Kampala — Uganda's economy could be headed for tougher times if donors are to hold firm with plans to cut aid to the country, Bank of Uganda has said.
Reports of the imminent donor aid cuts come on the heels of the alleged misappropriation of huge sums of money meant to finance different projects in northern Uganda.
Prof. Emmanuel Mutebile, the Governor of Bank of Uganda while announcing the Monetary Policy Statement for December said that the aid cuts would reduce Uganda's economic growth currently at 5% by 0.7%.
"It is too early yet to establish the effect (of the aid cuts) on the economy. If all the donors who are being reported to have cut aid do so, we think it will reduce the potential growth rate by about 0.7%," Mutebile said.
He also added that since the last monetary Policy Statement in November 2012, the prospects for real economic growth in 2012/13 had weakened.
"The main constraints to economic growth in the short term are the weakness on the demand side of the economy, a lack of growth in private sector borrowing, the need to cut government expenditure in response to donor aid cuts and the difficult global outlook," he said.
Mutebile also hinted at the possibility of introducing quantitative easing (increase money supply) so as to increase demand should the aid cuts persist.
"Depending on the action government takes on the fiscal side, there might be that possibility (Quantitative easing)," he said.
Dr. Adam Mugume, the Director of Research at BOU while responding to questions from the press regarding the aid cuts said that the cuts have a multiplier effect but that he expects the sentiments to improve in the New Year.
"The aid that is to be cut is equivalent to 1.3% of GDP and so if that is removed it is going to have a multiplier effect. We are however not sure for how long the aid will be cut, but it will definitely have an impact," Mugume said.
He also added that the reports about the aid cuts were however blown out of proportion which threw the citizens into panic.
"The first impact was the rumor and one would think that the aid being cut was $1billion. The aid being cut is budgetary aid of about $180m," he stressed.
The governor BOU announced that it was reducing the Central Bank Rate for the month of December 2012 by 50 basis points to 12% from 12.5% the previous month.
He said, "BOU's monetary policy will continue to focus on stimulating aggregate demand in order to boost real economic growth without jeopardizing the medium term target of 5% for core inflation. BOU has reduced the CBR in order to support a recovery in real growth."