of provision in unnecessary care due to increase in activity volume (Cohen et al. 2012). The complexities in budgeting to enhance forecast accuracy Hospitals have very complex revenue and funding structure from grants received from commonwealth, revenue generated from medical invoicing; donations receive from individual parties and other budgetary allocations (Department of Health 2016). The goals must be in measurable units, direct and attainable to enhance forecast accuracy (Eagar 2011). It is important to allow appropriated participation level in the budgeting to ensure an accurate and timely in the forecasting process in budgeting. Authoritarian prepare budget from the top down level as an overhead. The budgeting will include the use of capital and other fix asset to enhance the accuracy in forecasting (Mitton, Dionne Donaldson 2014). Participatory measure will allow cost centre managers to identify specific activity and resources such as full time employee to enhance forecast accuracy (Tanaka 2007). Cost centre managers will have the ability to identify difference expense related to their unit where upper management may no t have the ability to. The complexity in budgeting exercise will consider the inclusion of large and small volume of activity cost that include utility cost, human resources cost, clinical cost and other related operational cost (Mitton, Dionne Donaldson 2014). The level of detail will need to be achieving at the right level to facilitate timeline-ness and accurate allocation of resources. (ii) The forecasting of 5percent growth in cost and 10 percent growth in the activity from previous year is not suitable for the organisation. Reversing the forecasting method will be more suitable with the cost on a 10 percent growth and activity on 5 percent growth to ensure the hospital will achieve the target. This forecasting model has adopted the incremental budgeting method (Bragg 2014). It is a simplified budget method to perform a forecast base on the previous years budget and applied the percentage difference to the following year (Bragg 2014). This method is not efficient as it does not examine the hospitals expenditure and activity to achieve the forecasting result. Where the zero base budgeting will allow the hospital to determine expenses according to the activities and associated cost by clinical streams (Rosin 2015).This approach to budget required hospital manager to start from zero and force managers to justify the reason of expenditure and assess benefit of the spending every year (Bragg 2014) . Adopting the zero base budgeting will support the funds allocation in a more cost efficiency approach. Hospitals face multiple challenges on health care cost such as the changing funding structure and the population growth that triggers inpatient volume. The zero bases budgeting approach will support hospital to redesign allocation of funds and resources distribution, to enhance accurate financial budget forecast and maximise benefit and strengthen capabilities (Rosin 2015). (iii) YTD 2015/2016 Actual YTD 2015/2016 Budget Variance Total Activity volume 28000 30000 -2000 Total Cost $124 M $124 M The table above is under performance, it is not achieving the target. The cost in the above does not attract enough revenue from the volume of activity. There is a variance of -2000 in the actual activity volume against budget. Implication of performance organisational financial in revenue and cash flow Analysis of variance from the budgeted figures from different perspective, rate, price, cost (Zelman et al. 2013). The above table provide information to support analysis of variance and the hospitals performance. The reason to analysis the variance so performance can be enhance by identify financial trends and threats, as well as identify any opportunities to achieve hospital objectives (Zelman et al. 2013). Variances between budget and actual cost will lead to adjusting business strategies to achieve goals. Variance and cost of unit per activity volume will help hospital maintain the control over the hospitals expense by monitoring the actual verse budget (Singh Wheller 2012). Assuming the funding model is ABF in a hospital, because organisation has lower activity than the budget and funding allocation is base on the activity level. In this instance, hospital will receive less revenue as its target (IHPA 2011). Funding received will have shortfall against the budget from various sources include government, state and insurance companies (NSW Health 2016). Reduction of the revenue is going to impact the current financial statement result in a lower cash flow. The actual minus budget is unfavourable as the cost of service per activity unit is with a higher cost. Reason of the variance may include changes in admission level, cost of medical equipment or medicine or changes in labour cost (Zelman et al. 2013). Implication of underperformance will reflect in the financial statement as deficits for the year. The income such as health services funding, user charges, grants and other capital gain minus the expenses such as employee expenses, supplies and services a nd loss of investment will give the total cost (Zelman et al. 2013).. Hospital managers will use financial statements to make changes in financial forecast and prompt to reallocate resources to ensure a stronger control of revenue and maintain health care cost. Implication of performance in hospital acute patient services The underperformance in activity volume in this scenario indicated the service cost per activity unit are higher than budget (IHPA 2015). The scenario suggested the treatment provided was more expensive than forecast. The activity volume is also lower than forecast. This may suggest the activity volume in this year had used more input (IHPA 2015). Sometimes the underperformance of activity may due to unpredictable events such as natural disasters that result in increase of sudden increase of emergency admission that result in expensive health care cost. Other reason mat take into consideration may included, the hospital have complete more complicated cases (Dong 2015). The cost of treatment is more expensive and used more resources than usual. In addition, beds were occupied for longer days due to increase of length of stay and cannot accept additional patients hence reduce hospital activity. When health care cost could not generate enough activity, the implication in acute patients services may include decrease in quality of health care service activity (Damian Everhart et al. 2013). The increase of cost will suggest the less generation in funding and with a tighter budget next round. Hospitals with a tighter budget may not be able to purchase new equipment, do any new renovations and unable to recruit more staff (Dong 2015). All these are derive from the performance in hospital patient services. The reduction in revenue will result in nursing staff patient ratio to be increase to reduce cost of activity (Damian Everhart et al. 2013). There will be a potential in significate decrease in the quality of health care delivery. Strategic issue on service agreement It is important to ensure KPI are performance according to the services agreement. Currently the SLHD services agreement has two tiers of KPIs require hospital to perform on (NSW Health 2016). Tier 2 are less important as Tier 1 performance indicators are link very closely to funding and have financial impact in hospital operations (NSW Health 2016). Tier 1 indicators are the main driver and determine the funding hospitals will receive in the next year (IHPA 2015). It is very important to ensure financial sufficient and be sustainable to ensure efficient hospital operation. In a financial point of view, hospitals will generate more funds because the resources are fully utilise and being cost efficient (Zelman et al. 2013). Tier 1 KPI have a strong strategies focus in better patient care include achieving zero waitlist measure, achieving surgery admission within urgency categories timeframe and increase focus on quick emergency admission base on triage categories (NSW Health 2016). Ti er 1 KPI also include financial performance measures such as 100 percent on creditors paid within 30 days, expenditures matches budget and activities are performing against target. Tier 1 indicators help hospital monitor closely the indicators that directly impact on funding. The achievement of zero waitlist measure suggested hospital have use the resources effectively and efficiently activity (Dong 2015). This suggests the hospital is fully utilising of resources from staff to pharmacy and equipments activity (Damian Everhart et al. 2013). The analysis of performance indicators will suggest the area of failing in making satisfactory progress. In this scenario, the activity is not cost efficient and hospital will need to review the underlying cost for higher cost in service. Management intervention to improve scenario To improve the scenario, hospital may train personnel to understand the financial information in health care setting (Britt, Adams Snow 2015). Health informatics may create reports that include balance score cards and key performance indicators (KPI). The report should include more information and create better understanding in a bigger picture. A monthly and quarterly reporting frequently increase will also health managers a better comparison (Zelman et al. 2013). Report will provide more informative and real time information to monitor outcome and take actions to respond to negative variance. Educations to staff on the impact to the hospital from the performance are also important to strength and gain support from staff to changes implemented. Each department may provide data to represent their workload intensity and resources such as patient days, weighted activity and cost. Manager will have a better view by streams to better manager, monitor, utilise better resources and achiev e accurate forecast. (iv) Implication on organisations financials on liquidity and cash flow Small business creditors paid within 30 days refers to 30 days from receipt of correctly rendered invoice (Zelman et al. 2013). Currently in the scenario with a performance of 60% against the target is not performance and not acceptable. The positive side of paying creditors longer than 30 days will increase the cashflow and more buffers on liquidity. The less invoices to be finalise, the more flexibility the cash flow will be. Negative impact will be the cashflow is not reflective to the real situation. Where the actual amount of money the hospital has is not reflective as there are still many debts to be paid. On top of that, losing credit is a huge intangible cost. You may have more flexibility of the cash flow but you create a deficit position to the debtor (Zelman et al. 2013). Firstly, the debt may incur interest on the amount hospital own to other creditors. The interest will create financial burden on the next round of financial statement which increase unnecessary cost and accumulate onto the total health care cost. Secondly, losing credit can lead to losing hospital market and interrupted normal business practices. For example, pharmaceutical company will no longer accept accrual basic method of payment and require hospital to pay upfront for all the medicine provided. This will increase financial and cash flow burden, as well as decrease the ability to better forecast expenditures, with a tighter budget and less flexibility in allocating resources. Management intervention to improve scenario Hospital will need to review the current practice and identify issue why the payment cannot be paid within 30 days (State Government of Victoria 2017). Hospital will need to contact the small business creditor, discuss the problem and dealing with any disputes (State Government of Victoria 2017). If the hospital has difficulties in cash flow for the payment, hospital will need to communicate and negotiate the payment days and terms. Extend any invoice day or revise the invoice day to when product receive instead or order receive days to allow more flexibility in cashflow in order to achieve the target. There are always linkage in activity performance and financial budget. It is always important to regularly monitor financial performance and hospital activity performance to ensure hospital is achieving target within budget (NSW Health 2016). Perform regular monitor of activity will support hospital to identify any error and issue associated with lost, that enable to fix the problem and achieve hospital objective and goals. References: Abernethy, MA Brownell, P 1999, the role of budgets in organizations facing strategic change: An exploratory study, Accounting, Organizations and Society, vol.24, no.3, pp.189-204. Bragg, SM 2014, Budgeting: A Comprehensive Guide ,3rd edn, Accounting tools, U.S.A. Britt,J, Adams, S, Snow, T 2015, From the front line to the bottom line: building revenue intergrity, Journal of the Health care Financial Management Association, vol.69, no.7, pp.34-37. Cohen, M, McGregor, M, Ivanova, I Kinkaid C 2012, Beyond the hospital walls: Activity Based Funding Versus Intergrated Health Care Reform, Canadian centre for policy alternatives, Vancouver, viewed 07 March 2017, http://www.policyalternatives.ca/sites/default/files/uploads/publications/BC%20Office/2012/01/CCPA-BC_ABF_2012.pdf> . Department of Health 2016, Budget 2016-17, Department of Health, Canberra, viewed 07 March 2017, https://www.health.gov.au/internet/budget/publishing.nsf/Content/2016-2017_Health_PBS_sup1/$File/2016-17_Health_PBS_0.0_Complete.pdf>. Dong, GN 2015, Performing well in financial management and quality of care: evidence from hospital process measures for treatment of cardiovascular disease, BMC Health services, vol.15, no.45, pp.1-15. Eagar, K 2011, What is activity-based funding? ABF information series No.1, University of Wollongong, Wollongong, viewed 08 March 2017, http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1049context=gsbpapers>. Everhart, D, Neff, D, Al-Amin, M, Nogle, J, Weech-Maldonado, R 2013, The effects of nurs staffing on hospital financial performance: competitive versus less competitive markets, Health care management review, vol.38, no.2, pp.146-155. IHPA 2011, Activity based funding for Austrlian public hospitals: Towards a Pricing Framework, AIHW, Canberra, viewed 07 March 2017, https://www.ihpa.gov.au/sites/g/files/net636/f/publications/activity_based_funding_for_australian_public_hospitals.pdf>. IHPA 2015, Entity Resources and Planned Peformance, AIHW, Canberra, viewed 10 March 2017, https://www.health.gov.au/internet/budget/publishing.nsf/Content/2015-2016_Health_PBS_sup3/$File/2015-16_Health_PBS_4.09_IHPA.pdf>. Mihailovic, N, Kocic, S, Jakovljevic, M 2016, Review of Diagnostic related groups, Health Services Research and Managerial Epidemiology, vol.3, no10 Mitton,C, Dionne, F Donaldson, C 2014, Managing healthcare budgets in times of austerity: The roles of program budgeting and marginal analysis, Applied Health Economics Health Policy, vol.12, no.2, pp.95-102. NSW Health 2016, Service Agreement, NSW Health, viewed 12 Mar 2017, . Rosin, T 2015 , Should more health systems adopt zero-based budgeting?, Beckers Hospital review, viewed 09 March 2017, http://www.beckershospitalreview.com/finance/should-more-health-systems-adopt-zero-based-budgeting.html>. Singh,SR Wheller, J 2012, Hospital financial management: what is the link between revenue cycle management, profitability, and not-for-profit hospitals ability to grow equity?, Journal of Healthcare Management, vol.57, no.5 State Government of Victoria 2017, How to negotiate payment terms with suppliers, State Government of Victoria, viewed 12 Mar 2017, . Sutherland, JM, Repin, N Crump, RT 2012, Reviewing the potential roles of financial incentives for funding healthcare in Canada, Canadian Foundation for Healthcare Improvement, Canada, viewed 07 March 2017, http://www.cfhi-fcass.ca/Libraries/Reports/Reviewing-Financial-Incentives-Sutherland-E.sflb.ashx> . Tanaka,S 2007, Engaging the public in national budgeting: A non-governmental perspective, OECD Journal on Budgeting, vol.7, no.2, pp.139-177. Zelman, WN, McCue, MJ, Glick, ND Thomas, MS 2013, Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications ,4 th edn, Jossey-Bass, San Francisco.

