Many LDCs have implemented reforms to strengthen the prudential regulation and supervision of their financial systems. This article examines the progress made by LDCs in implementing reforms, analyses the weaknesses in their prudential systems and discusses policy options for further reform. While considerable improvements have been achieved, the occurrence of banking crises during the 1990s indicates that many countries have yet to build robust prudential systems which can protect their banking systems from systemic crises. The weaknesses include loopholes in the prudential regulations, shortages of skilled supervisors, and regulatory forbearance. Furthermore, there are difficulties in applying the developed country model of regulation, which relies heavily on accurate financial information, highly skilled technicians and an impartial bureaucracy, in an environment characterised by weak accounting and legal frameworks, acute shortages of skilled personnel and pervasive political interference in public administration. Options for further reform include higher capital adequacy standards, explicit rules covering intervention policy in distressed banks, restraints on competition in banking markets and greater use of the market for monitoring banks.Developing countries, Financial regulation, Banking, Banking systems, Bank regulation, Capital adequacy, Basle Capital Accord, Policy options for reform,

Most of the monetary policy frameworks which use a domestic anchor for monetary policy in sub-Saharan Africa (SSA) employ quantitative money targets. Although these frameworks proved useful in reducing inflation in SSA, they are not well suited to the discretionary fine tuning of monetary policy. Monetary policy frameworks should be reformed in the post-crisis period, especially in the 'frontier markets' of SSA, where the need for activist demand management will grow in line with economic development and the integration of domestic financial sectors into global markets. Reforms should include adopting a broader set of policy objectives in addition to inflation, replacing broad money as the intermediate target with a more sophisticated set of indicators and forecasts and reform of the operating target. In essence, central banks should introduce a form of inflation targeting lite. This should be complemented by measures to strengthen the transmission mechanism of monetary policy.

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In 1998/99 four insolvent commercial banks were intervened and closed by the central bank in Uganda. One bank was closed promptly while the other three were all subject to some form of attempted open bank resolution before eventual closure. This article examines the lessons from this experience and concludes that, in general, prompt closure is preferable to open resolution. This is because the losses incurred by distressed banks are likely to be much greater than the estimates made by regulators or auditors prior to closure, while the prospects for recapitalisation by private sector shareholders are likely to be very limited at best. Open resolution entails serious dangers of moral hazard, which increase the eventual cost to depositors and taxpayers.

This article contributes to the ongoing debate on the macroeconomic management of large aid inflows to low‐income countries by analysing lessons drawn from Uganda, where the fiscal deficit before grants, which was largely aid‐funded, doubled to over 12% of GDP in the early 2000s. It focuses on the implications of the widening fiscal deficit for monetary policy, the real exchange rate, debt sustainability and the vulnerability of the budget to fiscal shocks, and argues that large fiscal deficits, even when funded predominantly by aid, risk undermining macroeconomic objectives and long‐run fiscal sustainability.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Policy Research Working Paper 5927Romania, along with many other countries in the European Union, faces daunting fiscal challenges. Fiscal balances deteriorated sharply following the global economic crisis, forcing Romania to implement a fiscal consolidation that was one of the largest in the European Union, but which may not be sustainable without a recovery of economic growth. Although the ratio of public debt to gross domestic product is still relatively This paper is a product of the Central, South-central Europe and the Baltic States Unit, and Poverty Reduction & Economic Management Sector Unit, Europe and Central Asia Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at scanagarajah@ worldbank.org. modest, at around 35 percent, long-term fiscal solvency is threatened by the costs of funding the public pension system in the face of adverse demographic shifts over the next 50 years. Because of widespread tax evasion, the tax system in Romania is one of the least efficient in the European Union. Tax reforms that can reduce the amount of tax lost to evasion and fraud could make a major contribution to enhancing fiscal sustainability.

This article draws together the regulatory policy lessons arising from the Finance and Development Research Programme's project on prudential regulation and supervision of the financial sector in low-income countries. The policy recommendations include: bringing regulations, such as loan provisioning rules, into line with international standards, where this has not already been done; tightening bank licensing procedures and raising minimum capital requirements; introducing 'prompt corrective action rules'; providing the regulators with an unambiguous mandate to protect deposits and the stability of the financial system; enhancing the regulators' independence from political interference in operational issues but making them more accountable ex-post; introducing risk-based supervision; and limiting deposit insurance to small deposits only.Recent experience in emerging markets has demonstrated how costly financial crises can be -for the economy, government budgets and general living standards -and this has stimulated interest in improving financial sector regulation and supervision. This article analyses the lessons for regulatory policy generated by the Finance and Development Research Programme's project on prudential regulation and supervision of the financial sector in low-income countries. The objective of this project is to identify feasible policy reforms which can strengthen the prudential regulation of financial systems in countries where the institutional environment is often not conducive to effective prudential regulation. The empirical research undertaken by this project includes case studies of three low-income African countries and Bangladesh, and a study of regulatory failures in the East Asian countries hit by financial crisis in 1997/8. The objective of prudential regulation is to safeguard the stability of the financial system and to protect deposits. Hence its main focus is on the safety and soundness of the banking system and of non-bank financial institutions (NBFIs) which take deposits.The institutional impediments to effective prudential regulation include weak accounting standards and a shortage of qualified accountants, the poor quality of financial information available to regulators and the market, acute shortages of the specialist professional skills needed for financial regulation, poor pay in the public service, the politicisation of regulatory processes (which reflects the politicisation of public administration in general) and the difficulty in enforcing bureaucratic and legal regulations, which also stems in part from political interference in the regulatory process. Because financial systems in low-income countries are typically very small, effective prudential regulation is also impeded because it cannot take advantage of the * Research Associate, Institute for Development Policy and Management, University of Manchester, UK.