Martin Luther Oketch
3 November 2008
Kampala — Following the meltdown in the West's financial system arising from a global financial turmoil, the International Monetary Fund (IMF) has warned that Uganda will register a decline in its economic growth.
The IMF has predicted a decline in the economic growth of 7.5 at market price while casting doubt on the country's efforts to reduce inflation rate to 5 per cent this fiscal year. IMF also revealed that the projected economic growth of 8.1 per cent is only achievable and sustainable in the medium term while a single digit inflation of 5 per cent will be achieved by August next year.
Addressing a news conference in Kampala on October 31 at Bank of Uganda, the Assistant Director at IMF African Department, Mr Roger Nord said that the global financial environment can be expected to be more challenging in the coming years. This, he said may affect the financing of investment projects, underscoring the need to ensure value for money in public spending. But provided Uganda maintains its growth momentum, its strong economic fundamentals should allow it not only to weather the storm but to emerge strong.
"As a result, the IMF staff estimates economic growth to slow, albeit to a still healthy 7 to 7.5 per cent in the 2008/09 fiscal year. There are no indications that the Ugandan banking sector has any direct exposure to the toxic debt that has affected global financial markets, and banking soundness indicators appear healthy. Nonetheless, going forward, it will be important to step up prudential supervision to ensure that any emerging risks are identified early and addressed expeditiously," he said.
The surge in inflation rate of 15 per cent has led to faster growth in Uganda's base money meaning that the central bank is accommodating high inflationary pressure by using different types of monetary policy tools to control it
Mr Nord advised that monetary policy will need to be guided by the objective of reducing core inflation which now stands at 14.5 per cent as of October 31. "However, in the short term, the lingering impact of earlier price rise and effects of recent depreciation of the shilling will delay the achievement of the inflation objective. In the mean time, Bank of Uganda will need to restrain liquidity growth, while ensuring that sufficient credit is available for the private sector," he said.
Prudential supervision has become a central focus of the IMF, a development which he said Bank of Uganda should emulate to further strengthen bank supervision in the country. An economist with the IMF, Mr Omitry Gershenson said that Uganda had a current growth rate of 30 per cent in base money which represents Shs1,614billion. "The growth of base money in Uganda is because inflation is high and it means that the central bank is accommodating inflation pressure," he said.
However, on the other hand, the IMF mission team noted that Uganda's economy continued to perform strongly in 2007/08. Economic growth reached 9 3/4 per cent (at market prices), fuelled by a robust expansion of in the construction and services sector.
Mr Nord said that during the fiscal year 2007/08, exports grew by over 50 per cent, contributing to further increase in international reserves of Bank of Uganda; while fiscal policy remained prudent, anchored by strong revenue performance.
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