Poverty Eradication Plan

The Poverty Eradication Action Plan (PEAP), Uganda’s equivalent of a Poverty Reduction Strategy Paper (PRSP), serves as the country’s main development strategy and planning framework for fighting poverty. Government’s overriding aim as espoused in PEAP is reducing the total number of people living in absolute poverty to less than 10% of the population by 2017 (MFPED 2001). PRSPs are national planning frameworks for low-income countries.They are a requirement for all countries that would like to access concessional loans through the Poverty Reduction Growth Facility (PRGF) or to benefit from debt relief under the Heavily Indebted Poor Countries (HIPC) initiative. They are also the main framework around which most bilateral donors are to build their cooperation (WHO 2004). Developed in 1997, prior to the advent of the PRSP initiative by the World Bank, PEAP is widely acknowledged to be a home-grown plan with clear national ownership and leadership.Since its formula tion, PEAP has undergone two rounds of revision. The first round of revision was in 1999/2000 and it gave rise to PEAP 2001. The second round was in 2002/2003 and gave rise to the PEAP 2004. PEAP 1997 was structured around four areas: a) macroeconomic policy, b) institutional framework for poverty eradication, c) policy framework to increase incomes of the poor, and d) measures to improve the quality of life of the poor (MFPED 1997).Following the introduction of the PRSP initiative, a mutual agreement was reached between the Government of Uganda and the World Bank to retain PEAP as Uganda’s PRSP with some improvements such as widening consultations on the plan and broadening its scope to include detailed diagnosis of poverty in the country. * What's New * Site Map * Site Index * Contact Us * Glossary ————————————————- Top of Form Bottom of Form * Home * About the IM F * Research * Country Info * News * Videos * Data and Statistics * Publications Uganda and the IMFSend your comments on PRSPs and IPRSPs to [email  protected] rg See also: Poverty Reduction Strategy Papers (PRSPs)Free Email NotificationReceive emails when we post new items of interest to you. Subscribe or Modify your profile| | | | Poverty Reduction Strategy Paper Uganda's Poverty Eradication Action Plan Summary and Main Objectives Ministry of Finance, Planning and Economic Development Kampala, Uganda March 24, 2000 Poverty Reduction Strategy Papers (PRSPs) are prepared by member countries in broad consultation with stakeholders and development partners, including the staffs of the World Bank and the IMF.Updated every three years with annual progress reports, they describe the country's macroeconomic, structural, and social policies in support of growth and poverty reduction, as well as associated external financing needs and major sources of financing. This country document is b eing made available on the IMF website by agreement with the member country as a service to users of the IMF website. | Use the free Adobe Acrobat Reader to view Annex Tables and Chart 1 (212 KB) Contents 1. Introduction Uganda's planning framework The revision of the PEAP2. National vision and overall goals   Ã‚  Ã‚  Ã‚  Reducing bsolute income poverty: Raising educational achievement of Ugandans Improving the health of the people Giving voice to poor communities3. The Poverty Eradication Strategy   Ã‚  Ã‚  Ã‚  Creating a framework for economic growth and transformation   Ã‚  Ã‚  Ã‚  Good governance and security Actions which directly increase the ability of the poor to raise their incomes   Ã‚  Ã‚  Ã‚  Actions which directly improve the quality of life of the poor4. Macroeconomic stability, medium- and long-term expenditure implications of the PEAP   Ã‚  Ã‚  Ã‚  Macroeconomic stability and the macroeconomic framework   Ã‚  Ã‚  Ã‚  The Medium-Term Expenditure FrameworkU sing the PAF to prioritise public expenditure Poverty priorities and the PAF Additionality Accountability of PAF resources The overall allocation of expenditures within the MTEF   Ã‚  Ã‚  Ã‚  Intermediate output targets in the medium-term Long-run targets and costings Long-run resource availability5. The Monitoring StrategyAnnex Table 1: Goals, targets and indicators in the PEAP 2000 Annex Table 2. 1. Uganda: Selected Economic and Financial Indicators, 1996/97–1999/2000 Annex Table 2. 2. Uganda: Fiscal Operations of the Central Government, 1996/97–2002/2003 Annex Table 2. . Uganda: Balance of Payments, 1996/97–2002/03 Annex Table 2. 4. Uganda: Monetary Survey, 2000–3 Annex Table 3: Summary of Medium-Term Expenditure Framework | Contents1. IntroductionThis paper is a synthesis of the main features of the Government of Uganda's Poverty Eradication Action Plan (PEAP). The PEAP has guided the formulation of government policy since its inception in 1997, and is currently being revised. Under this plan, Uganda is being transformed into a modern economy in which people in all sectors can participate in economic growth.This implies a number of conditions: * The economy requires structural transformation, including the modernisation of agriculture, the development of industries which build on demand and supply linkages from agriculture, and continued institutional development in the legal and financial sectors. * Poor people must be able to participate in this growth, both by expanding smallholder agriculture and by increasing employment in industry and services. * Economic growth must be sustainable, high quality and broadly based. The non-material aspects of poverty must be addressed; participatory studies have shown that insecurity, illness, isolation, and disempowerment are as important to the poor as low incomes. Uganda's Poverty Eradication Action Plan (PEAP) is established on four major pillars: * Creating a framework for economic g rowth and transformation * Ensuring good governance and security * Directly increasing the ability of the poor to raise their incomes * Directly increasing the quality of the life of the poor.The revision of the PEAP in 2000 draws on the progress made since 1997, including the development of sector-wide approaches, the participatory research carried out by the Uganda Participatory Poverty Assessment Project (UPPAP), the constraints identified in the Poverty Status Report, and the development of costings of public actions and monitorable indicators in key, poverty-oriented sectors. It will also place a greater emphasis than the 1997 document on the actions which promote private sector development and therefore contribute indirectly to poverty-reduction. The revised PEAP is Uganda's Comprehensive Development Framework.Uganda's planning frameworkThere have been a number of initiatives to strengthen the planning process in recent years. This includes major consultative exercises concern ing Uganda's long term goals and objectives, such as Vision 2025, describing national aspirations, and the 1997 Poverty Eradication Action Plan as a national planning framework to guide detailed medium term sector plans, district plans, and the budget process. In turn, detailed sector-wide plans and investment programmes have reached varying stages of completion, set within an overall medium term expenditure framework.A programme of strengthening district capacity to prepare medium term expenditure frameworks is also underway. The modern approach to planning involves ensuring that the right framework has been established to enable effective programming, implementation and monitoring. Chart 1 describes the flows and relationships between different plan/policy processes in Uganda. The most important point to note is that these elements interact in an ongoing process. Uganda's over-arching national planning document is the Poverty Eradication Action Plan, signalling poverty eradication as the fundamental goal of the Government.Chart 1 shows the relations between the PEAP and other plans. The PEAP is not a blueprint for sector activities. It provides a framework for the development of detailed sector plans and investment programmes. Implementation of the PEAP demands sector-wide programming to determine sector objectives, outputs and outcomes expected from sector expenditures, and the activities which the expenditures will fund in order to achieve the desired outputs and outcomes. Quick guide to planning processes|   |Vision 2025:| an overview of long term goals and aspirations by the year 2025|   | The PEAP:| the national planning framework on which to develop detailed sector strategies|   | Sector Planning:| technical specifications of sector priorities, disciplined by hard budget constraints|   | District Planning:| implementation plans for sector strategies based on local priorities / needs|   | MTEF:| annual, rolling 3 year expenditure planning, set ting out the medium term expenditure priorities and hard budget constraints against which sector plans can be developed and refined|   |District MTEF:| setting out the medium term expenditure priorities and hard budget constraints Against which district plans can be developed and refined|   | Annual Budget ; District Budgets:  Ã‚  Ã‚  | annual implementation of the three year planning framework|   | Donor; NGO; private sector:| participating and sharing information / ideas in developing sector plans and budgets|   | Participatory processes:| bottom-up participation of districts in the planning and monitoring process, as well as participatory poverty assessments, providing essential feedback on progress towards poverty eradication goals| Thus the 1997 PEAP has guided the preparation of detailed sector plans. Capacity constraints within line ministries, which have been a serious limitation in sector planning, are being overcome by support from our donor and NGO communities i n a spirit of partnership and teamwork. In recent years, major advances have been recorded in production of the Ten Year Road Sector Development Programme, the Education Strategic Investment Plan and the Health Sector Plan, and the Plan for the Modernisation of Agriculture. Also underway are plans for the energy sector and the justice sector.Eventually all sectors will be covered by up-to-date, resource constrained sector plans and investment programmes which focus on achieving the goals of the PEAP. In turn, the PEAP and the sector plans set the framework for preparation of district plans (although these are still at an early stage of development). Under Uganda's decentralised system of governance, the local authorities are responsible for determining the implementation plan for sector programmes based on local priorities. Involvement of communities in the planning framework is also being strengthened.Under the Uganda Participatory Poverty Assessment Project (UPPAP), the second pha se will include dissemination of the perspectives of the poor in order to help guide policy at both national and district levels, and there will be further work in nine pilot districts to enhance community-level participatory planning and monitoring capacities. It is important to note that the relationship between both the PEAP and sector plans, and between sector and district plans, and between district and lower local council plans, is an iterative one. The PEAP sets the framework for other plans, but is also a product of those plans.For example, the current PEAP revision reflects the policy statements made in various sector plans, and tries to balance the sector objectives within a national framework. In turn, revisions of sector plans should take note of national priorities and constraints as outlined in the PEAP in refining their own sector strategies. The National Planning Authority, according to its mandate in the Constitution, will have the role of ensuring that the differen t plans are consistent. The same principle applies to the relationship between sector and district plans.While medium term plans establish a policy framework and desired outputs and outcomes, they are meaningless unless disciplined by hard budget constraints. Therefore another critical element of the planning framework is the medium term expenditure framework (MTEF). Since 1992, MFPED has been developing an MTEF, which is presented to Cabinet as part of the annual â€Å"Budget Framework Paper† (BFP), covering three fiscal years. Preparation of the annual BFP includes detailed discussions with sector working groups each year to monitor performance of current programmes and projects.These discussions identify implementation bottlenecks, inefficiencies in existing operations, and potentially unsustainable imbalances in the size of the recurrent and development programmes. The discussions also take account of any upcoming policy initiatives in order to ensure that all new policie s are comprehensively costed to reveal the full extent of their fiscal implications, and in order to propose how the Government's expenditure programme can be adjusted in light of new policy priorities, both within and between sectors.The important point is that, in the medium term, public resources can be redeployed in accordance with changing strategic priorities; it only requires development of the capacity and willingness to reprioritise spending needs and reallocate expenditures in a disciplined way. More recently, there have been attempts to broaden the consultation of the BFP process by increased discussion with donors, especially on the sectoral priorities of Government expenditure and on the consistency of Government assumptions regarding external financing with actual donor financing plans.Steps are also being taken to involve civil society in the consultation process. An abbreviated version of the BFP (the version that goes to Cabinet before the expenditure allocations ar e approved by Cabinet) is published in the annual â€Å"Background to the Budget†, and a detailed summary of the composition of expenditure for all sectors for the three year MTEF is published as an appendix table in the Budget Speech document. In 1999, a start was made on extending the BFP process to the districts, when training workshops were organised for the local Governments.Technical expertise is being provided by the central ministries to help district administrations to prepare their own three year expenditure planning frameworks consistent with resource availability. Government hopes that in due course this capacity can be extended to lower level local councils. The final element of the planning framework is an assessment of the impact of plans and budgets on civil society and beneficiaries, shown at the bottom of Chart 1 as â€Å"civil society†.There are a variety of monitoring techniques, such as technical assessments of project/programme performance, statis tical surveys, and more participatory methods to complement the traditional household survey methods such as the Uganda Participatory Poverty Assessment Project, which is attempting to bring the voice of the poor into national, district, and lower level planning. The results of monitoring activities provide feedback at all levels of the planning system.The revision of the PEAPWhile the basic principles behind the 1997 PEAP remain valid, there have been significant developments since its preparation both in outcomes—such as the huge increase in educational enrolments—and in the preparation of sectoral plans and the information available about poverty. Hence, to remain relevant, the plan has to be revised. It is envisaged that the revision of the PEAP will be a regular process carried out every two years, drawing on the results of the Poverty Status Report which will also be prepared every two years.Preparation of the revised PEAP remains a highly participatory process. Government recognises that the planning system does not consist of decision-making by a single institution at the centre. Rather, the system involves the interaction of a number of processes within an overall framework. As such, the process is much more dynamic and responsive to changes in policy priorities and/or resource constraints. The involvement of a much larger number of agencies in the planning process makes it important that planning linkages are clearly specified and understood.Substantial effort is being made to improve the partnership process in Uganda. As mentioned above, participatory approaches have increasingly been adopted both for sector plan preparation and monitoring and appraisal exercises. In revising the PEAP we have summarised and consolidated the results of previous consultations and research findings. The revised PEAP builds on an ongoing process of consultation. An initial â€Å"discussion draft† was circulated to a wide range