The Bank of Uganda Governor, Emmanuel Tumusiime Mutebile, has said that if donors go ahead and cut aid to Uganda, the country's economic growth rate will reduce by about 0.7%.
"That's if they cut because we hear some have cut and others haven't," Mutebile told a press conference on Dec. 4 in Kampala.
The Central Bank has in the recent months eased interest rates to stimulate economic growth which slowed to 3.2% in the year 2010/2011 down from 6.7% in 2009/2010. The slow growth was due to a tight monetary policy implemented by the central bank, aimed at combating inflation that hit the highs of 30.4% in October last year.
The Ugandan shilling has depreciated to about Sh2700 per US dollar in recent weeks due to sentiments in the foreign exchange market about donor aid cuts, marginal reductions in interest rates by the central bank among other factors.
Analysts say that if donors fail to reverse their decision of cutting aid to Uganda, the shilling will 'somehow' be affected. The donor countries fund up to a quarter of the country's national budget every financial year, which according to analysts, has been vital in financing different sectors of the economy.
Over the past few weeks donor countries including Sweden, Ireland, Norway, Britain, Denmark and Germany have suspended aid to Uganda "until further notice" following reports that billions of shillings went missing in the Office of the Prime Minister at the expense of the poor Ugandans.
Adam Mugume, the central bank's director for research told journalists on the sidelines of the press conference that aid cuts have a multiplier effect on the economy since they contribute 1.3% to the total Gross Domestic Product.
"If that is removed then the year 2013 will have challenges," Mugume said, adding that Bank of Uganda will ensure that it maintains a conducive monetary policy that will see core inflation stabilising at around 5% in 2013.