of stakeholders to sti mulate dialogue and debate.Later drafts incorporate the results of this wide consultation. In order to ensure reasonable levels of participation in preparation of the revised PEAP, the editorial team prepared a Participatory Action Plan. This includes consultations at the central government level as well as with local governments, with donors, with Parliamentarians, and with civil society, as well as the development of adequate feedback mechanisms to ensure that all stakeholders have contributed effectively to the drafting process.General consultative workshops: the revision process includes two major consultative meetings involving wide representation of stakeholders (politicians; ministries; donors; NGOs; private sector; civil society; urban and local authority representatives, media). The objective of these workshops is to review current drafts and to provide detailed comments on policy issues arising from the drafts. Regional meetings for district officials: MFPED, working with the Ministry of Local Government, has already undertaken some regional work to explain the PEAP, UPPAP findings and budget issues.District officials will be presented with drafts of the revised PEAP at a series of regional workshops. As mentioned above, the CSO Task Force will also be promoting discussion of PEAP related issues within districts and communities. Donor consultations: in addition to participation in the general consultative workshops, the current draft has been presented at the Donor Consultative Group meetings in March 2000. Political consultation: In addition to attendance at the general consultative workshops, another meeting for members of all Parliamentary sessional committees was held in February 2000.This will be followed by further briefing sessions for specific sessional committees on issues relevant to their sector. Feedback mechanisms: It is very important to ensure that there is adequate time for written responses and contributions. Drafts have been widely circulated for the consultative workshops in February and April. There will be active follow-up, especially at the district level, to ensure that written responses are received from every district and sector ministry.Building on existing consultative processes: Issues raised during the revision process will not only be followed up at the general consultative meetings, but also raised through existing consultative fora (such as the sector working groups for the budget framework process; NGO consultative meetings; and regular donor meetings). Contents2. National vision and overall goalsPoverty has many dimensions including low and highly variable levels of income and consumption, physical insecurity, poor health, low levels of education, disempowerment, a heavy burden of work or unemployment, and isolation (both social and geographical).Drawing on recent evidence (including household surveys and the Uganda Participatory Poverty Assessment Project), the PEAP highlights the many dimensi ons of poverty in the Ugandan context. It recognises the importance of increasing income to poor households, and places a high priority on eradicating income poverty. It also views ignorance as a particularly constraining feature of the lives of poor people, and is concerned to improve literacy and educational achievement among the population at large.Health is another central concern for the poor, and the Government has established clear goals for improving the health of Ugandans. It is essential that poor people have an effective voice in the design and implementation of public policy. The objective of the PEAP is to marshal public effort at improving these dimensions of household wellbeing. Reducing absolute income poverty:Income levels are low in Uganda, and large sections of its population are unable to buy the basic necessities of life—food, clothing, and shelter. Low incomes also lead to poor health and limited education. Consumption poverty levels are high.In 1997, 44 percent of the population was estimated to consume less than what is required to meet the basic needs of life. Low rates of economic growth, and the effects of civil disorder, are important historical factors causing poverty in Uganda. Incomes are also highly unequally distributed, which reduces the impact of economic growth on poverty reduction. At the level of the household, poverty is related to rural residence (specifically to living in the north or the east), to land shortage, to low levels of education, to being headed by a female widow or by someone old, and to limited access to markets.Unequal sharing of resources within the household reflects not only cultural factors but unequal access to education and physical assets such as land, in which women are disadvantaged. Poverty also reflects society-wide phenomena including insecurity, the quality of public services, the availability of productive employment, macroeconomic stability and the functioning of markets, health infor mation, and the technical information available throughout society. But there are clear signs of improvement: * The proportion of Ugandans in consumption poverty fell from 56 percent in 1992 to 44 percent in 1997. Average real household consumption rose by 17 percent over the period, and rose in every year (this is confirmed in the national accounts data). * The expenditures of the bottom 20 percent rose even more: those of the bottom 10 percent rose by 29 percent, and those of the of the next 10 percent by 23 percent over the period. * A major factor in the reduction of poverty was the benefit farmers gained from the increase in coffee prices, reflecting the combined effect of the boom in world coffee prices and the liberalisation policy, which passed the price increase on to farmers. There was no systematic trend in inequality in the 1990s. But although inequality is not definitely getting worse in Uganda, it would be desirable to reduce it. These data are encouraging: incomes are rising without a significant increase in inequality, and therefore poverty is falling. However, not all groups participated equally in the growth in incomes. Although poverty fell in all regions, average incomes grew faster in the regions which were initially better off. So although overall inequality did not increase, regional inequality increased significantly (Table 2. 1). Table 2. : Household consumption gains by region| | Region| Percentage of population in consumption poverty| Percentage growth in real consumption|    | 1992| 1997| 1992–1997| | Central| 45. 5| 27. 7| 21. 4| West| 52. 8| 42. 0| 15. 9| East| 59. 2| 54. 3| 11. 0| North| 71. 3| 58. 8| 14. 4| | The income group which benefited most dramatically was cash crop farmers, reflecting the increase in cash crop prices. Poverty in this group fell from 60 percent to 44 percent between 1992 and 1996 (Table 2. 2). Income poverty among food crop farmers remained largely unchanged (falling marginally from 64 percent to 62 percent).Table 2. 2 Household consumption gains by economic sector| | Sector of household head| Share of population (%)| Percentage of population in consumption poverty|    | 1992| 1996| 1992| 1996| | Food crop| 47. 2| 44. 2| 63. 7| 62. 2| Non-food cash crop| 23. 4| 26. 7| 60. 1| 43. 7| Manufacturing| 3. 7| 3. 3| 44. 8| 27. 4| Trade| 6. 7| 6. 9| 25. 9| 19. 4| Government services| 6. 8| 5. 5| 35. 0| 28. 0| Not working| 4. 3| 4. 9| 60. 2| 63. 4| | Participatory data from the UPPAP indicate that many communities consider that poverty is increasing. This probably reflects two differences from the household survey.First, the participatory assessment was confined to poor, mainly food-producing communities, which gained the least from recent improvements. And the perceptions of poor people covered in the UPPAP were probably based on a broader view of poverty, encompassing more than simply low income. The Government of Uganda considers that absolute poverty must be eradicated. It has set itself the objective of reducing the headcount of income poverty to 10 percent of the population by 2017. Raising educational achievement of UgandansThe PEAP aims to raise educational achievement of the Ugandan population, especially among children of poor households.The significance of education is that it increases incomes and economic growth, and it offers an intrinsic benefit in itself. In 1997, the policy of free education for four children in every family was introduced and primary enrolment increased enormously from 2. 6 million in 1996 to 6. 5 million currently. Almost three million children entered the schooling system and the gross enrolment rate, using school-based data, rose to 128 percent in 1997 and 145 percent in 1999. Participatory evidence clearly shows that this increase is greatly appreciated by poor people.These data show that the main issue in primary education is no longer increasing quantity, but maintaining quantity while enhancing quality. It is generall y agreed that the quality of education in Uganda declined seriously between the mid-1970s and the late 1980s, and the increased enrolment is now straining the system. While the 1998 National Integrity Survey found that 60 percent of parents were satisfied with the quality of their children's education, the UPPAP investigation found widespread concern with schooling quality among the poor communities contacted.This is borne out by more formal investigations of schooling quality. The heavily burdened primary schooling system cannot meet the immediate demands for classrooms, teachers, and teaching/learning materials. Educational policy thus faces two central challenges: first, how to keep the increased number of children in school: and secondly, how to ensure that quality is maintained and improved given the expansion in the system. Enrolment rates in secondary and tertiary education remain low, although they have increased in recent years.Total secondary enrolment rose from 336,022 in 1997 to 427,592 in 1999. The draft strategic plan for secondary education estimates that only 10 percent of the secondary school age population is in school and that only 6 percent of the poorest 25 percent complete secondary education whereas 22 percent of the best-off 25 percent do so. Whereas Uganda is now well ahead of most countries in Africa in primary education, it is behind the others in secondary education.Although current policy will be focussed on achieving sustainable universal primary education, the requirements of a growing modern economy will place increasing emphasis on secondary schooling, and such schooling is certain to figure prominently in future PEAP revisions. The Government of Uganda has achieved its objective of universal primary education. The challenge it now faces is to encourage children to remain in school, and to acquire relevant skills for adult life.This implies the following objectives: * Maintain universal primary school enrollment (including poor households) * Reduce drop out rates and raise completion rates * Raise the cognitive skills of primary school graduates (as reflected in results from the National Assessment of Progress in Education). Improving the health of the peopleLife expectancy in Uganda has been estimated at just 42 years in 1997 (World Development Indicators). This is exceptionally low, mainly because of the AIDS epidemic. Child mortality is high, though it fell significantly from 180 per thousand in 1989 to 147 in 1994.In addition to increasing mortality, illnesses such as AIDS and malaria incapacitate large numbers of people. Trends in AIDS incidence are presented in the Poverty Status Report; there is a marked fall in incidence in urban areas, where the range of prevalence rates in ante-natal clinic attenders in six urban centers fell from 12–28 percent in 1991 to 7–15 percent in 1997. In rural areas there is no clear trend. Illness is a dimension of poverty which affects all income groups in Uganda, although it affects the poor particularly badly.Health outcomes depend on at least six factors: incomes, education, information, health services, water supply and sanitation. Studies of household data in Uganda have shown that both education and specific information about the causes of illness significantly reduce child mortality. For instance, one study (using 1992 data) found that if a mother has good information about malaria and diarrhea, this reduces the under-five mortality of her children by 0. 045, compared with the overall mortality rate of 0. 18. The same study found that child mortality was much more strongly related to education than to incomes.Mothers in the top expenditure quartile had lost almost the same proportion of their children as mothers in the bottom expenditure quartile, but child mortality dropped at every level of maternal education and mothers with further education had only a quarter as high a rate of child mortality as mothers with no educatio n. More recent data suggests that the link between incomes and mortality has grown stronger (Table 2. 3). Between 1988 and 1995, while under-three mortality fell by 6 percentage points for the poorest 20 percent, it declined by almost 60 points for the richest quintile. Table 2. Under-three mortality by wealth quintile| | | 1988| 1995| | Poorest quintile| 188. 5| 182. 5| Second quintile| 163. 9| 154. 5| Third quintile| 184. 9| 168. 1| Fourth quintile| 180. 6| 134. 3| Richest quintile| 157. 6| 99. 7| | Source: Sahn et al (1999)| Adult mortality may be more powerfully affected than child mortality by income and access to curative services. The most commonly named consequence of poverty in the UPPAP study was ill health, and the third most commonly named was death. It may also be more powerfully affected by the presence of health services, especially for maternal mortality.In the case of AIDS, cultural factors interact with poverty. In some parts of the country, single women cannot get access to land; finding a partner then becomes a matter of survival and people in these circumstances take risks which they would otherwise avoid. A World Bank study has developed projections of under-five mortality in Uganda. Using international data, it has been shown that child mortality responds to the effects of technical progress in preventive and curative care over time, and to female education and income growth within the economy. Using relationships estimated using international data, the ollowing projections are derived: Table 2. 4: Projections of Child Mortality in Uganda, 2017| | | Child mortality in 1995:| 160. 2| | Child mortality in 2015:| | | assuming time trend alone assuming increased female education assuming female education and 3% per capita income growth assuming female education and 5% per capita income growth| 118. 9 117. 6 110. 2 85. 2| | | | These projections show that child mortality could be halved by the end of the period. However, there are three cavea ts: * the impact of female education may be underestimated, especially given UPE. AIDS will tend to increase child mortality more than these data suggest. * Most importantly, the best international performers—many of whom have been socialist countries such as China and Cuba—have achieved much faster improvements in health outcomes. It is important to recognize that energetic public action can produce very fast improvements in health even at low income levels, as the examples of China, Cuba and Sri Lanka show; Uganda's primary education enrolment, though not its health status, is now much better than most countries at its income level.The lessons suggested by these countries include the enormous importance of getting simple health messages out to the population, and the importance of community-level management using very cheap personnel sometimes known as `barefoot doctors'. The very strong emphasis on preventive health messages in the minimum package is an attempt to r eorientate the health system to maximize its effects on health outcomes. Improving the health of the Ugandan population is a priority objective of the Government of Uganda.The Health Sector Strategy sets targets of reducing child mortality from 147 to 103 per thousand, maternal mortality from 506 to 354 per 100,000, to reduce HIV prevalence by 35%, reducing the total fertility rate to 5. 4, and reducing stunting to 28% by 2004/5. Giving voice to poor communitiesPoor people suffer directly from being disempowered. Powerlessness, described as inability to affect things around one, was reflected in the findings of UPPAP. The National Integrity Survey also found that 40 percent of the users of public services had to pay bribes.Such experiences are not only materially impoverishing; they are also demoralising. More broadly, people experience frustration when they cannot perceive their influence over public policy. UPPAP reported, for instance, that poor people saw no effective mechanisms to hold service deliverers accountable. The Government of Uganda aims to implement further administrative and political reforms which will increase poor people's control over their own lives and the policies and services which affect them. Contents3.The Poverty Eradication StrategyThe overall poverty eradication strategy is based on the following principles: * The public sector's role is to intervene in areas where markets function poorly or would produce very inequitable outcomes. * Where the public sector intervenes, it should use the most cost-effective methods, including the use of NGOs for service delivery where appropriate. * Poverty-eradication is a partnership and should involve the closest possible integration of the efforts of government with its development partners. All government policies should reflect the importance of distributional considerations, of gender, of children's rights, and of environmental impacts. * Each area of public action will be guided by the formu lation of desired outcomes and the designs of inputs and outputs to promote them. Strategic public action for poverty eradication is established on four pillars: * creating a framework for economic growth and transformation; * good governance and security; * actions which directly increase the ability of the poor to raise their incomes; * actions which directly improve the quality of life of the poor.It is important to note that these four elements interact. For instance, although primary education is discussed under `quality of life', it also has implications for all the other three goals. The distinction between the goals helps to focus attention on the actions which most directly affect poverty, but the interactions between the objectives need to be borne in mind. Creating a framework for economic growth and transformation. Economic growth and employment-generation are necessary conditions for poverty-eradication.The PEAP must be based on an understanding of the growth potential of the Ugandan economy, and of the public interventions needed to achieve it. .Work at Uganda's Economic Policy Research Centre has projected the growth of incomes and investment over the next twenty years. The EPRC's model has three main components; an investment function, a balance-of-payments constraint, and a production function. Economic growth in the model is driven by three main factors; the accumulation of human and physical capital, and the shift of labour from agriculture to manufacturing, in which it is assumed to be more productive.Estimates of the coefficients are derived from a sixteen-country panel data set. The projections for Uganda include a low-case, based on existing trends, giving 5. 5–6. 5 percent annual growth in GDP over the period (giving a GDP per capita of $550 in constant prices in 2020). They also provide a high-case, based on an increase in the productivity of aid and the diversification of the productive structure. This yields 7–8 percent per annum growth, giving a GDP per capita of $700 in 2020. This model therefore gives potential annual per capita GDP growth of between 2. percent and 4 percent. A very recent study at the World Bank takes a larger cross section to explain why growth rates vary across countries, and focuses more on institutional determinants. It identifies a number of factors which constrain growth, and assesses by how much economic growth could be raised if Uganda could close the gap in these factors compared with average values for developing countries (controlling for income levels). Some factors (such as trade openness and macroeconomic stability) are already better than average, and cannot yield higher future growth.Uganda must maintain the good performance of these indicators. But others—closing the gap in educational attainment, deepening financial institutions, and improving property and contract rights—can yield significant gains. The study estimates such gains could produce an additional GDP annual growth per capita of 1. 7 percentage points. Mean per capita growth of 3. 2 percent per annum (which is what was achieved in the 1990s) could be raised to around 4. 9 percent (assuming no deterioration in the external terms of trade).This translates into a GDP growth rate of 7. 8 percent per annum. These studies show that GDP growth of the order of 7 percent per annum is feasible over the longer term in Uganda. But such economic growth will not be automatic. It will call for public action today to build the institutions needed for higher growth. Economic growth in Uganda requires a framework within which the private sector can expand. The first essential element is macroeconomic stability. Without this, economic growth will not be sustainable.The revised PEAP therefore includes a commitment to maintain macroeconomic discipline which has underpinned the fast economic growth of recent years. The second key element is setting appropriate macroeconomic incentive s. This involves economic openness, which encourages exports and labor-intensive investments. The future for Ugandan industry is not reliance on a wall of high tariff protection—which encourages capital-intensive investment which does little for employment—but open competition in a market which is being expanded by rising incomes from agricultural modernisation.Thirdly, the framework for economic development also includes the equitable and efficient collection and use of public resources. On the revenue side, independent research has shown that recent tax reforms, including the introduction of VAT have made the incidence of taxes more progressive. Local taxation, however, may need review in order to make it more progressive. The use of the savings made available by external debt relief for poverty-reducing purposes and the development of a sound strategy for external borrowing are essential.On the expenditure side, the Poverty Action Fund has been used to reallocate ex penditures to directly poverty-reducing services – primary education, primary health, agricultural extension, feeder roads. Equalisation grants are gradually being introduced; these are designed to make the delivery of services more equals across the country. The aim is that a poor woman in a remote rural area should be able to demand the same standard of service from the public sector as a man in the most affluent urban setting. The budgetary reform under the MTEF is central to implementing the PEAP.Finally, in order to promote economic transformation, the constraints on private sector competitiveness need to be removed. Surveys of business people in Uganda have shown that they face severe constraints on their operations. Infrastructure is a major constraint; firms' experience of power cuts significantly reduces their investment, and the development of internal markets is impeded by the limitations of the road network. Hence the sector-wide transport strategy and the ongoing process of utility reform are key.Another constraint is the difficulty that business people experience in enforcing contracts; this will be addressed by the programme of commercial justice reform which the government is beginning. The weakness of the financial sector is also a serious constraint. Reform of these sectors is essential for the development of the private sector. This is a poverty issue, because the expansion of formal employment is a central part of the strategy. A crucial component of the PEAP is accelerating economic growth. The actions outlined above can be expected to raise GDP growth performance to a potential as high as almost 5 percent per capita per year.Good governance and securityGood governance is increasingly recognised as a prerequisite to economic growth and development. In Uganda, consultations with the poor have shown that insecurity is among their most pressing concerns. Work by the Human Rights Commission, the Law and Order Sector Working Group and th e Governance Action Plan project has identified the main priority areas in this sector. Conflict resolution and effective support to conflict-afflicted areas are essential. Armed conflict has been a decisive factor in the impoverishment of the North and the East.In 1999 the internally displaced population of Uganda is estimated at 622,000, and in addition insecurity affects many people who are not actually displaced. So the successful resolution of conflicts is a necessary part of poverty-eradication. The democratisation of Uganda has been pursued in a context of decentralisation. The process involves the transfer of responsibilities to district level. Participatory work has shown that the most highly appreciated level is the Local Council 1 or Village Council (LC1), the level which is closest to the people.The implications of decentralisation for ministries of central government have been reflected in the government restructuring, but the extent to which they are now ready to fulfi l their new role needs to be assessed. Good governance involves making public expenditure transparent and efficient. Many reforms have been undertaken to make it harder to misuse public funds with impunity, including the establishment of the Ministry of Ethics and Integrity and the design of a new regulatory structure for procurement. Service delivery on the ground urgently needs improvement, as various surveys have shown.This is to be addressed by the introduction of results-orientated management, by pay reform designed to increase and simplify public sector remuneration, and by strengthening bottom-up accountability; communities must be able to hold service deliverers accountable through the Village Councils. Law and order is being addressed by the introduction of a sector-wide approach in which reforms proposed for the criminal justice sector will be costed. The poor reputation of the police needs to be addressed by an improvement in service delivery.The relatively good reputatio ns of LDUs and LC courts can be built upon. Public information is central to good governance and innovative methods of disseminating information should be explored by inter-sectoral cooperation. The special needs of the disabled require a community-based approach which deserves priority. Disaster management, which includes the handling of drought, floods, earthquakes and conflict, requires both preparedness and response; the recently established Ministry within the Prime Minister's Office has prepared a national strategy.Actions which directly increase the ability of the poor to raise their incomesRecent empirical work (mentioned above) has established that GDP growth rates of over 7 percent per annum are feasible for Uganda, providing the needed public actions are taken. What does such growth mean for household income and poverty? The Government has prepared projections for GDP growth and other key macroeconomic variables. The model forecasts real GDP and real per capita private co nsumption up to fiscal year 2019/20, on the basis of a national accounts format.In these scenarios private incomes grow less fast than Government income. As a result, private consumption growth is slower than GDP growth. In real terms, consumption per capita grows by 3. 2 percent per annum for the high projection and 2. 5 percent per annum for the low one. How much poverty reduction are such consumption growth rates likely to yield? Taking the structure and distribution of income (measured by household consumption) as given in the 1997 Poverty Monitoring Survey, an assessment can be made of the effect of such growth on income poverty.If we assume that every Ugandan household experiences per capita income growth of 3. 3 percent per annum, the income poverty headcount would fall to 10 percent by 2017. The MOFEP higher growth scenario (a growth of household consumption of 6. 2 percent per annum, or 3. 3 percent in per capita terms) is therefore consistent with the poverty goal of the P EAP, so long as such growth is distributionally neutral (all households benefit proportionately). Not all sectors, however, will experience such high growth. Taking past experience as a guide, a growth rate of 6. percent in aggregate consumption might involve agricultural incomes growing at only 4. 7 percent per annum (with services and manufacturing growth being respectively 7. 9 percent and 12. 4 percent). If households are locked in their sectors of employment (as reported in the 1997 household survey), those employed in agriculture would experience slower income growth. We estimate that in this limiting case, headcount poverty would only fall to 22 percent, even if aggregate household income growth were 6. 2 percent per annum. Low agricultural growth constrains the poverty reducing impact of economic growth.These conditional projections of potential poverty reduction under the Gvovernment's assumptions for economic growth highlight the need for more targeted interventions, the e ffect of which would be to accelerate the incomes of the poor directly. Two main lessons emerge: first, poverty reduction calls for higher agricultural growth rates; and non-farm employment must be increased in the rural areas where most poor people live. Most Ugandans are self-employed, mainly in agriculture. This gives the Plan for the Modernisation of Agriculture a central role in poverty-eradication.Despite the constraints of limited technology and market access, the potential of raising agricultural incomes is considerable. The PMA identifies six core areas for public action in agriculture: research and technology, advisory services, education for agriculture, access to rural finance, access to markets, and sustainable natural resource utilisation and management. Employment outside agriculture can be promoted by microfinance, advisory services, and vocational training. Feeder roads remain a central priority as in the 1997 PEAP, since when maintenance expenditure has tripled.Lab our-intensive methods have been found to be financially cheaper than other methods of road-building and will contribute to employment generation. Research on land shows considerable inequality, often resulting from administrative and political factors more than the operation of the market. The Land Act is designed to strengthen the land rights of the poor. Women's land rights need to be strengthened further; public sensitisation for the purpose of the Land Act is needed: a cost-effective structure for land administration is needed; and the Land Fund needs to be operationalised, targeting the landless poor.The restocking programme for rural livestock has the potential to reduce poverty by restoring economically valuable assets, provided mechanisms are identified to target the poor. The Government is establishing a new regulatory and supervisory structure for microfinance in order to increase poor people's access to financial services. The Government has withdrawn from the provision o f capital for credit but will still provide support for capacity-building. Publicly supported research is coordinated by NARO. Research is to be decentralised, and stakeholders are to be involved.The appropriate mix between national and international research needs consideration. The potential benefits of publicly provided advisory services vastly outweigh their costs. Strategy is now being reviewed. The advisory service must address issues relevant to poor farmers, using ideas developed by NGOs for low-input technologies which the poor can afford. The services need to address productivity-enhancing techniques for farmers at different levels of resources, drought-resistant crops where needed, nutritional issues, marketing, storage and processing, and soil-conservation.Livestock, fisheries and agroforestry will also be covered by the advisory services. The management of markets is a private sector role under the PMA. The public sector has a role in ensuring that market access is affo rdable for vendors, in improving access to market information throughout the country, and in formulating policy on genetic modification and on organic farming. Sustainable resource use will be promoted by raising awareness, including the encouragement of communal initiatives to protect common property resources.Forestry needs to be promoted by a mixture of public protection and investment in private forests. Valley dam schemes will be reviewed; this is an important priority for addressing the poverty of the Karimojong and the insecurity associated with cattle-rustling. Energy for the poor will be promoted by encouraging the use of more efficient cooking technologies and by smart subsidies for rural electrification, which will encourage entrepreneurs to invest in power infrastructure in rural growth centres.This will make it easier for the rural poor to have their output processed, increasing their effective access to the market; it will also enable more households to gain access to electricity in their homes. Actions which directly improve the quality of life of the poorHuman development outcomes in Uganda have been transformed by the introduction of free primary education for four children in each family, which has lead to a massive increase in enrolment. Primary education is a central element of the PEAP. Now that quantity has increased so much, quality is critical.Challenges include the implementation of low-cost classroom construction and the management of the gap between teachers and classrooms including the use of double shifts where appropriate, measures for bottom-up accountability, and the possibility of using school gardens to educate children about agriculture while also providing some food. In secondary education, a strategy is in draft. Targeting gifted children from poor backgrounds is a poverty issue. Health care is being coordinated by the new health strategic plan. At the heart of this is the minimum health package.Service delivery is being im proved by a number of mechanisms including better remuneration and training, better infrastructure, and better accountability to consumers through village health committees. The pro-poor implementation of cost-recovery will require the successful identification of targeting mechanisms, perhaps geographically based. AIDS and population growth raise cross-cutting issues. Water and sanitation are being supported by major public interventions, with communities paying a small proportion of the investment costs and being responsible for the maintenance of the facilities.Community sensitisation on water-borne disease and on the need for maintenance is therefore critical. Adult literacy is likely to be made an element of PAF from this year; its benefits are potentially very considerable, as literacy has been directly found to increase agricultural productivity and evidence suggests it will also influence health outcomes. Housing is a private sector responsibility, but the state can encourag e the availability of low-cost housing. Contents4.Macroeconomic stability, medium- and long-term expenditure implications of the PEAPMacroeconomic stability and the macroeconomic frameworkIn the medium term (three years), Government's strategy for fighting poverty is reflected in the Medium Term Expenditure Framework (MTEF) and the expenditure priorities which are incorporated into the MTEF. The MTEF is itself fully integrated into a macroeconomic framework which is designed to ensure low inflation of no more than 5% and to support rapid broad based real GDP growth of 7% per annum. In the first year of the MTEF, 2000/01, inflation may be higher and growth lower than the medium term targets because of the lagged impact of the external terms of trade shock which Uganda suffered in 1999/2000). The exchange rate will continue to be market determined, with the Bank of Uganda intervening only to dampen excessive volatility in the exchange rate and to maintain net international reserves at a level which is consistent with the targets in the PRGF programme (these targets will be based on the objective of maintaining gross foreign reserves at a minimum of ive months of imports of goods and non factor services). Macroeconomic policy will be accompanied by a deepening of structural reforms in key areas including the banking and financial system, public utilities and the transport infrastructure, which are aimed at removing key constraints to private sector growth, and reforms to improve the efficiency and quality of public services. The key linkages between the MTEF and the macroeconomic framework are via the domestic borrowing requirement and the projected net inflows of external financing.The MTEF is consistent with both the levels of donor support projected over the medium term, relatively conservative projections of domestic revenue mobilisation and domestic bank borrowing which is consistent with the monetary objectives discussed in the next paragraph. The increased expenditures on programmes and projects specifically targeted on poverty reduction (for example, expenditures under the Poverty Action Fund (PAF) are projected to increase from 2. 9% of GDP in 1998/99 to 4. 6% of GDP in 2000/01) are fully consistent with the Government's macroeconomic objectives.Increased expenditures on the PAF will be funded by increased donor support, including debt relief made available under the enhanced HIPC initiative, and by restraint in the growth of non priority expenditures. The overall fiscal deficit, excluding grants, is projected to rise from the programmed 8. 1% of GDP in 1999/2000 to 9. 7% of GDP in 2000/01, before declining to 8. 7% and 8. 2% of GDP in 2001/02 and 2002/03 respectively. Donor support, net of external amortisation, is projected at 10. 4%, 10. 1% and 9. % of GDP respectively in 2000/01, 2001/02 and 2002/03, and will therefore more than cover the projected fiscal deficits, allowing Government to accumulate savings with the domestic ban king system and the non bank private sector. Annex Table 2. 1 refers. The medium term monetary objectives are to maintain a rate of growth of broad money (M2) of 15% per annum which is required to hold core inflation (which excludes food crop and fuel prices) to no more than 5% per annum. This rate of money supply growth is consistent with the projected increase in money demand given projected growth of nominal GDP (averaging 12. % per annum) and a decline in the velocity of circulation of circulation of an average of 2. 2% per annum. Private sector credit is projected to expand by 15% per annum in nominal terms. This will allow private sector credit to gradually increase as a share of GDP. The growth in the net foreign assets of the Bank of Uganda will be determined primarily by the objective of maintaining gross foreign reserves at a minimum of five months of imports. Consistent with these objectives, Government is projected to accumulate savings in the domestic banking system of Shs 14 billion (0. 14% of GDP) in 2000/01, Shs 89 billion (0. 1% of GDP) in 2001/02 and Shs 95 billion (0. 77% of GDP) in 2002/03. Annex Table 2. 4 refers. The trade deficit (denominated in dollars) is projected to widen in 2000/01 because of the impact of the external terms of trade shock, which will depress export earnings. However the increase in the trade deficit will be largely offset by the projected rise in official and private transfers. As a percentage of GDP, the current account deficit (including transfers and FDI) will rise from the outturn of 4. 1% in 1998/99 to a projected 4. 6% of GDP in 2000/01, before declining to 3. 8% and 3. % of GDP in the following two years. The capital account is projected to remain in surplus, which together with the debt relief provided under the HIPC and enhanced HIPC initiatives, will enable the Bank of Uganda to accumulate net international reserves of $58 million in 2000/01, $108 million in 2001/02, and $116 million in 2002/03. This is s ufficient to maintain gross reserves at the target level of five months of imports of goods and non factor services. Annex Table 2. 3 refers. Annex Table 2. 1 summarises projected investment and savings. Public investment is projected at 7. 4% of GDP in 1999/2000 and 7. %, 7. 3% and 7. 0% in the next three years. Public savings are projected at 5. 1% of GDP in 1999/2000 and 5. 0%, 5. 0% and 4. 7% in the next three years. Private investment is projected at 10. 3% of GDP in 1999/2000, rising to 10. 5%, 12. 8% and 12. 9% in the next three years. Finally, private savings are projected to fall to 8. 1% of GDP in 1999/2000, recovering to 8. 7%, 11. 2% and 11. 5% in the next three years. The Medium-Term Expenditure FrameworkThose aspects of the PEAP which have implications for public expenditure will be implemented through the medium-term expenditure framework.This framework is presented to Cabinet as part of the annual â€Å"Budget Framework Paper (BFP)†, covering three fiscal year s. The objective of the MTEF is the design of all public expenditure by a clear analysis of the link between inputs, outputs and outcomes, in a framework which ensures consistency of sectoral expenditure levels with the overall resource constraint in order to ensure macroeconomic stability and to maximise the efficiency of public expenditure in attaining predetermined utcomes. Ultimately, these medium-term objectives need to be consistent with the longer-term objectives defined by the PEAP; so the PEAP will be used to guide reallocations of expenditure. The sectoral implications of the PEAP objectives are reflected in the design of sectoral strategies which in turn guide the expenditure allocations made each year under the MTEF. The MTEF is intended to guide all public expenditure including the use of resources committed by donors.For this reason, the Government is introducing a sector-wide approach wherever feasible, under which government and donors contribute to a common pool of resources used to achieve the sectoral objectives. The flexibility which this arrangement allows is essential to the efficient use of public expenditure,. because only in a sector-wide approach can the overall implications of a national programme within each sector be considered, and because a sector-wide approach can reduce duplications of effort by different projects and divergences of cost structure between projects and other public activities.Using the PAF to prioritise public expenditureThe PEAP of 1997 drew particular attention to the need for increased expenditure on the delivery of those services which directly benefit the poor. It was recognised that in Uganda, as in most other countries, there could be a tendency to neglect the interests of the poor unless a conscious effort was made; this is one implication of the observation that powerlessness is one aspect of poverty. Since 1997, the institution of the Poverty Action Fund has been used to achieve the planned reallocatio ns.The PAF has three essential elements for this objective. First, no expenditure is included in PAF unless its direct poverty benefits are clearly demonstrated. Secondly, the use of funds in the PAF is subject to particularly stringent monitoring procedures in which civil society actively participates. Thirdly, the use of funds for PAF activities is clearly additional to the levels achieved in the 1997/8 budget. Most of the areas included in the PAF consist of service delivery which directly benefits poor people, rather than administration.In order to achieve the increase in spending on service delivery and on infrastructure, it is necessary to keep administration lean. Government will continue to endeavour to make its administrative elements as lean as possible and to avoid the proliferation of administrative structures which can impose serious fiscal costs. Poverty priorities and the PAF The PAF (summarised in Table 4. 1) includes the most high-priority public expenditures from t he poverty-eradication perspective.Inclusion of a particular sector or programme in the PAF is justified by the high economic and/or social returns to the form of expenditure, by the fact that a substantial proportion of the benefits of expenditure in that area are received by the poor, and by the priority which participatory work has shown the poor themselves attach to that area. Areas already included in the PAF include rural roads, agricultural extension, primary health, primary education, water supply, and equalisation grants whose purpose (defined in the Constitution) is to make the quality of service del

Fashion and Social Media

Psychology of Clothing Youngstown State University November 21, 2013 The fashion industry is uniquely positioned to take full advantage of the power of social media. Being an exceedingly visual and expressive industry with an engaged consumer base, the increased publicity and interactivity that social media provides lends itself particularly well to brands in the industry. Twitter, one the leading social media sites. Has also established a presence at major events in the fashion world.An example is Fashion Week, where the fashion house Barberry broke barriers and instilled innovation by live-tweeting photographs of models Just before they stepped on the catwalk at London Fashion Week. It gave individuals an unparalleled look behind the scenes, which in return made â€Å"#Barberry' the second most trending topic on Twitter at that time. Other leaders within the fashion industry are taking to the idea twitter and social media as a whole to expand the relevance of the industry on their take. They are tons of professionals within our industry who can accommodate just about any individuals' style and taste.For the purpose of this paper the focus as on four leaders within the fashion industry. Cosmetic Brands M. A. C cosmetics (@MACcosmectics) and Amiability Cosmetics (@Maybelline) Creative Director of ELL Magazine Joe Zee (@mrJoezee) and finally the website and blob dedicated to everything beauty, Into the Gloss (@lntoTheGloss). Over the past several months, there were key significances with each, first M. A. C cosmetic's re launch Of VIVA Glam, since the first campaign was unveiled in 1994 which features a beautifully creamy shade of deep red where all proceeds went to aids research. But the biggest part of he re launch was when M.A. C cosmetic's revealed via twitter that Rueful was returning to front the one that started it all: Viva Glam 1. Next is Amiability New York Cosmetics, Something very admirable is that they actually reply back to their followers in rega rds to questions, concerns and the whole nine. Also they rewet pictures of individual wearing products for their line as well. Something on trend is the innovation of plums colors which are perfect for the fall and also globalization is a trend with the recent opening of a corporate branch in Lagos, Nigeria which events arm the red carpet opening party trending that night.Next is Ell Creative Director Joe Zee. I'd like to call him Fashion's Approachable Ambassador because given his status within the fashion industry he really connects with his followers by tweeting things within his every life as well as live tweet photos from front row runway shows and event parties within the fashion industry and oncoming trends and sneak peeks within ELL magazine's upcoming issues. Lastly is into the gloss, being an individual who loves makeup would preferable loved work within the beauty part of the fashion industry, I take a lot in from this twitter page, which is no secret my favorite.They are always ahead with the latest trends and innovations regarding all things beauty with an editorial feel. The instant update regarding the latest breakthrough trends are something waiting for. Using twitter in the fashion industry is a win / win for both the individuals and the fashion Houses or leaders. Brands use it to expand and reach to the specific target market using social networking sites like Twitter. Twitter and Social media in the fashion industry is important basically cuts out the middle man while creating a direct communication method between the buyer and seller.The fashion industry literally have uncovered a one of the secrets to success through consumer driving inspiration and testing trends. Which ultimately allows the ability to identify and capitalize on what's currently trending and hot in the industry early, which can make all the difference to a fashion brand or retailer's predominance in the industry, with the ability to amplify the buzz. The best thing about this twitter assignment was the ability to really identify with what part of the fashion industry o wanted to be a part of by following certain people, whether that be Journalist, photographer, marketing or beauty for example.Twitter is the ultimate form of communication with brands and leaders because, like mentioned before they really respond back to their followers creating a one-on-one feel and instilling inspiration to that follower as well, so I would suggest if anything use twitter as platform for professional reasons to get your name out there and be a part of communities full of individuals with similar interest and for that reason alone, is why I will continue to use twitter.

Monetary policy conduct under inflation targeting framework - Free Essay Example

Sample details Pages: 25 Words: 7432 Downloads: 2 Date added: 2017/06/26 Category Statistics Essay Did you like this example? CHARPTER ONE 1.0 INTRODUCTION The world is turning into a demon to its own people as many are living in deplorable situations that are hardly bearable. The price level have risen sharply in the recent past coupled with dwindling wage levels and declining growth rate, especially, in majority of African countries where poverty has embedded itself to an extent that people in these countries live below one dollar per day. However, majority of governments have embarked on instituting major reforms through introduction of avant-garde monetary policy schemes, which forge the way forward through which the monetary authority re-design its policy by focusing primarily on price stability as the primary objective. Don’t waste time! Our writers will create an original "Monetary policy conduct under inflation targeting framework" essay for you Create order In the last twenty years, majority of both developed and emerging economies respectively have embarked on IT framework as their best choice in conducting monetary policy, with none of inflation countries targeters abandoning the framework, save for Finland and Spain, that have already joined the European Monetary System (EMS) in late 90s. IT-framework; an approach to management of monetary policy was pioneered by the New Zealand Government in 1990 after it abandoned its pegged exchange rate five years later. By the year 2009, over twenty-five countries comprised of developed, emerging, and developing countries around the world had so far espoused the IT-Framework and have reported greater achievement of low inflation rate. Majority of these countries mainly from Latin America, East Asia and United Kingdom had experienced high bout of inflation and financial crises exacerbated by their former monetary policy regimes. These not only resulted to sacrificing output and employment but als o resulted to severe increase in international capital flow leading to a switch to floating exchange rate. 1.1 Historical Background In relation to many other African countries, the monetary policy and financial institutions of Kenya has developed rapidly within the last two decades and probably more advanced than other countries at a similar stage of underdevelopment. Kenya opened its own Central Bank in September 1966 with the hope that, it would at least generate secondary expansion by facilitating the creation of bank credit and accelerate the process of monetization of the economys subsistence sector, in spite, of its openness and sensitivity to fluctuations of primary commodities. The next decade following the establishment of her Central Bank witnessed interesting changes in Kenyas monetary and banking policies as the oil shock of 1973 created inflexibility in the foreign exchange reserves as they declined considerably. Hence, the magnitude and speed of reduction in credit expansion were not adequate to show the decline in foreign exchange reserves. In fact, the fear that tight monetary policy induced from outside could hamper the rate of development at home led to feeble corrective measures such as restraining inflation impact due to price boom of exports, which coincided with expansionary monetary policy under a low profile of interest rates. In the early 1980s and 1990s Kenya experienced high inflation resulting from a prolonged spell of drought and political instability that resulted from introduction of a multiparty system in the Kenyan political history in late 1980 and also general elections followed later in 1992. Besides, in 2002, the growth per capita was negative due to high corruption of the highly ranked government official and political interferences of major decision-making organs of government including the Central Bank of Kenya, as it could not carry out its mandate freely. In the year 2008, Kenya faced another dark moment in terms of its political stability as the whole country went into turmoil due to the highly disputed general elections of 2007. The once giant of East African countries went down into ashes and major sectors of the economy especially the financial sector got hurt the most. Since then, it has been very difficult for the resurgence of economic stability, political stability and financial i nstitution even after the power brokering that gave birth to a coalition government in that same year. However, in late 2010, the coalition government of Kenya gave hopes to recovery of major sectors of the economy when the New Constitution unanimously voted into existence in a referendum. This Constitution has brought about major reforms in the financial and political arenas more specifically in the Central Bank of Kenya as per se; hence, major changes are expected to be instituted by CBK for an effective and independent monetary policy conduct. 1.1.2 Road map of Kenya towards adoption of ITF 1.1.2a) Central Bank of Kenya main policy objective The amended Central Bank of Kenya Act of 1996, CAP 491(4) permitted the Banks operational autonomy in the conduct of monetary policy and mandated price stability as one of its primary objectives through formulation and implementation of such principal object of the bank, thus, promoting the long-term goal of economic growth. In fact, the Central Bank of Kenya does not announce an inflation target; instead, it uses money growth reserve as her main nominal anchor of which the repo rate forms its main operational target. It is in this perspective that the CBK monitor and control inflation rate through interest rate transmission channel as a way of conducting monetary policy. Apart from the main objective that is price stability, the Bank has a mandate to balance its inflation goals against other goals such as exchange rate stability and promotion of liquidity, solvency and steady-market back up while ensuring equilibrium in domestic and external payments. 1.1.2b) Central Bank of Kenya attributes that favor ITF adoption The Bank like any other bank of its caliber is mandated by the legislation to carry out its objectives in a more coherent and consistent manner without any external interference, thereby commanding greater central bank independence. The Old Constitution of the Republic Kenya of (1963) and Newly Promulgated Constitution of the Republic Kenya of (2010) have further strengthened the Banks Act, thereby, empowering the bank to carry its main objective without political interferences and curbing time-inconsistency trap. The appointment and removal of the CEO of the Bank (governor) and his/her deputy rest with the president discretion for a period of four years term in office unless stated otherwise. In connection to the governor term of office termination, the president has a directive to appoint a tribunal comprised consisting of a chairperson and two members who hold offices in High Court or Court of Appeal. This tribunal enquires on matters related to termination of such appointments and make recommendation to the president. Nevertheless, these might undermine the Banks credibility in upholding autonomy in case the termination of the governor might be unlawfully since the appointing authority might compromise the tribunal to favor his/her decision. In conformity with the Act CAP (491), the MPC is hereby required to forward a report at least every six month to the Minister detailing all dealings the bank is undertaking hence the Minister shall table the MPC report before the Parliament for further amendment and deliberations. The Bank is exempted from any taxation whatsoever in respect to losses or profits. The Banks books of records and financial statements subjected for auditing by the Controller and Auditor General only if the Minister of Finance deems it appropriate for such auditing. Both Governor and Deputy Governor are indebted to adhere to the bank in totality and prohibited from engaging in any other paid businesses, professional activities or employment while still in office. These is in agreement with majority of literature such as (Klomp and Haan 2008) who based their idea on Cukierman Index which states the following inherent features for a central bank to be termed as more independent: (i) if the governor appointing authority rest with BOG rather than the president, is not prone to relieve of his/her duty, and has a longer tenure in office. (ii), if the government has no tendency to interfere with banks conduct of business, for example, in policy formulation and implementation; if there is a greater independence be it of legal instruments or goal instruments; and also if the government has no capacity to borrow from the bank. (iii) last but not least, if the bank main objective is price stability. 1.1.2c) Economic Independence of CBK Kenya has also experienced tremendous financial innovations intensifying greater implications to monetary policy transmission mechanism. The Bank is empowered to act as a fiscal agent of the government or any public entity. Similarly, the advance made by bank to the government is supposed to be secured with securities issued by government, of which are supposed to mature before twelve months, bears interest at market rate, and are advanced for a short-term period to the government. In compliance with the statute, the CBK has an authority to grant loans and advances not exceeding three years in fixed period to government as a Deposit Protection Fund Board (DPFB), while the bank has mandate to lend or give credit to public entity, although, it is limited in extending such credits. The main interest is built on the various chief features associated with the introduction of inflation targeting framework by most of the Central Banks of both developed economies and transitional economies around the world; borrowing heavily from various aspects of literature that have analyzed greatly the development of this framework in order to determine the viability of the framework in low income countries such as Kenya. indeed, little has been done in A model specific to the needs of Kenya will be developed while building a general structure within the framework of an ITF so as to distinguish between group characteristics of the inflation-targeting and non-targeting central banks since its inception, and the relationship between various variables mentioned in the hypothesis. In addition, the paper depicts lessons learned by countries that have already adopted the strict ITF since 1990s. What become apparent evident in process of this review, however, is that several contributory problems must first be solved before forming an informed judgment on the likelihood of low-income countries embracing the framework. The first of these problems is whether there are impetus and aspect linked with decisions to move from a specific monetary practice to another. Second problem revolves around the feasibility of other policy designs of monetary policy such as exchange rate regime and central bank independence Third problem will address chief pitfalls that could prevent low-income countries from embracing this policy design. The study hypotheses investigates the relationship between conditions that lead to adoption of inflation targeting framework in developed economies and examine if these pre conditions have a replicate effect in low income countries. The other parts of the paper shall be structured as follows: In section II, assess modification of monetary policy conduct under ITF by various developing countries central banks, the cons and pros of shifting to such strategy. In section III evaluate the exchange rate transition and its role to inflation targeting framework more specifically the following interrelated issues will be taken into considerations: the role of nominal exchange rate it plays as a nominal anchor, the costs associated with the real exchange rate overvaluation; and the approach for exiting the pegged exchange rate. Section IV reviews the role of the central bank independence since it forms the core tenet of conjecture that is built around the inflation targeting framework.Likewise, other contributory factors to embracing the framework will be captured in this Section. The paper concludes with the policy recommendation and the way forward. 1.3 General Salient features, Implementation and Experience A better strategy for monetary policy is built on the following inherent characteristics as summarized by Svensson Lars 1997; Friedman, 1990; McCallum, 1990 that is, it is supposedly to be highly correlated with the goal and has a tendency to be controlled by central bank with much ease than the goal itself. Similarly, the public and the central bank should be able to comply to it with much ease than the goal. In addition, transparency is of greater importance in terms of the efficiency and effectiveness of the bank communicating to the public its objective and procedure of conducting its monetary stance. Literature from (Bernanke and Mishkin 1997), Bernanke et al. (1999) and (Svensson Lars 1997) has vehemently mentioned various elements that form this framework which includes. First, price stability is formally chosen as the main intent of monetary policy, which indicates the monetary stance and the central banks principle of appraising its performance. Second, the central bank issues a declaration, which categorically states the numerical target for inflation within a specific, horizon-thus the bank has the latent to lessen the possibilities of falling into time inconsistency trap in carrying out its primary goal. Third, either the government can opt to choose the target, independently or collectively with the central bank, which is associated with appropriate changes in the central banks law thus enhancing instrument independence of the institution in achieving its target. Fourth, the ITF promotes high transparency in the conduct of monetary policy thus enabling flow of information from the central bank to the public and government. Svensson Lars (1997) stated that, when the authority anticipate the policy target deviation, the strategy should be attuned in such a way it is neither contractionary nor is it expansionary in accordance with keeping the policy on target. On this background, the IT-framework work best in forecasting future inflation, that is, the relevant information for forecasting monetary policy is of greater importance in predicting future inflation. Indeed, this transparency of inflation targeting forms a better juncture in terms of motivating and focusing the activities insi de the central bank. More so, there is high tendency of central bank accountability, which is often outlined in case of breach of inflation target, meaning it helps in clarifying what the central bank is capable and incapable for it to be accountable. Although, inflation targeting has proved to be the best modern strategy it does not lack some criticism or problems that characterizes it in terms of implementation and monitoring. For instance Svensson Lars (1997) has described some of the inherent problems that makes this strategy ineffective, which includes: central banks inability to restrain inflation due to the fact that, previous decisions and contracts play a vital role in determining current inflation. In other words, the authority can only have power over the future inflation. In addition, monitoring and evaluation of monetary policy by public faces a greater set back due to the inadequate control of inflation. CHARPTER TWO 32.0 Literature Review A large body of literature has been developed to analyze the effectiveness of an explicit numerical anchor since such framework was adopted in early 1990s. There exists a large number of literatures on major development of Inflation Targeting Framework since its inception in developed countries and emerging economies. However, there is little development in low-income countries in regards to adoption and implementation of this framework varies greatly in most of these countries because of lack of a well-developed financial market, inadequate fiscal position, political interferences and also lack of market integration in majority of them thus posing a bigger challenge to welcoming this framework as a way of monetary policy conduct. Therefore, the section borrows heavily from past studies that have since been done in order to demarcate the gaps that have made the framework ineffective. 3.1 Transition to Inflation Targeting Framework: Central Bank of Kenya In the past decades, the monetary policy encountered by most of the emerging markets economies has been depressing, these resulted to extreme periods of monetary instability, vacillating from high inflation, to colossal capital flight, and thereby led to downfall of many financial systems. However, the forecast for successful monetary policy in the majority of countries in transition have so far been augmented. This has been typified by considerable decline of inflation rate in Latin America region as an example of an emerging region, which dramatically fell from an average of above 400% in 1989 to less than 10% (Mishkin Savastano, 2001) According to Morande and Schmidt-Hebbel (997), this objective of inflation control has been interpreted by public as formal targets or hard targets. Thus enables the central bank to be more accountable by explicitly announcing a multi-year target for inflation. Downs and Vaez-Zadeh (1990) declared that during the transition it is not possible to forecast market behavior..[s]ince the old money-model is bound to be obsolete and perhaps of little use (318). Indeed, the old fashioned regime of money-growth targeting framework has proved inefficient in the recent past, although the Central Bank of Kenya has been able to maintain inflation rate as low as possible. Above all, the de-regulation of economic activities in the early 1990s marked a major landmark in the conduct of monetary policy in Kenya in terms of objectives, instruments and institutional framework. Mwega 1990(a) developed a model that sought to explain the changes in the CPI Growth e.g. real income (T) changes, changes in money supply (M2), changes in import prices and changes in previous years inflation rates (Pt-1) were the expansionary variables. In these results, he found money supply to be a significant determinant of inflation. Similar study was done by Ndungu (1993) where he did a comprehensive study on the dynamics of the inflationary process in Kenya for the period 1970-1991. He used a monetarist model, named the error correction form of model and empirically showed monetary growth, interest rates changes, real income growth and excess money printing which were significant determinants of inflation in Kenya assuming a closed economy. When he included the external economy, he found the exchange rate had a significant effect on the domestic price level. The results of his study indicated inappropriate government policies (monetary and fiscal) resulted lack of control of inflation especially in 1980-1990 where inflation level escalated. Mishkin and Schmidt-Hebbel (2007) in there panel data analysis comprising of both inflation-targeting industrial countries and non-inflation targeting industrial countries, argued that ITF has helped these countries in achieving stable inflation rate in the long-run where they are attributable in oil-prices and exchange rate shocks, and that are associated with strengthening of monetary policy independence and enhanced policy efficiency. Taguchi and Kato (2010) assessed the performance of the IT in East Asian economies where they adopted a co-integration approach between money and inflation. The estimation results were that, the ITF in the sample of few selected economies, except for Philippines, proved to work well as an anchor for controlling inflation through speeding up price adjustments (stabilizing inflationary expectations) against money supply in the context of floating exchange rate. Similarly, they argued that, well-functioning inflation targeting framework was consistent with enhanced monetary autonomy under the post-crisis floating exchange rate. Aizenman and Hutchison (2008) used a simple empirical model where they estimated panel data for 17 emerging markets for both inflation-targeters and non-inflation targeters and concluded that there was a stable inflation response running from inflation to policy interest rates for inflation-targeters in emerging markets who have anchored their inflation than in non-inflation targeters whose central banks respond less in such markets. Similarly, they argued that the response to real exchange rate was much stronger in non-IT countries, however, suggesting that policymakers are more constrained in the IT regime where they attempt to target both inflation and real exchange rate and these objectives are not always consistent. 2.2 An overview of the exchange rate transition and its role in ITF The Central Bank of Kenya policy objectives have been to protract an exchange rate that will ensure international competiveness while maintaining domestic rate of inflation at low levels through conduct of strict monetary stance. Calvo and Reinhard (2002) argued that Majority of emerging markets are facing problem in performing inflation targeting due to various issues of how to manage the exchange rate under the condition that their external debt is primarily denominated in U.S. dollars. Therefore, the idea of this framework is believed to work best under floating exchange rate regime.Hence, inflation targeting framework as a monetary policy strategy becomes unrealizable in majority of this countries due to too much concern towards exchange rate volatility. In recent times, countries with fixed exchange rate have a tendency to fix their domestic currency value to countries whose main objective is to anchor their inflation in readiness to keep inflation rate in check. Most of the countries that have adopted a crawling target or peg their currency tend to devalue at a firm rate in order to keep their inflation rate low vis a vis their counterpart anchoring countries. These periods marked a milestone that foresaw an accelerated money supply growth and high inflation, but at the same time there was a move to speed up economic reforms and accelerate the pace of liberalization. An exchange rate regime makes central bank quite accountable because it has clear-cut goals [b]ut can actually weaken accountability of the Central Banks in emerging- markets countries, by eliminating important signal that can help keep monetary policy from becoming too expansionary (Blejer, creb, 1999, p. 41).Also, for the same reasons described in (Mishkin, 1999a) exchange rate targeting can promote financial fragility and lead to foreign exchange crises that can also lead to full-fledged financial crises with disastrous consequences for the economy(Cited by Blejer creb, p.50) .Hence, a continuous adherence of exchange rate regime is probable to have far-reaching impact of economic sluggishness and exacerbate redundancy in the economy, which is exactly what Kenya has exper ienced in the past. Therefore, the Central Bank should move more assertively by provision of an extra credibility, where policy easing is desired to prevent output reductions, without igniting fears of renewed inflation. Mishkin Savastano ( 2001) acknowledged that [t]here are three broad monetary policy strategies that can produce an explicit nominor anchor that credibly constrains the discretion of the central bank over the medium : hard exchange-rate pegs, monetary targeting, and inflation targeting. In spite of this, majority of industiralized economies, notably the United States, have used a more or less the same strategy of anchoring inflation. However, it does not explicitly anchor inflation but it implicitly anchor its inflation. a monetary policy with an implicit but not an explicit nominal anchor sought of monetary policy strategy to achieve macro-economic goals. Whereas, the three monetary policy strategies have enabled emerging economies to set up institutions and mechanisms that have effectively and efficiently constrained the discretion of their monetary authorities; their suitability to conditions in different markets differs according to each strategy that is adopted by each country. Reinhart and Rogoff (2004) declared that, Developing countries central banks tend to pursue exchange rate targets that considerably are more deterministic than their official pronouncements.[while] a managed floater might be operating a fixed exchange rate or a crawling peg for extended periods. Likewise, Kenya has undergone myriad exchange rate regimes in the past mostly driven by various economic cycles, and chiefly the balance of payments deficit. For instance, up to 1974, the exchange rate was pegged to the dollar, but later the devaluation of the currency resulted to a change of the peg to the SDR.1 from 1974-1984 period. This regime lasted until 1990 when a dual exchange rate system was adopted that lasted till October 1993 when, after a series of devaluations, the official exchange rate was abolished. (Mwega and Ndungu, 2001) acknowledged that Kenya adopted a unified and flexible exchange rate in the early 1990s, as part of a market-based reform program designed to improve the investment environment and spur economic growth(Cited by Ndungu, 2008). In addition, the (Kenyan Economic Survey, 1995) revealed that the nominal exchange rate suddenly depreciated by about 32%, moving to Ksh38 to the U.S dollar from Ksh 44 to the dollar, and inflation declined from 46% in 1993 to 28.8% in 1994 (as cited in Ndungu, 2000) as a result of shilling appreciating against dollar in 1995. 2.3 Central Bank Independence The literature on ITF in emerging market economies suggests that this monetary policy strategy should be adopted only if some institutional preconditions are met. One of them is Central Bank Independence. Many scholars have given much attention to the central bank autonomy and the role it plays in adopting ITF. Indeed, where central bank is autonomous from government interference it is likely to insulate itself from political pressures to finance government fiscal deficits, which can result to over-expansionary monetary policies that would lead to inflation above target. Cukierman, Webb and Neyapti (1992) constructed Central Bank Index that was designed in two folds that is, legal independence and turnover rate of governors, where both revolved around central bank charters and legislation and the relationship it has over the overall performance of the economy. This paper provides an overview of the mushrooming literature on authority autonomy and precision relating it to the mechanis ms through which central banks have in the past adopted greater openness, thereby, focusing more on the role they play in adoption and effective implementation of inflation targeting framework. (Klomp and De Haan, 2010) used a random coefficient model and they estimated a sample of more than 100 countries to re-examine the relationship between CBI (measured by both governors TOR and central bank legal indicator) and inflation. They found Central Bank Index to be negatively insignificant with the level of inflation rate of country specific. Most literatures in developing countries have focused on de facto independence as a proxy of CBI that is governors turnover rate. Studies of Cukierman, Webb and Neyapti (1992) stated that the average and variance of inflation has a negative correlation to governors turnover rate in most of the developing. This is due to the fact that, majority of studies has expressed doubts over the reliability of most of indicators used to construct Central Bank Independence indices. Indeed, there exist a greater divergence when it comes to categorization of indicators used to measure CBI incase of high income countries, emerging countries and low income countries. Cukierman,1994 and Eijffinger and De Haan (1996) have categorically contended that, the CBI indices in majority of high income countries are arises from central banks laws interpretation and are of great concern to legal independence indicator, whereas, in developing countries de facto independence indicators form the main measure of central bank independence. Axel Dreher, Jan-Egbert Sturm, Jakob de Haan (2010) used a data set comprising of eighty-eight countries term of office of central banks governors since 1975-2005. They used logit model to test the likelihood central bank governor term of tenure geting terminated before their legal term in office expires. According to their results, the probability of a TOR as a measure of CBI tend to soar under certain condtions which includes: unstable political system, undue elapse of governor term of service in office and during elections period in self-governing countries. Accordingly, they indicated in their hypothesis that there was a higher chance of the governors getting replaced if there was huge drop out of veto players from the government. Alex, Webb and Bilin (1992)) developed legal independence where they mentioned some of the intrinsic features such as the degree of independence that the authority should bestow to the Bank, and lone dependence on legal component of independence. Beside s, the legal independence is significant in ascertaining inflation rate in developed economies. Whereas, turnover rate of governors forms a better turning point of inflation determination in developing countries. Likewise they argued that, in cases where governor legal term of office is shorter than that of government CBI is likely to be compromised by the government, thereby, resulting to increased TOR. More over, the governor is likely to be susceptible from government influence thereby derailing long-term objective of policy formation and implementation under the pretext of political pressure especially during election periods. (Kuttner Kenneth, Posen Adam 2010), took the same direction and indicated that undue appointment of governor in office result to construed information to the bank in terms of carrying out its primary objective of price stability. For instance, unjustifiable appointment of governor under low inflation periods may reinforce the exchange rate, while the opposite is always true. Since governors appointment seem to contain valuable information regarding the exchange rate and inflation rate. Gutierrez (2003) indicated that CBI has positieve impact in reducing the chances of governments incurring budget deficits through quasi-fiscal activities. Since such activities can be understood on their inflationary impacts. Posen and Kuttner (2010) estimated the effect of legal appointment of governor to office exchange rates and bond yield and argued that the main test was to verify the scope to which markets observe that the next governor will bring a swing in policy, whereby he/she is expected to determine the bearing of such swing. This is in conformity with the fact that, the news conveyed may favour either one side due to markets reaction after such appointment. 2.4 Financial Institutions Another important prerequisite for successful ITF stressed by the literature is a healthy financial and banking system. Several reasons can be advanced to explain the great importance of well-functioning financial system under inflation targeting framework. First, a sound financial system is essential to guarantee an efficient transmission of monetary policy through the interest rate channel which forms the major channel through which the CBK carries out its main objective of price stability, and more specifically forms an enabling environment of smooth exchange and provision of credit. Second, according to Mishkin (2004), a weak banking sector is potentially problematic to achieve inflation target, because the central bank would be hesitant to raise short-term interest rates for fear that this will impact the profitability of banks and lead to a collapse of the financial system. Third, countries characterized by weak financial institutions are more vulnerable to a sudden stop of cap ital outflows, causing a sharp depreciation of the exchange rate which leads to upward pressures on the inflation rate (Mishkin, 2004). Fourth, a consequence of lack of large domestic capital markets is an important accumulation of foreign currency external liabilities by firms, households and the government, while their assets are denominated in domestic currency. This liability dollarization makes the financial system more vulnerable to a depreciation of the domestic currency9 by reducing the net worth of borrowers through a balance sheets effect Finally, as outlined in (Woo 2003), a well-developed domestic capital market enables the public treasury to diversify its sources of funds (e.g. by issuing bonds), and then reduces incentive to finance public deficits through inflation. Moreover, (Cukierman 1992) argues that the degree of financial depth is positively correlated with the level of CBI, in the sense that broad financial markets are more likely to grant their central bank more independence in order to avoid potential disruptions in the process of financial intermediation. Lucotte, (2010 argues that for any monetary policy strategy, a sound financial system in essential to guarantee efficient transmission of monetary policy through interest rate channel, but also through credit channel. (Mishkin, 2004) declared that unhealthy financial system can result to problems in case of embracing the scheme since CB tend to raise interest in the short term for fear of collapse of financial systems. He also argues that exchange rate sharply depreciate due to huge capital outflow thus exacerbating upward pressure on the inflation rate. 2.5 Political institutions Eijffinger and De Haan, ((1996) noted that, a positive relationship between party political instability and CBI has been reinforced by current politicians in office who anticipate a greater downfall in terms of losing their position in an election, thus, they tend to delegate authority to central bank in order to constrain the future government, that is restrict the range of policy actions available. Similarly, according to findings of (Cukierman, 1992) Influence of Political Stability countries experiencing political stability leads to a more independent central bank. The results showed that political parties instabilities have a positive relation with CBI, whereas a high level political party instability has a negative relationship with CBI. The political arena is of greater importance in arriving to the conclusion as to why most countries experiencing high bout of inflation tend to be characterized by high level of political instability. The main contribution is to examine whether the political institutions have embarked on strengthening and supporting the democratic space in terms of political participation, democracy, accountability and openness in government. 2.6 Fiscal Positions CHARPTER THREE 3.0 Methodology This paper will focus more specifically on various institutional arrangements focusing primarily on the central bank autonomy, financial institutions, fiscal position, political institutions and also macro-economic variables. In order to underscore the effect of ITF, it is also important to note that, most of the emerging economies that have already anchored their monetary strategy using this framework have a very short experience with regard to its implementation; therefore, the analysis will focus on those countries with more than two years of operation by the end of 2009. Similarly, since the data used in these paper is largely secondary data it varies greatly due to various factors associated to country specific, for example, political upheavals that may have derailed data collection; re-organization of governments from former regimes these is mainly related to former soviet union countries which disintegrated in 1990s. 3.1 Data coverage and sources The Panel dataset covers thirty-nine developed economies, emerging markets and developing economies comprising of those markets that have targeted their monetary policy and those that are yet to target for the period ranging from 1980-2009. This is because it is easier to establish the effectiveness of the framework since the first country anchored its monetary policy in late 1980s. See appendix for further variable specific description 3.2 Variable Specification 3.2.1 Exogenous variable This paper is built on a half year rule in deciding the actual date that the inflation targeting countries adopted the framework. Therefore, the first six months of the year will be taken as the actual year of adoption and the second six months of the year will be captured in the year that follows and will be recognized as the year of inflation targeting adoption. 3.2.2 Endogenous Variables I. Institutional Indicators Institutional indicators have been highly used by various scholars and countries targeting inflation in determining the preference or probability of shifting their former monetary stance to inflation targeting framework. The variables of importance will be categorized into four broad indicators each proxied with variable of interest to be analyzed at a later stage. Central Bank Independence Index proxied by both legal independence index and governors turnover rate forms the first institutional indicator of interest. This paper is built on the indices of Cukierman et al (1992); Crowe, C. and Ellen E. Meade (2007); Kuttner and Posen (2001); Grilli, et al (GMT)(1992) it will take a diferent appraoch. I use their more or less methodology of arriving at the legal independence index by constructing a dummy variable of CBI guided by the following six broad questions: first, what is the authority primary objective of monetary policy conduct? Second, who is responsible in the appointment procedures of the chief executive of the authority? Third, The Turnover rate of the Governors forms an inverse relationship of central bank autonomy where it is assumed that a high turnover rate is good indicator of fragile central bank sovereignty. Therefore, Cukierman et al (1992) derivation of the TOR will form the focal point of this paper and the expected sign is negatively related to the likelihood of adopting ITF. Political stability variable forms a larger part in determining the probability of countries anchoring their inflation rate, in particular, the developing countries where democracy is highly undermined by few political elite. Beck et al (2001) constructed a dataset called Polity IV project to measure institutional political stability using databases of DPI. However, the Polity IV project is further reconstructed to Polity2 Index. Similarly, the focus is democratic score and autocratic score used to derive this index by deducting both score.Hence for the sake of this paper, a democratic score dummy will be indicated by 1 if a country is more democratic or zero otherwise. The same applies to autocratic score dummy where it will take a value of 1 if a country is very autocratic or zero otherwise. The exchange rate regime forms the third institutional indicator variable. Many proponent of international finance have classified exchange rate regime into both de jure exchange rate(according to law), which basically captures central banks official commitment to policy, however, it lack proper mechanism for actual policy control. The other classification of exchange rate regime is the de facto exchange rate (by existence) and it monitors the exchange rate movement, however, it lacks the intended compositional characteristics. The IMFs AnnualReport on Exchange Arrangement and Exchange Restrictions classified the exchange rate regime into nine categories and further re-classified the same into three folds namely: 1)floating exchange rate comprised of free floating, managed floating. 2) An intermediate floating comprising of basket pegging, crawling pegging and band arrangement 3) fixed exchange rate comprised of hard pegging and currency board. For the purpose of this paper, I will employ the de jure exchange rate classification where I will construct a dummy variable, which will take the value of 1 if a country is under floating exchange rate or zero otherwise. Since the interest is built on the impact of the exchange rate regime towards country specific shifting to another monetary policy strategy. The sign of coefficient is expected to be positive, that is, the more flexible exchange rates the higher the chances of a country to adopt the framework. II. Macro-economic Structure variables The Financial Development variable forms the first macro-economic structural indicator of in interest. Therefore, it is of great importance to countries forging the way forward in case of adopting this strategy since it gives authority credibility to meet their intended objectives. Although, there are many indicators that have been used to test financial depth of various countries private credit ratio to GDP will form my indicator. I expect a positive coefficient that categorically states that, strong financial depth provides high probability of countries adopting this framework. Second, trade openness which is the ratio of exports plus imports of goods and services to nominal GDP is used as an alternative to evaluate the extent of exposure to external shocks. This is because it has a direct relationship with the exchange rate regime hence a fixed exchange rate makes a country to be vulnerable to external shocks due to pressure of sustaining such regime. This variable has a positive relationship with the likelihood of adopting inflation targeting. Third, Financial openness proxied by the ratio of external government debt to nominal GDP measures the financial openness of a country. Countries characterized with greater financial openness compel authority responsible of conducting monetary policy to inauspicious environment in the conduct of their business. Therefore, financial openness has an inverse relationship with the discretion of adopting inflation targeting framework. The fourth measure of macroeconomic structure is fiscal balancewhich is typified by two aspects, that is,government balance to GDP ratio and current account to nominal GDP ratios. The presumption is that, those countries that are highly characterized by government fiscal imbalances are conceived to command low levels of reliability. The variables in consideration are supposed to be positively related with ITF. III. Control variables: Third macroeconomic variable to be included in the model will be the log of GDP per capita (ln_GDP), which measures the variation in the level of economic development involving countries. Has a positive sign of coefficient to inflation targeting. Fourth Variable is the nominalized inflation rate (INF_N) hence the sign is expected to be negative. A normalized inflation is important in case of controlling weight of hyperinflation and it should be lagged two periods to avoid a potential simultaneity between inflation targeting and inflation level. Empirical methodology This paper aim at protracting logit model estimation in order to arrive at the choices facing various countries in particular developing countries in adopting inflation targeting. Moreover, the will 3.1.1 Panel data logit regression model Due to the nature of the exogenous variable (I.e. binary exogenous variable) given as ITit where it takes a value of 1 if a country specific is inflation targeting and 0 otherwise. Subscripts i=1N is the cross section dimension; t=1T both representing country specific and years respectively. it is the constant term. The white noise term is specified as it=it+it where it designate unnoticed country-specific effects, whereas it is the random error. it ~ IN(0, 2) is an assumption of random effects logit model specification. IT it-2= it + INSTit + INF (-2)it+ Xit + it it ~ IN(0, 2) The independent variables include institutional framework denoted as (INSTit) and comprises of various institutional variables comprised of: first, Central Bank Independence indices measured in this analysis by the turnover rate of central bank governors and legal independence of central banks. 3.1.2 The Inflation approach These section is built on both panel and cross-sectional approach, where the exogenous variable is nominal inflation rate variable. The independent variables arises from control variables comprised of trade openness, Log of GDP per Capita, dummy Exchange rate regime, proxy of current account to GDP ratio, and Polity2 index as a proxy of political instability. Under this section the variables under consideration will be grouped in three periods 1980-89, 1990-99 and 2000-2009, each is made up of at least ten years. I also include a dummy Inflation Targeting Framework (ITFt-2) in lag of two years in order to capture the marginal effect of the framework towards inflation rate for inflation targeting countries or zero otherwise. See Appendix VI, Table6 for further variable specific explanations 3.3 Data The sample of IT countries is composed of Australia, Brazil, Colombia, Canada, Czech Republic, Chile, Guatemala, Ghana, Hungary, Israel, Mexico, Peru, Philippines, Poland, S. Africa, S. Korea, Thailand, Finland, Norway, Spain, Sweden, New Zealand, Iceland, and United Kingdom. Whereas, Non-IT countries includes: Bulgaria, Belgium, Egypt, Nigeria, Kenya, Dominic Republic, Ireland, Argentina, Morocco, Cape Verde, Equatorial Guinea, Honduras, Luxembourg, Netherlands ,and Greece. Difference in majority of literature on the actual dates and number of countries that have so far adopted ITF (eg Kuttner and Posen 2001) Peru IT regime to January 1993 vis a vis (Mish kin and Schmidt-Hebbel 2001) and Bank of Peru date it to January 1994 and January 2002). This paper will stress the (Levya 2008) countries IT classification by the end of 2005 exclusive of Ghana which adopted ITF in 2007 and Turkey (2006). 3.4 Estimating Results 4.0 Conclusion The main analysis of this study will exhaust major avenues that have led many countries shifting their former monetary strategy to inflation targeting framework paying attention to emerging markets and developing countries. Factors such as institutional arrangement and macroeconomic variables that have been considered in this paper have a high likelihood of countrys decision to embrace the ITF. The findings of my analysis using probit regression model have indicated that CBI has a positive relationship of a country specific adopting the framework this clearly states the need of major central bank to be fully independent before they embrace the framework. Similarly, market capitalization is one of the indicators of financial development of a country hence it is clear that, countries need to have strong financial institutions before switching to this framework. The Log of Real GDP per capita is significantly associated with the choice of inflation targeting hence a good precedent of im proving overall economic performance; it is also consistent with the fact that the rationale behind adopting ITF is to improve economic performance. The regressions results also indicate that majority of countries with floating exchange rate stand a high probability of embracing ITF. (Hu, 2003), found the negative effect of inflation over the chances of adopting the ITF be unforeseen, which is consistent with this analysis. In fear of losing public credibility, the central bank is more likely to adopt inflation targeting when inflation rates are low, which makes the targeted inflation rate easier to achieve. This is because most central banks are unwillingly to adopt inflation targeting during high bout of inflation that might undermine their credibility. Strong financial development variables are found to play a key role in determining the likelihood of developing countries adopting ITF under various regression specifications. 4.1 Policy Recommendation Inflation targeting offers a coherent framework for the conduct of monetary policy, not only for industrialized and established emerging market economies but also, with some modification, for pre-emerging market economies such as Kenya with the dominant view that the basic architecture of the formal inflation-target framework is sound and is likely to remain in place in the future. The instruments independence, in which the central bank controls monetary policy instruments, should be insulated from short-run political pressures that may lead it to time-inconsistency trap thus producing bad long-run outcomes. In addition, the central banks long-run preferences should coincide with societys preferences that suggest a goal dependent central bank, and a transparency of policy associated with inflation-targeting that is intended to central bank highly accountable to the public.